Feedback sought on proposals to clarify tax rules for deregistered charities

A tax policy officials’ consultation paper released today seeks feedback on proposals to clarify the tax rules that apply when a charity is removed from the Department of Internal Affairs’ Charities Register.

Registration as a charity is voluntary but charities that choose to register can qualify for certain tax concessions, including tax-exempt status.  They may also be eligible for greater funding as some donors and funders support only charities that are on the register.

However when a charity is deregistered it can face significant and complex tax consequences, depending on the reason for deregistration.  Some can be serious, particularly if the deregistered charity has not had a proven charitable purpose for some time.  Others may simply have failed to file the required annual return with Charities Services which administers the register.

In welcoming the paper’s release, Revenue Minister Todd McClay said he expected the options presented in the paper would be seen as a positive step towards giving charities greater certainty about how the tax rules applied.

”Given the importance of the charities sector in our communities it makes sense to look at how we ensure that rules around the tax-exempt status of charities are properly targeted and that when a charity is deregistered, it is clear about its new tax obligations,” said Mr McClay.

The paper seeks to canvass public opinion on proposed changes to the tax rules that could help to deal better with the varied circumstances of charities when they are deregistered.

These include:

• clarifying how the general tax rules, including the company, trust or other entity-specific regimes apply to deregistered charities;

• establishing the opening values of any depreciable property or consideration for any financial arrangements held by a deregistered charity when it becomes a tax-paying entity; and

•  prescribing specific timing rules for when the tax provisions apply.

Feedback is also being sought on whether additional measures might be helpful to ensure that affected charities are aware of their tax obligations following deregistration.

“For the overwhelming majority of former charities who have genuinely tried to meet their registration requirements in good faith, the changes proposed will provide greater certainty about their new tax obligations,” Mr McClay said. 

The officials’ issues paper, Clarifying the tax consequences for deregistered charities is available at Inland Revenue’s tax policy website, www.taxpolicy.ird.govt.nz

Submissions close on 23 August.