Hon. Michael Cullen
15 July 2003
Speech Notes

Address to the Community Trust Chairs meeting

This is not a time or place for me to talk to you, but for us to talk together. I am therefore going to make these comments brief, and to touch on two core issues: the relationship between the responsibilities of central government and the need for flexibility and local responsiveness of the trusts; and what the government is doing in the general area of charities.

You are trustees of very large amounts of money. It is a simple fact that the money did not fall from heaven, nor was it gifted by community benefactors. Community trust money has an unusual parentage. On the one hand, governments of the day provided for and guaranteed deposits in community based Trust Banks. On the other, the members of communities banked with them. Assets built up on the basis of individuals using the banks, and that use was no doubt encouraged and enabled by the underlying guarantee that the government provided.

The end result was a very special form of government-community partnership. We can leave aside the policy questions of the day that would seem quaint in this day and age: and especially why the government would see the need to guarantee particular financial services providers.

The fact is that the government guarantee conferred value, that was capitalised in the market value of the Trust Banks, and that was sold and converted into the assets that you now manage. It is always a problem when valuable resources crystallise into money: who owns them, and who controls them?

Control is relatively simple: you control them but I appoint you. (Of course that is the legal fiction: the cabinet does, in consultation with existing trustees, local MPs and other community representatives).

It is a very simple but dangerous game to demand independence. Independence of operation is only ever efficient if there is a very clear and effective articulation of ownership. The ownership of community trusts is scattered with the winds. The account holders have long since been merged with the operations of Westpac, or have moved on to other financial service providers. The reality is that nobody owns you, but everybody claims your assets and that is a very fragile and potentially fickle and unstable arrangement.

In reality, we will never settle the matter or ownership of trust assets. While trusteeship might be a convenient – and even permanent – resolution of ownership, the fundamental question of responsibility for ownership still has to be resolved.

This means that the focus inevitably shifts to control: what you do and how that stewardship is monitored by the government’s role in the appointments process.

This has been papered over in recent years, but this year I though it was necessary to make sure that we both knew where each was coming from and hence we have had the exchange of correspondence that led into this meeting.

The focus of the correspondence was on good governance and on ethics. The emphasis was on how we deal with conflicts of interests and the performance of trustees. I think we have clarified arrangements at the formal level, but we need to accept that the subtleties on conflict, on performance and of ethics can never be prescribed in regulations or letters of understanding. All are highly personal and subjective.

The reality is that there is a need for accountability both ways; from us for appointments and from you on performance, conflicts of interests and the ethical use of trust money.

That is where I would like our discussions to head today; not on the formal procedures and expectations outlined in my letter to you.

This leads naturally into the area of charities and where you, as guardians of money entrusted for charitable purposes, might be affected.

I will start with tax. Last year your representatives raised with me your concern over the significant compliance costs being incurred by community trusts in order to make tax-free distributions to mostly tax-exempt organisations.

During the past year officials have been working with representatives of the trusts on how to reduce these compliance costs. I am very pleased that the tax bill introduced last month included an amendment to exempt community trusts from income tax from 1 April 2004. Distributions will be subject to tax in the beneficiaries’ hands at their applicable marginal tax rates. The beneficiary, rather than the trust, has to account for the tax on the income. Tax exempt beneficiaries will still pay no tax on their distributions, but tax paying beneficiaries will.

In order to minimise compliance costs, it is not proposed that this beneficiary income be subject to a withholding tax payable by the community trusts based on the individual beneficiary’s tax liability. Likewise imputation credits received by the trusts will not be available for attaching to the distribution of beneficiary income.

Under the proposed amendment, community trusts can continue to distribute the corpus of the trust, that is the capital sums settled on the trust, capital sums made by the trust and accumulated tax paid income, earned prior to 1 April2004, without a tax impost.

That is where things stand in terms of the Bill currently before Parliament.

The gap that remains is the taxing of small distributions to not-for-profit taxpaying organisations. One consequence of the proposed amendment is that these organisations may incur compliance costs and be subject to income tax where they were not previously. One way of getting around this is to increase the $1,000 tax deduction currently allowed to not-for-profit organisations. This proposal will be examined as part of the 2004/05 IRD work programme later this year.

Finally, a few words on where things stand with the establishment of the Charities Commission.

A key feature of the new regulatory regime is that organisations wishing to continue to access tax benefits currently offered to charities will be required to register with the Commission. Information provided during the registration process will be used to determine if a charitable organisation is being set up with a clear public benefit in mind and for a charitable purpose. Two years transitional registration will be granted to organisations that currently hold a clearance letter from IRD.

Registered organisations will have a unique number that they will have to display on fundraising material and it will provide the public with an assurance that an organisation is carrying out charitable work.

The Commission will be primarily concerned with educating and supporting charities to achieve voluntary compliance with their core regulatory responsibilities. The enforcement scheme that has been developed is quite light handed, with one of its functions being to ensure that the public is given timely notification of whether organisations are fulfilling their regulatory obligations.

I am sure that more clarity about who is and who is not carrying out charitable work will assist you in evaluating the legitimacy of the many approaches you get for support from your trusts.

All in all, the environment that surrounds the community trusts is becoming more settled and less complicated. The role and expectations on trustees have been clarified, the tax rules have been simplified and the registration of charities is proceeding. The trusts are an important part of our social fabric, and I look forward to working with you in the future to enhance your effectiveness.

Thank you.

ENDS

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