Drafting issues
Issue: Use of the terms “ceased charities” and “date of cessation”
Clauses 19, 27, 104 and 107
Submission
(Sue Barker, New Zealand Law Society, New Zealand Institute of Chartered Accountants)
The word “ceased” should not be used in the headings of new section CV 17 and new section CW 41(6), as the charity may not have ceased. Similarly, this term should not be used in new section HC 31(1B). In addition, section HR 11 should be amended to refer to “the date of the change in circumstances” rather than “the date of cessation”.
Comment
The use of the term “ceased charity” was intended to denote that the entity’s “tax charity” status had ceased, rather than the charity itself. Officials accept that this phrase could be confusing and that a different phrase would be more appropriate.
Recommendation
That the submission be accepted.
Issue: Use of the term “person”
Clauses 19, 27, 107, 108 and 123
Submission
(Sue Barker)
The provisions relating to deregistered charities should use the term “entity”, as that term is defined in the Charities Act 2005, rather than “person”.
Comment
Officials consider that the term “person” is more appropriate than “entity”. The term “person” as used in the Income Tax Act 2007 encompasses a wider range of entity types than “entity” as defined in the Charities Act does. For example, an unincorporated body of people is a person, but would not necessarily be an entity.
Recommendation
That the submission be declined.
Issue: Use of the term “Charities Commissioner”
Clause 27
Submission
(Sue Barker)
There is a typographical error in proposed section CW 41(1)(aa)(i), it should say “Charities Commission”, rather than “Charities Commissioner”.
Comment
Officials agree that this is an error.
Recommendation
That the submission be accepted.
Issue: Use of undefined terms
Clause 27
Submission
(Sue Barker)
The term “Board” is not defined. A definition should be added to section YA 1.
Alternatively, a generic term, such as “charities regulator” should be used instead, and defined in section YA 1, as this could cover the Department of Internal Affairs as well as the Charities Registration Board.
Comment
We accept this submission. Statutory bodies, such as the Charities Commission, do not need to be defined in the Income Tax Act. The submission correctly noted that the Board is not defined in statute.
Recommendation
That the submission be accepted.
Issue: Eligibility to derive exempt income in section HR 12
Clause 108
Submission
(Sue Barker)
New section HR 12(2)(b) excludes assets which were gifted or left to the person while the person was deriving exempt income under sections CW 41 or CW 42. The adjustment should not turn on whether the entity was actually deriving exempt income under these sections, but rather on whether it was eligible to do so.
Comment
Officials accept this submission. In a small number of cases a deregistered charity may not have been actually deriving income, and so the use of an eligibility concept is appropriate.
Recommendation
That the submission be accepted.
Issue: Clarify what “distribution” means
Clause 108
Submissions
(Ernst & Young, New Zealand Law Society)
New section HR 12 requires net assets to be “distributed for charitable purposes”. It should be confirmed that assets may be regarded as “distributed” for the purpose of section HR 12 if their legal or registered ownership has not changed but there has been a change in the capacity and purpose for which they are held. For example, if a deregistered charity has resolved that particular assets be held on trust for another organisation with appropriate charitable purposes. (Ernst & Young)
To provide flexibility it would seem appropriate to refer to assets “distributed or applied” for charitable purposes within the relevant 12-month period and possibly also to clarify that this would include the entity settling, or declaring that it holds, assets on trust for charitable purposes within the 12-month period. (New Zealand Law Society)
Comment
We consider the term “distribution” is likely to be wide enough to encompass assets whose equitable ownership has changed. Even so, and for the avoidance of doubt, this matter can be made clearer in new section HR 12.
Recommendation
That the submissions be accepted.
Issue: Clarify whether gifts are to be disregarded in section HR 12 regardless of their current form
Clause 108
Submission
(Ernst & Young)
Clarification is required to determine that amounts must be disregarded in relation to gifts of money. It is not clear whether new section HR 12(2)(b) is intended to ignore gifts of money (regardless of the form in which they may now be represented and held) or the amounts of gifts which are now represented and held as money, even though the original gifts may have been of other types of assets or investment.
Comment
Officials consider this matter should be clarified in the Tax Information Bulletin, not in the legislation. The requirements in new section HR 12 are based on assets held at a relevant date. If an asset, other than money, was gifted to an entity but has since been disposed of and is now represented in money, that money is not ignored under proposed section HR 12(2)(b) as it is not in itself an asset other than money.
Recommendation
That the submission be accepted.
Issue: Clarify the definition of “net assets”
Clause 108
Submission
(KPMG)
The definition of “net assets” in new section HR 12 should be clarified to make it clear that if an asset is disposed of for an amount less than market value, at the entity’s “end date”, it is the amount of the net proceeds from disposal which is treated as income.
Comment
Officials consider this matter should be clarified in the Tax Information Bulletin, not in the legislation. The requirements in new section HR 12 are based on assets held at a relevant date. If an asset has been disposed of before that date for less than market value, then it is the amount of disposal proceeds which section HR 12 will take into account.
Recommendation
That the submission be accepted.
Issue: Suggested alternate approach to the amendments to section CW 41
Clause 27
Submission
(New Zealand Law Society)
The drafting of proposed section CW 41 is complicated and confusing, attempting to achieve its effect by way of amendments to section CW 41(1) and (5), plus the addition of new subsection CW 41(6), and a confusing provision relating to the application of the amendments (clause 27(5)).
The intent of the proposed amendments is to clarify the point in time when a deregistered entity is a tax charity and to ensure that an entity is not exposed to tax on a retrospective basis when the entity has effectively relied upon registration under the Charities Act 2005 in taking the position that it was tax-exempt.
A simpler way to achieve the policy intention would be to amend section CW 41 by:
- amending the definition of “tax charity” to clarify the start and end dates for this status; and
- adding a new subsection (which could be new subsection (1A), (2A) or (6)), that clearly states the intended effect (that is, tax charity status until the day of final decision, provided that the entity has complied with its constitution).
Comment
Officials believe the drafting of new section CW 41 meets the intended policy outcome but it could be simplified to improve taxpayer certainty.
The issue of retrospectivity, requiring the validation of past mistakes, coupled with the requirement of fairness on a go-forward basis and the current pre-existing structural complexity of section CW 41, all contribute to the difficulty of the drafting. The New Zealand Law Society’s suggestions, which are also complex, demonstrate the inherent drafting difficulties. Nevertheless, we believe the current drafting of section CW 41, enhanced by some minor clarifications suggested by the Law Society and other submitters, is “fit for purpose”.
Recommendation
That the submission be noted.
That new section CW 41 be simplified to improve taxpayer certainty.
Issue: Clarify that non-compliance with the entity’s constitution or rules does not necessarily mean it does not meet the requirements in new section CW 41(1)
Clause 27
Submission
(New Zealand Law Society)
It may be appropriate to state explicitly that a tax charity’s non-compliance with its rules does not necessarily mean that it does not meet the requirements set out in new section CW 41(1).
Comment
The proposed amendments apply to entities which are removed from the charities register. If an entity’s non-compliance with its constitution or rules does not lead to it being removed from the register, these rules will not apply to that entity.
Recommendation
That the submission be declined.
Issue: Drafting should recognise that the effective date of registration could be before the day an entity is registered
Clause 27
Submission
(New Zealand Law Society)
The drafting should recognise that under the Charities Act 2005 the effective date of registration may be either the time at which an entity actually becomes registered as a charitable entity or an earlier “effective registration time” (Section 20 of the Charities Act 2005 refers).
Comment
Section 20 of the Charities Act 2005 sets out that:
“The Board may, if it thinks fit, direct the chief executive to register a notice in the register of charitable entities that specifies that an entity must be treated as having become registered as a charitable entity at a time (the effective registration time) that is before the time at which the entity actually became registered as a charitable entity.
If the Board exercises its powers under subsection (1) in relation to an entity, the entity must be treated as having become registered as a charitable entity at the effective registration time for the purposes of this Act, the Income Tax Act 2007, and the Estate and Gift Duties Act 1968”.
Officials believe therefore that the proposed wording in clause 27 is adequate.
Recommendation
That the submission be declined.
Issue: Use of the term “day of final decision”
Clause 123(8)
Submission
(New Zealand Law Society)
It would be simpler if the term “day of deregistration” or “day of effective deregistration” were used instead of “day of final decision”. The reference in paragraph (a) of the definition of “day of final decision” to the day the entity “is removed from the register of charitable entities” is intended to refer to the effective date of removal specified by the Charities Commission or Board under section 31 of the Charities Act 2005, rather than the date the notice of removal is registered in the register under that section. This seems appropriate, provided that the effective date of deregistration cannot be set retrospectively. If the effective date of deregistration could be set retrospectively, then it may be appropriate to refer to the date the notice of removal is registered in the register under section 31 of the Charities Act 2005.
Comment
Officials intended this date to denote the effective date of deregistration, not the day on which the decision to remove the entity was actually noted in the register. As above, when referring to the effective date of registration, we believe that the current wording adequately achieves the policy intention.
Recommendation
That the submission be declined.
Issue: The drafting of section HC 31 should mirror that of section HR 11(1)
Clause 104
Submission
(New Zealand Law Society)
The proposed amendment to section HC 31 should mirror the drafting used in new section HR 11(1) in relation to the circumstances in which section HR 11 will apply – for example, instead of referring to a charitable trust “losing its charitable status”, new section HC 31(1B) should refer to a charitable trust “ceasing to meet the requirements to derive exempt income under sections CW 41 or CW 42”, or similar, or simply include a cross-reference to section HR 11.
Comment
The submitter raises a good point that the wording of new section HC 31(1B) should match that of new section HR 11 to ensure consistency between the two provisions.
Recommendation
That the submission be accepted.
Issue: Section CV 17 need not deal with the timing of derivation of the relevant income
Clause 19
Submission
(New Zealand Law Society)
New section CV 17 need not deal with the timing of derivation of the relevant income because this is dealt with in new section HR 12.
Comment
Officials see no harm in including this reference in both sections, as they will provide certainty for taxpayers about when this amount will be income.
Recommendation
That the submission be declined.
Issue: Proposed amendments in clauses 110 and 123(6) are potentially misleading
Clauses 110 and 123(6)
Submission
(New Zealand Law Society)
The proposed amendments in clauses 110 and 123(6) of the bill, which imply that there is a direct link between registration and deregistration under the Charities Act 2005 and the tax concessions relating to donee organisations and fringe benefit tax, are potentially misleading and inappropriate, and this may provide sufficient grounds for deleting both amendments, in their current form.
Comment
Officials do not believe these provisions imply a direct link between an entity being deregistered and an entity ceasing to meet the requirements to be a donee organisation or a charitable organisation for FBT purposes. We acknowledge that a deregistered charity might still apply its funds wholly or mainly to charitable, benevolent, philanthropic or cultural purposes within New Zealand and therefore qualify for these tax concessions.
The reason for including these amendments was to provide protection for entities and their donors when the entity is found to have ceased to meet the requirements at some time, but had nonetheless acted in compliance with their constitution or rules until deregistration. This is effectively a “grace-period”, similar to the one contained in proposed new section CW 41.
Recommendation
That the submission be declined.
Issue: Drafting of donee organisation status
Clause 110(1)
Submission
(New Zealand Institute of Chartered Accountants, New Zealand Law Society,)
The rationale of the proposed amendment to section LD 3(2) is to provide donors with a greater level of certainty that their donations tax relief will not ordinarily be reversed in circumstances when they have made a bona fide monetary gift and the entity they have donated to is later deregistered. In our view the current drafting of new section LD 3(2)(ab) does not reflect this.
A simpler approach to achieve the policy intent of the proposed amendment would be to provide specific protection for donors in relation to taking the position that an entity to which they have donated is a donee organisation. In this context, an entity’s registration under the Charities Act 2005 or listing on Inland Revenue’s donee organisation list could be specified as a sufficient or relevant grounds for concluding that an entity is a donee organisation.
Comment
Officials accept that the current drafting may not fully achieve the policy intention. This is explained in the item “Extending donee status to all registered charities”. The amendment is intended to apply to registered charities who meet the current requirements of a donee organisation. There are a number of ways to achieve this result. New section LD 3(2)(ab) should refer to a registered charity whose funds are applied wholly or mainly to purposes (as set out in its rules) within New Zealand.
Recommendation
That the submission be noted.
That new section LD 3(2)(ab) be redrafted to better achieve its policy intention.
Issue: Extension of FBT status
Clause 123(6)
Submission
(New Zealand Law Society)
The proposed amendment to the definition of “charitable organisation” in section YA 1, by adding a new paragraph (ab) that refers to deregistered charities, is intended to be taxpayer-friendly, by protecting organisations that have relied upon registration under the Charities Act 2005 in taking the position that the limited exemption from FBT for charitable organisations can be utilised.
The general intent of the proposed amendment is supported but the way in which the amendment seeks to achieve that intent is confusing and needs to be revisited. A simpler approach to achieve the general intent of the proposed amendment would be to provide specific protection, under either the Income Tax Act 2007 or the Tax Administration Act 1994, for an entity that has taken the position, on reasonable grounds, that it is a “charitable organisation” and in this context provide that an entity’s registration under the Charities Act 2005 or listing on Inland Revenue’s donee organisation list is a sufficient ground for taking such a position.
Comment
Officials accept that the current drafting may not fully achieve the policy intention. This matter is discussed in the previous item “Drafting of donee organisation status”.
Recommendation
That the submission be noted.
That new section LD 3(2)(ab) be redrafted to better reflect its policy intention.
Issue: Drafting of section HR 12
Clause 108
Submission
(New Zealand Law Society)
The exclusion of gifted assets, and potentially other items, should be dealt with as part of the “net assets” calculation, and the amount of income to be recognised under section HR 12 would then be the net assets value less the value of assets distributed for charitable purposes in the relevant 12-month period.
Comment
Officials believe the current drafting achieves the intended policy.
Recommendation
That the submission be declined.