Currently, Charities in NZ are broadly exempt from income tax. This is a choice that ‘we’ as a society have made. It is centred on the view that if an organisation is established for a charitable purpose, then ‘we’ should support that organisation and maximise the resources it has available to achieve its purposes.
There are often debates around how wide the tax exemption should apply. The case of Sanitarium, a health food company owned by the Seventh-day Adventist church, is often quoted as the ‘case in point’.
On 24 February 2025, Inland Revenue released an Officials’ Issues Paper titled Taxation and the not-for-profit sector. The release of the Paper represents the first step in a potential fundamental change to the taxation of charities in New Zealand.
One of the questions raised by Inland Revenue is whether income from a business that is unrelated to achieving its charitable purpose should be subject to income tax. It asks what are the most compelling reasons to tax or not tax such businesses, what are the most significant practical implications and how to define whether a business is related to a charitable purpose?
A flow on question becomes, if a business owned by a charity is subject to tax and that after tax profit is subsequently applied for a charitable purpose, should the charity receive a tax credit i.e. a tax refund. This would be akin to a charity making an interest free loan to the Government that is repaid when cash is applied for a charitable purpose. At least a bank pays interest…
A further focus from Inland Revenue is donor-controlled charities and whether additional rules are required due to the risk of tax abuse. The key proposed changes appear to be whether to restrict how tax exemptions apply to donor-controlled charities and their business operations and whether to introduce a minimum distribution amount that must be applied for a charitable purpose each year.
To the extent a charity pays tax, it has less cash available to be applied for a charitable purpose. What is missing from the Inland Revenue Paper is how that funding shortfall is to be met to ensure a net drop in charitable services does not arise. Even cash which is reinvested into a business operated by a charity, reduces the need for bank funding which would otherwise reduce the net profit able to be applied to charitable activities. Will the Government make up the difference?
It is also curious that the Paper provides no ideas or consideration to changes that might help or support New Zealand’s charities. A one-sided Paper indeed.
