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Charity tax concessions in the spotlight

September 14, 2018


Partners Barney Cumberland
Special Advisors Stuart Hutchinson
Senior Associates Nick Bland, Paul Windeatt


Charities and their stakeholders and supporters should be aware that various tax concessions that ultimately support the work that they do are currently under review - and in some cases under attack - on multiple fronts.

Current and impending developments affecting charities (and other not-for-profits) include:

  1. the Tax Working Group review of the tax system, including charity taxation;

  2. Charities Act developments, including recent registration decisions and the review of the Charities Act;

  3. proposed “remedial” charity income tax, donation tax incentive and other changes in the latest omnibus tax bill;

  4. significant GST changes affecting charities and other non-profit bodies that have been added to the tax bill;

  5. ongoing IRD compliance activity and litigation targeting tax credit claims for donations to charities and other donee organisations; and

  6. IRD moves against donee organisations with overseas purposes.

This FYI maps out the current state of play in relation to these developments.

Tax Working Group Review

The Tax Working Group (TWG) interim report on its review of the New Zealand tax system is imminent, due to be released this month, and charities should take note.

The TWG review potentially raises a number of issues for charities. In particular:

  • The review may recommend new taxes, potentially including some form of capital gains tax. If a capital gains tax or any other new tax is proposed, the scope of the tax and any exemptions or concessions will be of particular interest to charities.

  • Charity taxation, and in particular the longstanding tax exemption for charities’ business income, is also understood to be on the TWG agenda. If the TWG does consider that charity taxation warrants attention, the pros and cons of taxing charities’ so-called “unrelated business” income, as well as other issues such as imputation credit refundability for charities and social enterprise taxation, may be up for debate.

  • There is also a tie-in with the review of the Charities Act, discussed below. Charity-related TWG material is being shared with DIA, which is the lead agency for the Charites Act review, and any charity-related findings in the TWG interim report will be taken into account as part of the Charities Act review.

We are tracking the TWG review closely and will be able to provide further information once the interim report is released.

Charities Act developments

Entities generally need to be Charities Act registered to access charity income tax exemptions, and registration can buttress eligibility for other tax concessions and maximise access to funding from various sources.

The latest tax bill currently before Parliament, discussed further below, also proposes to make Charities Act registration mandatory for:

  • all entities that use the charity business income tax exemption, from 2019 (whereas currently non-registered entities are entitled to use the exemption because their businesses are carried on for the benefit of registered charities); and

  • all charitable entities that wish to qualify as “donee organisations” for donation tax incentive purposes, from 2020 (whereas currently donee organisations do not need to be registered, and simply obtain IRD confirmation of donee organisation status).

The principal eligibility requirement for Charities Act registration purposes is charitable status, and there continue to be developments on this front.

A very recent, high profile example is the High Court’s dismissal of Family First’s appeal from a Charities Registration Board (CRB) decision to deregister Family First, on the basis that its purposes are not exclusively charitable. Family First failed to convince the court that its principal focus on advocating a particular, traditional view of the family unit and marriage was of public benefit and charitable at law. The court also considered that some of Family First’s other advocacy purposes were not charitable.

The Family First decision - which is being appealed - follows on from the New Zealand Supreme Court's decision regarding Greenpeace. It can also be compared and contrasted with other recent CRB registration decisions – including the CRB’s decision earlier this year to reject Greenpeace’s claim to charitable status, and its later decision to affirm the registration of the animal welfare advocacy organisation Save Animals From Exploitation. 

Charity involvement in advocacy is also included within the scope of the Charities Act review.

The Charities Act review was announced in May and a detailed discussion document is expected to be released in October. For further details, see our previous FYI on the Charities Act review

From a tax perspective, key issues such as the “charitable purpose” definition and tax exemptions linked to registration are ostensibly excluded from the scope of the review.

However, charities need to be mindful that:

  • some important matters relating to eligibility for Charites Act registration are specifically included in the review, such as the registration of entities that operate businesses for the benefit of registered charities and the extent to which advocacy should be permitted without affecting eligibility for registration; and

  • as noted earlier, any charity-related findings in the TWG’s interim report will also be taken into account as part of the Charities Act review.

We are in the process of preparing submissions in anticipation of the review discussion document, and we would welcome your feedback on any concerns that you have regarding the current Charities Act registration and compliance regime.

Proposed “remedial” charity income tax, donation tax incentive and other law changes

Hidden amongst so-called “remedial” changes in the latest tax bill, which is currently before the Finance and Expenditure Select Committee (FEC), is a raft of changes impacting on charities and other not-for-profits.

For further details, see our submissions to the FEC on the "not-for-profits remedials" in the latest tax bill.

The charity income tax changes include the proposal noted above that all entities that use the charity business income tax exemption will be required to register under the Charities Act, from 2019. There are also further changes to the punitive income tax provisions that apply to entities that lose their exemption from income tax, in particular because they are deregistered under the Charities Act.

The donation tax incentive changes in the tax bill are significant. They include:

  • a proposal for listing with IRD to become mandatory for entities to qualify as donee organisations for donation tax incentive purposes, from 2019 - akin to the requirement to register under the Charities Act to access charity income tax exemptions, but without the same legislative framework, and protections, in relation to the listing process;

  • the proposal noted earlier that would require all charitable entities that wish to qualify as “donee organisations” to register under the Charities Act, from 2020 (in addition to IRD listing, and notwithstanding that donee organisations that have other, non-charitable qualifying purposes are not subject to any equivalent requirement);

  • a proposed specific anti-avoidance provision targeting donations tax credit claims, which is currently so broadly worded that it would effectively allow IRD to use the provision to attack donation tax credit claims in a wide range of donation fundraising scenarios; and

  • changes to allow interest and penalties to be imposed in relation to incorrect or excessive donation tax credit claims, while also providing that donors are not entitled to interest when donation tax credit refunds are held back by IRD.

Other charity-related changes in the bill relate to depreciation recovery income from a deemed disposal of depreciable assets when an entity becomes tax-exempt, and the extension of foreign trust reporting requirements to registered charities – over and above the Charities Act requirements that they already need to meet by such charities.

Policy officials and the FEC are currently considering submissions on the tax bill, and the FEC is scheduled to report back on the bill in January 2018.

Non-profit body GST law changes

The latest tax bill also now includes significant non-profit body GST changes, which have been belatedly added by a Supplementary Order Paper issued this month.

In broad terms, the intent of the changes is to ensure that GST-registered non-profit bodies cannot claim concessionary GST input tax credits on their acquisitions of goods and services without having to account for GST in respect of related disposals.

The changes address the current position that a GST-registered non-profit body can claim GST input tax on all acquisitions, including asset costs, that do not relate to any GST-exempt activity (eg, the on-supply of donated goods and services, financial services, accommodation), but this does not mean that the body has to account for GST output tax on related disposals.  GST will not apply to the disposal of an asset if the disposal is not part of the body’s “taxable activity” (eg, where a charity sells premises or other assets that it has used for non-taxable, non-exempt fundraising activities).

Going forward, it is intended that such disposals would effectively be deemed to be part of the non-profit body’s taxable activity, so that GST would apply (at the standard 15% rate, or 0% if the supply is zero-rated).

The changes also include transitional provisions to give GST-registered non-profit bodies a window of opportunity, until the end of March 2021, to exclude assets used for non-taxable purposes from their deemed taxable activity, or to deregister. Under the provisions, a body would account for the GST input tax previously claimed on asset costs, rather than accounting for full GST output tax on the disposal, or deemed disposal (in the case deregistration), of the asset. 

GST-registered charities and other non-profit bodies need to review their position in light of the changes, in particular to determine whether the transitional provisions should be used.

For some non-registered entities, the changes may also impact the decision whether or not to voluntarily register for GST purposes.

IRD targeting of donation tax credit claims

As indicated by the proposed donation tax incentive changes in the latest tax bill, noted above, donation tax incentives for monetary gifts to donee organisations - and especially donation tax credit claims by individual taxpayers - are a particular focus for IRD.

This reflects the fact that there has been a substantial increase in the amount of donation tax incentive claims since Parliament lifted the previous, restrictive caps on such incentives back in 2008, and extended concessionary tax deductions to all companies.

In addition to the proposed changes in the latest tax bill, donation tax credit claims continue to be a target of IRD compliance, audit and investigation activity, with a particular focus on situations where IRD thinks an individual has not made a true “gift” to a donee organisation.

IRD has issued various revenue alerts and other items setting on its view of what constitutes a “gift” for donation tax credit purposes, and in June issued items confirming the circumstances in which IRD will accept that parents’ donations to state and state-integrated schools will qualify for tax credits. Further items on parents’ donations to early childcare centres and to private schools are also proposed.

IRD’s audit and investigation activity has also led to disputes with taxpayers, and litigation, regarding the donation tax credit provisions.

On the litigation front, the High Court has very recently issued a decision rejecting IRD’s disallowance of a taxpayer’s donation tax credit claims, in circumstances where the taxpayer had loaned a significant sum to a Charities Act registered donee organisation and then progressively forgave the debt owed by the charity. The court confirmed that the forgiveness of debt each year constituted a monetary gift paid by the taxpayer to the charity, so that the taxpayer qualified for a donation tax credit.

The implication of the decision is that if you forgive (or have recently forgiven) debt owed to you by a donee organisation, for no consideration, you may be entitled to claim a donation tax incentive.

This decision may well be appealed by IRD, and decisions on other gift-related tax litigation are also pending, so this is an area where donee organisations and donors need to take particular care.

IRD moves in relation to donee organisations

In connection with donation tax incentive claims, IRD has also been reviewing and revising its position on the eligibility criteria for “donee organisation” status under current legislation.

IRD’s focus has been the principal “donee organisation” category, which covers entities that apply their funds “wholly or mainly” to charitable, benevolent, philanthropic or cultural purposes within New Zealand.

The longstanding position, accepted by IRD and supported by New Zealand case law, has been that “mainly” in this context means that more than half of an entity’s funds must be applied to charitable or other qualifying purposes within New Zealand. However, IRD has now strongly indicated that it will re-interpret “mainly” to mean 75% or more, despite submissions from the New Zealand Law Society and others opposing this re-interpretation.

Various additional issues also arise in relation to how you determine the extent to which an entity’s funds are applied to charitable or other qualifying purposes within New Zealand.  

IRD is expected to issue an item confirming its final position on the above matters very soon.

In addition, IRD is proposing to issue a further item on a related “donee organisation” category, which covers funds established and maintained exclusively for the purpose of providing money for charitable or other qualifying purposes within New Zealand.

Charities that principally pursue their purposes within New Zealand but also pursue their purposes overseas will need to review their position in light of IRD’s re-interpretation of the donee organisation provisions and its potential impact on donors’ tax incentive claims.

Further information and advice

If you need further information or advice regarding any of these developments, contact the Simpson Grierson Tax Team.