This article is not intended to discuss legal issues regarding charities but to point out some facts. I have, in the past, expressed concern over the lack of proper advice in running of charities. Accumulation of wealth is not the purpose of a charitable organisations but I would not dismiss that notion where some charities are concerned.
New Zealanders are generous by nature and give sizable sums to charities and non-profit organisations promoting various causes.
Tax exemptions and privileges are given to such organisations to encourage them to support the needy.
Unfortunately, not all charities are operated in a transparent manner.
The law in this area can be complex and daunting even for a practitioner.
New Zealand has defined charitable purposes in Section 5 (1) of the Charities Act 2005, which says, “In this Act, unless the context otherwise requires, charitable purpose includes every charitable purpose, whether it relates to the relief of poverty, the advancement of education or religion, or any other matter beneficial to the community.”
The Charities Act was amended in 2012 to include amateur sport.
Charity and taxes can be complex. It is actually a tax payer-funded subsidy.
According to the Charities Services (formerly known as the Charities Commission), there are over 26,000 registered charities in New Zealand, with a collective income of almost $16 billion in the 2013 tax year, with $218.3 million paid as tax credits.
Inland Revenue Department (IRD) deregistered 3902 charities in 2012 and 479 since February 2015 for various reasons.
Where is money given to charities going?
Charities do not pay income tax on their exempt income provided that they do not receive any non-exempt income. They would however be required to file their Annual returns with the Department of Internal Affairs.
Income earned by charities and distributed in New Zealand is tax free.
If you employ staff, whether it is a priest or a caretaker, you must remit PAYE.
If you are a registered Charity, then you are entitled to a Resident Withholding Tax (RWT) Certificate of exemption so that you do not need to pay tax on your interest on savings.
You must show this to the interest payer (usually a Bank) to avoid them deducting tax and remitting to IRD.
Some charities are exempt from paying Fringe Benefit Tax (FBT), but there are conditions to be met. It is essential that your tax agent or professional advisers guide you correctly and are familiar with tax issues involving charities.
If you are carrying out a taxable activity and your turnover is more than $60,000 in a 12-month period, you must register for GST. If you are hiring a hall for a wedding or a function that is prima facie a taxable activity and if registered for GST, you must charge output tax.
In return, you can claim your inputs.
A common error amongst charities is to determine income which is taxable and supplies which attract GST. There is certain ‘income,’ such as donations that have no GST impact as opposed to a trading activity or a supply. In such a case, there will be a GST impact even if you are a charitable organisation.
There are of course concessions and special rules for claiming input tax for nonprofit bodies. It is important that you get the correct advice.
Charities have limited statutorily imposed accountability in respect of the board of trustees, unlike directors of companies. This should be addressed in the near future to ensure that the principles enunciated by the Charities Services are upheld.
Not all charities serve the community. I read an article recently in New Zealand Herald according to which a charitable hospital gave only 0.2% of its income for charitable causes. The focus must not be the accumulation of wealth but its purposeful distribution for the benefit of the people.
Abuse and Audits
Tax exemptions are approved and given for a purpose hence should not be abused. No person with some control over the Charity should be able to divert any amount derived from the Charity for their own benefit or any pecuniary benefit of any individual.
If potential conflicts are discovered or dubious transactions exist, advisors must advise Charities to refrain from such practices. You can subject yourself to investigations under various civil and criminal offences. It is morally and ethically wrong to be involved in such practices. Tax exemption will not apply if a person has obtained any benefit from the exempt income.
IRD conducts audits from time to time. It is essential that tax agents and professional advisors are kept informed of all correspondence when this happens. Record keeping is essential whether you pay your tax or not. These documents (hard or electronic copies) become evidence of your charity. The onus is on you to show that you have complied.
We wish to see a Charity Tribunal set up for Charities to air their grievances. Legal action, as the recourse now, is expensive and time-consuming.
The High Court case concerning the National Council of Women of New Zealand is a good example (The National Council of Women of New Zealand Incorporated v Charities Registration Board 2014 NZHC 3200).
It is also advisable that the Charity Services be expanded to monitor the 26,000 Charities. The tax payer has a right to know how their money is spent.
Dave Ananth is an experienced tax barrister practicing in Auckland. He was an IRD Prosecutor based in Manukau before establishing his private practice. He is now in Malaysia advising on GST compliance on a two-year contract. He is a regular speaker at various conferences and seminars.
Email: firstname.lastname@example.org; www.davetaxnz.nz