Charity rules need a helping hand

Wellington (18 May 2015): Government needs to set clearer rules, provide greater transparency and remove the tax advantage enjoyed by for-profit arms of charity groups if it wants to promote the work of the charitable sector, according to The New Zealand Initiative.

The public policy think tank’s latest report, Giving Charities a Helping Hand, analysed over a decade of regulatory change in the sector, and found that the current rules are stacked against smaller operators while allowing commercial arms of large charities to claim income tax exemptions with little oversight.

“With about $16 billion flowing into charities a year, it is absolutely necessary to have effective regulation in place to maintain the public’s trust in the sector,” said Research Fellow Jason Krupp, author of the report.

“Unfortunately we appear to have set the regulatory bar too high in some places, with many legitimate charities struggling to attain or retain registered charity status, which threatens the vital work they do in communities.”

The report notes that under the Charities Act (2005), charities have little insight or say into how the Department of Internal Affairs assesses whether their purpose is charitable. In addition, the report notes that appeals to the regulator’s decision can only be made to the High Court, a costly option that many groups will not have the resources to meet.

At the same time, longstanding rules allow the for-profit arms of charities to retain earnings within the business tax free, with little oversight by the regulator into how much of this money is distributed to charities, and what these charities do with these funds once it is distributed to them.

“What the rules do is create a situation where commercial groups like Ngai Tahu and Sanitarium, both of which operate under registered charitable status, pay no income tax on any profits retained within the business, potentially giving them a significant advantage over tax paying competitors,” said Krupp.

With an estimated 700 limited liability companies on the Charities Register that generate over $372 million in tax-exempt profits a year, the report calculates that government foregoes about $104 million in fiscal revenue.

“We are not suggesting that registered charities should not be allowed to have for-profit arms, just that these businesses should compete with private firms on an equal footing,” said Krupp.

The report proposes that government rebalance the regulatory landscape by fulfilling a 2010 commitment to review the Charities Act and the definition of charitable purpose.

Charities must also be allowed to challenge the regulator’s decision on charitable status at far lower level than the High Court, such as the District Court. In addition, any appeal should be conducted on a de novo (from fresh) basis, as is done in the Environment Court.

Lastly, government must tax for-profit businesses owned by charities in the same way that private firms are taxed, while allowing unlimited deductions on distributions made to relevant charities.

Download the report here.

ENDS

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