End of “tax charity” status and grace-period for compliant entities
Issue: Compliance with the relevant constitutional documents or other information supplied to the Charities Commission or Board at the time of applying for registration
Clause 27
Submissions
(New Zealand Institute of Chartered Accountants, New Zealand Law Society, Sue Barker)
The amendments to section CW 41 ensure that deregistered charities will continue to be tax-exempt until the date of “final decision”, so long as they have acted in accordance with their constitution or other information supplied to Charities Services at the time of applying for charitable status. This effectively provides a “grace-period” for compliant entities starting from the date of registration with Charities Services to the earlier of two dates: namely, the day the entity is removed from the charities register or the day on which that entity exhausts all disputes and appeals to determine its charitable status.
The requirement to act in accordance with “information supplied … at the time of applying for charitable status” is unclear and not workable. This is because an entity’s constitution may be amended over time, and the requirement to act in accordance with information supplied at the time of applying for registration will become increasingly anachronistic and irrelevant as time passes. We suggest changing this requirement to refer instead to the “constituting document” or the “entity’s rules as filed on the charities register”.
Comment
We support the submissions. The constitution or rules of a registered charity are required to be filed on the charities register and any changes to the constitution or rules of the entity are required to be notified and reviewed by Charities Services. The constitution or rules of the entity as they appear on the charities register are current. Therefore, we believe it is sufficient to refer to the entity’s rules as they appear on the charities register.
Recommendation
That the submissions be accepted.
Issue: It is unclear why “day of final decision” should be used as an end point for the grace-period
Clause 27
Submission
(New Zealand Law Society)
As noted above, the grace-period effectively allows an entity to remain a tax charity, and to be protected from exposure to tax on a retrospective basis, until any appeals or proceedings “in relation to … charitable status”, are finalised or exhausted.
It is unclear why this should be used as an appropriate end date.
If such appeals or proceedings are successful, the entity should not be removed from the register at all. It is also noted that that the Courts can make interim and final orders for an entity to be restored to the register from a specified date and to remain on the register (sections 60 and 61 of the Charities Act).
If such appeals or proceedings are unsuccessful, there does not seem to be any reason why the effective date of removal specified by the Charities Commission or Board, or effective date of removal as determined by the Court should not stand.
Comment
The protection afforded by the “grace-period” is based on whether a charity has been compliant with its constitution or rules. This is a significant departure from the current rules, which assess whether a charity is deriving income for charitable purposes.
We do not agree that the grace-period should end sooner for entities which do not successfully appeal their deregistrations. This is because these entities would have been acting in compliance with their constitutions or rules, and we feel comfortable that they should continue to be tax-exempt until the point that it is determined whether or not they will continue to be registered. The decision to deregister the entity might have come about as a result of a change in jurisprudential interpretation of whether a specific activity is in fact charitable in purpose. To subject the deregistered entity to tax while it is disputing the decision to deregister would impose unnecessary tax and compliance costs on an entity which has acted in good faith in compliance with a constitution it believed met the requirements for charitable status.
Recommendation
That the submission be declined.
Issue: Grace-period for compliant entities should be retrospective
Clause 27
Submission
(New Zealand Law Society)
The amendments should also apply with retrospective effect given that the amendments are taxpayer-friendly, and entities that have already been deregistered should be given the protection afforded by the amendments.
Comment
The amendments relating to the grace-period are intended to provide increased certainty that, for tax purposes, entities can rely on the decision made by Charities Services to recognise that entity as charitable in purpose. Other amendments, such as the new tax on accumulated net assets in new section HR 12, impose additional requirements on deregistered charities. Those requirements are intended to maintain the integrity of the tax concessions available to charities and improve overall public confidence in the charitable sector.
The grace-period is taxpayer-friendly, and will reduce the number of organisations which could face retrospective tax liabilities if they are deregistered. We understand the desire for certain taxpayer-friendly changes to have retrospective effect, but we note that they are designed as part of a package of changes, some of which would not be appropriate to apply retrospectively.
Recommendation
That the submission be declined.