Tax status of certain community housing entities

(Clauses 28, 29, 110, 123(7) and 159)

Summary of proposed amendments

Amendments are being made to the Income Tax Act 2007 and the Tax Administration Act 1994 to confer tax-exempt status and donee organisation status on community housing entities who meet specified criteria. The amendments address current tax uncertainties relating to community housing entities who provide affordable home-ownership products to low-income households.

Application date

The majority of amendments will apply from 14 April 2014.

The specific criterion in the proposed income tax exemption that the entity must be a registered community housing entity under the Housing Restructuring and Tenancy Matters Act 1992 will apply from the date the new Regulatory Authority proposed under the Social Housing (Restructuring and Tenancy Matters) Bill comes into existence.

Key features

New section CW 42B of the Income Tax Act 2007 confers an income tax exemption on community housing entities which meet specified criteria, including only supplying housing products or services to specific classes of recipients which are listed in the new section.
The specific classes of recipients listed in new section CW 42B include other tax-exempt community housing entities, and people or classes of people, described in regulations to be set under new section 225D of the Tax Administration Act 1994.
New section LD (3)(1)(ab) of the Income Tax Act 2007 confers donee organisation status on community housing entities which meet the requirements in new section CW 42B, which ensures that donors who give monetary gifts of $5 or more to one of these entities qualify for donations tax relief.

Background

Currently, the tax-exempt status and donee organisation status of community housing entities involved in the provision of affordable home-ownership products aimed at low-income households with alternative housing options is not certain. This is because the charitable status of these entities is uncertain. Charitable entities that are registered with the Department of Internal Affairs – Charities Services are eligible for the charities-related income tax exemption and donee organisation status.

Charities law recognises the relief of poverty as a charitable purpose, however entities that offer affordable home-ownership products tend to fall outside the charities criteria – the ability to purchase a house is an indication a person is not “in poverty”.

The Government believes that community housing entities should have a range of options in relation to housing products to offer to recipients – for example, rental and home ownership. If an entity provides affordable home-ownership products aimed at low-income households, but in all other ways would be recognised as charitable in purpose, the Government believes that the provision of a home ownership product alone should not disqualify that entity from being entitled to tax-exempt status or donee organisation status.

The proposed amendments are intended to address the current lack of tax certainty, and help to promote home ownership for New Zealanders who would not otherwise be able to afford to buy a house.

Detailed analysis

Income tax exemption (clauses 28, 29, 123(7) and 158)

A community housing entity is eligible for the proposed income tax exemption if it carries on the business of providing housing products or services to the following recipients:

persons, or classes of persons, described in regulations made under new section 225D of the Tax Administration Act 1994; and
other community housing entities which are eligible for the proposed income tax exemption.

Classes of recipients’ criteria

New section 225D of the Tax Administration Act 1994 permits the Governor-General to make regulations specifying people, or classes of people who may be recipients of housing products or services offered by community housing entities.

The factors which may be used to determine a recipient are:

the person’s geographic location in New Zealand;
the composition of the household a person lives in;
the income of the person or household; and
the person’s assets.

These criteria ensure that the proposed exemption is aimed at community housing entities that are involved in the provision of new housing products to people who are on low-incomes and who could not otherwise afford to buy a home without Government assistance.

The Minister for Housing and the Minister of Revenue will be responsible for establishing a framework for determining who can be an eligible recipient of housing assistance for the purposes of the proposed exemption. This framework is currently being developed.

Furthermore, new section 225D contemplates that the regulations may have retrospective effect and could apply from a date before the bill containing these amendments is enacted.

Other exemption criteria

The community housing entity must also ensure that:

its business is not carried on for the private pecuniary profit of any individual;
all profit of the business is reinvested into the business; and
no person with some control over the business may be able to direct or divert an amount derived by the business for their own benefit or advantage.

These criteria are similar to those described in current sections CW 42(5), (6), (7) and (8) of the Income Tax Act 2007. They ensure that only community housing entities that operate under a non-profit model are eligible for the proposed income tax exemption.

Donations tax relief for donations to tax-exempt housing entities (clause 110)

Under current tax law, donors who make cash donations of $5 or more to donee organisations are entitled to tax relief based on their donation. In the case of individuals this relief is in the form of a tax credit; in the case of corporate or Māori authority donors, in the form of a tax deduction.

The proposed amendment to section LD 3(2) of the Income Tax Act 2007 confers donee organisation status on community housing entities.