Hon Parekura Horomia
Minister of Maori Affairs
Tax laws on Maori authorities to be modernised
The Government will modernise the tax rules on organisations managing Maori assets held in communal ownership, Revenue Minister Michael Cullen and Maori Affairs Minister Parekura Horomia announced today.
"The present rules date back to the early 1950s and have not kept pace with changes in tax law," Dr Cullen said. "As a result, taxpayers can face undue complexity and, in some cases, even double taxation."
Mr Horomia said there had been repeated calls from Maori over the years for the rules to be overhauled as, in their present shape, they were probably inhibiting Maori economic and social development.
"Tax rules specific to Maori authorities will continue to be needed because of the unique way that Maori freehold land and other tribal assets are administered and owned, including communal ownership and restrictions on the ability to sell," Mr Horomia said.
The main features of the proposed legislation are:
- The definition of "Maori authority" for tax purposes will be tightened to include only organisations that manage Maori assets.
- New tax rules relating to Maori authorities will be based on the company imputation model.
- The tax rate applying to Maori authorities will continue to be lower than the company tax rate because most members are taxed at a lower personal tax rate. The new withholding tax rate will reduce from 25 percent to 19.5 percent.
Other changes relate to the "charitable" status of Maori organisations for tax purposes:
- Entities that qualify as charities will not be excluded from the associated exemption from income tax simply because they benefit people connected by blood ties.
- Marae on Maori reservations whose funds are solely applied to the administration and maintenance of the marae will qualify for a "charitable" income tax exemption.
"The proposed changes have been the subject of consultation throughout the country with Maori organisations and their advisers, and we are confident that they will be widely welcomed by the Maori community," the Ministers said.
The new rules will be included in the taxation bill to be introduced in May.
Contact: Patricia Herbert [press secretary to Dr Cullen] 471-9412, 021-270-9013, or Wilma Falconer [press secretary to Mr Horomia] 471-9105 or 021-644-380.
Taxation of Maori Organisations
Questions and Answers
Why review the taxation of Maori organisations?
The specific tax rules applying to Maori authorities are complex and outdated. They were last revised in 1952 and, as a result, the rules do not incorporate subsequent changes in tax policy and tax administration, nor do they reflect the evolutionary changes undertaken by Maori organisations. These tax rules now involve unnecessary restrictions, complex processes and high compliance costs (such as tracking income) and, in some cases, can lead to double taxation of Maori authority income. This, in turn, may actually inhibit Maori economic and social development. Over the years there have been repeated calls from various Maori groups for these laws to be reviewed.
The inability of an entity to qualify for a "charitable" tax exemption when its beneficiaries are determined on the basis of bloodlines has been raised by the Maori community as a major concern, although it is by no means an issue limited to Maori. Although Maori organisations often provide benefits of a charitable nature to iwi and hapu, they might not qualify for an exemption because their benefit extends to a specified group of people connected by blood-ties - that is, they fail to meet the "public benefit" test for charitable status. It is recognised that this test seems inappropriate to New Zealand society because it fails to recognise New Zealand's unique cultural groupings.
The tax status of marae was also raised as a significant issue for Maori. Marae have similar functions to churches and public halls but often cannot gain the same "charitable" tax exemption as these institutions because of the "public benefit" test and the uncertainty about whether maintaining marae is a "charitable" purpose at common law.
What are the proposed changes?
The key proposal in this package recognises that there is a continued need for a separate tax framework for Maori authorities because of:
- restrictions Maori authorities face in the development of their assets;
- impediments which pose barriers to economic efficiency in the use of their assets; and
- attenuated and ill defined property rights of individual members associated with Maori authorities.
The policy rationale for retaining a separate tax framework for Maori authorities is to recognise the restrictions and limitations placed on those Maori organisations that own and administer property for the benefit of Maori by applying tax rules that take account of these barriers.
These characteristics set certain Maori organisations apart from companies and trusts. The most defining characteristic is the non-transferability of property rights, and this is particularly evident in relation to Maori authorities that administer Maori freehold land on behalf of their owners under the Maori Land Act 1993.
Thus, tax rules specific to Maori authorities will continue to be needed because of the unique way that Maori freehold land and other tribal assets are administered and owned, including communal ownership and restrictions on the ability to sell.
The main features of the Maori authority proposal are:
- The definition of "Maori authority" for tax purposes would be tightened to include those entities that are the subject to the restrictions and constraints described above.
- The new tax rules would incorporate a credit attribution system, similar to the company imputation model, and would apply to all Maori authorities.
- The tax rate applying to Maori authorities would continue to be lower than the company tax rate because most members are taxed at a lower personal tax rate. The new standard rate on retained earnings would be 19.5 percent, down from the current 25 percent for large authorities.
There are a number of second-order issues relating to detailed design and transitional issues that are still being finalised.
What are the Maori authority proposals aimed at?
The Maori authority proposals are aimed at clarifying and simplifying tax administration for Maori authorities and minimising the extent to which individuals who derive benefits from these entities must interact with the tax system. In particular the proposed rules should update and simplify the tax processes for Maori authorities and their members and the Maori Trustee. This should mean that there would be less need for these taxpayers to interact with Inland Revenue.
Why is the deduction for donations available to Maori authorities being extended?
The current deduction available to Maori authorities for donations to Maori associations is being extended to include donations of money to organisations with "approved donee status". The deduction would continue to be limited to 5 percent of the net income of the authority, but any changes in the company deduction limit should also apply to the deduction available to Maori authorities. This proposal should recognise the greater range of community benefits that are assisted by Maori authority funding.
Why is the public benefit test being relaxed?
The public benefit test is being relaxed so that an entity that meets the "charitable purposes" requirement should not be automatically excluded from the charitable income tax exemption simply because its members are connected by blood ties. In determining whether an entity meets the public benefit test other factors must be considered, such as the nature of the entity, the activities it undertakes, the potential beneficiary class, the relationship between the beneficiaries and the number of potential beneficiaries.
In practice, the application of this proposal will require some guidance so that an entity can determine whether it benefits a sufficient section of the public.
Can marae be "charitable" organisations for tax purposes?
Marae situated on Maori reservations (pursuant to the Maori Land Act 1993) that solely apply their funds to the administration and maintenance of the physical structures of the marae may qualify for charitable tax exemption.
This measure would not preclude marae or marae based organisations from seeking the general charitable income tax exemption if they meet the common law requirements of a charity (as amended by the public benefit test proposal).
If I have any questions, how can I get answers?
The discussion document, Taxation of Maori organisations, on the website of the Policy Advice Division of Inland Revenue at www.taxpolicy.ird.govt.nz, contains details on the proposals. It also contains the history of the Maori authority tax rules and a glossary of the tax terms as they apply to Maori authorities.
A commentary on the bill will be available when the bill is introduced at the above website. The commentary will explain the policy underlying the proposed new rules and how they work. We will be distributing hard copies of the relevant parts of the commentary to interested parties.
What Maori input was there in the development of the proposed reforms?
Preliminary discussions on the review's terms of reference were held with key national Maori organisations including the Federation of Maori Authorities, the Maori Trustee, the Maori Women's Welfare League, and the New Zealand Maori Council.
In February 2000, a series of focus-group discussions were held with Maori organisations and tax practitioners to seek feedback on initial policy ideas that the review team had developed. These initial ideas considered the appropriateness of applying company and trust taxation to Maori authorities, and the options for retaining and simplifying the current Maori authority tax rules. Options for amending the law of charities as it relates to Maori organisations were also canvassed.
On 9 August 2001 the Government released a discussion document on the review of the taxation of Maori organisations for public consultation. The document contains proposals for simplifying and updating the income tax rules applying to a broad range of organisations known as "Maori authorities", including marae, runanga, land trusts, trust boards, incorporations, and for Maori organisations seeking "charitable" tax exemption.
To support the discussion document, information workshops were held in 22 regions around the country. The purpose of these workshops was to raise awareness about the proposals set out in the discussion document and to encourage people to make submissions on the proposed changes. Over 1200 people including trustees and administrators of Maori organisations, tax professionals and other interested parties, attended these workshops. In response to numerous requests from people for more time to make submissions, the Government extended the submission closing date from 19 October to 9 November.
Eighty-one submissions were received on the document, from a wide range of people.
The key views arising from this consultation round was that the tax rules for Maori authorities should be simple and flexible in order to accommodate the future development needs of Maori organisations and businesses. It was also believed that the tax rules should be consistent with the Government's desire to minimise, as far as practicable, the extent to which individuals must interact with the tax system. There was a clear preference for retaining a separate set of rules for Maori authorities - but in a more efficient and simplified form.
The Federation of Maori Authorities and the Maori Trustee have had input into the policy development process.
The proposed reforms were developed after consideration of the submissions received and further consultation on the discussion document proposals.
What will happen after this?
The proposed changes will be contained in a tax bill scheduled for introduction in mid May 2002.
After the legislation is introduced, it will have its first reading and be referred to a Select Committee, which will call for submissions from the public. This is another opportunity for people to have their say on the proposed changes before they become law.