Other matters
Issue: Administrative guidance on meaning of “benevolent”, “philanthropic”, “cultural” and “charitable” should be provided
Submission
(Sue Barker)
We understand that Inland Revenue is currently working on guidelines on the various limbs of section LD 3 – that is, what constitutes “benevolent”, “philanthropic”, “cultural” or “charitable” purposes for the purposes of section LD 3 of the Income Tax Act 2007. These guidelines could be usefully expedited.
Comment
Officials understand that this work is expected to be completed mid-year.
Recommendation
That the submission be noted.
Issue: “Declined” charities
Submission
(Sue Barker)
The tax consequences for charities that have been declined registration, as opposed to deregistered, can be just as complicated, and should also be addressed as part of these reforms.
Comment
The submitter raises a valid point. However, further work is required to investigate the policy implications of extending the proposed reforms to declined registrations. This work should be considered in the context of the Government’s tax policy work programme.
Recommendation
That the submission be noted.
That officials consider whether declined registrations should have the same treatment as deregistered charities as part of the Government’s tax policy work programme.
Issue: Amendments should be made to the Charities Act 2005
Submission
(Sue Barker)
The approach being taken to the definition of “charitable purpose”, and the Charities Act 2005 generally, by the charities regulator is too narrow, even “anti-charity”, and needs to be amended. The narrow approach of the charities regulator is incorrect as a matter of law, and will ultimately be found to be so. The approach is also contrary to the original rationale for the establishment of the Charities Act in the first place, which was to monitor “bad” charities, not to deregister so many “good” charities on the basis of fine, black-letter, and by no means universally accepted legal distinctions. Given this, and if the promised review of the Charities Act is not to take place, the most helpful amendment that could be made would be to the process by which decisions of the charities regulator can be appealed.
Comment
Officials note that any changes to the Charities Act 2005 would be outside the scope of this bill.
Recommendation
That the submission be declined.
Issue: The rules should also apply to charities which are required to obtain approval from the Commissioner of Inland Revenue
Clauses 27 and 28
Submission
(New Zealand Law Society)
There does not appear to be any reason why the new rules for deregistered charities should apply to entities that register under the Charities Act 2005 to become tax charities but not apply to entities that are required to obtain approval from the Commissioner of Inland Revenue. Both types of tax charity ought to be covered by these proposals.
Comment
Officials do not support the submission. The amendments apply to charities that have been deregistered or removed from the charities register. They do not apply to periods before 1 July 2008, the date on which the charities income tax exemptions in sections CW 41 and 42 were linked to registration with Charities Services. As a result, the grace-period for compliant deregistered charities, during which an entity is not exposed to tax on a retrospective basis where the entity has effectively relied upon the decision of Charities Services that it is charitable, cannot apply to periods before 1 July 2008.
Before 1 July 2008, whether an entity was a charity or not, and therefore eligible for the charities-related income exemption, was a question of fact and there was no requirement for Inland Revenue to register or approve a charity. However, a practice had developed whereby entities would specifically seek Inland Revenue’s confirmation that the entity met the requirements of the charities-related income tax exemption and Inland Revenue would in such cases issue a letter of confirmation.
We do not consider the grace-period afforded to compliant deregistered charities should apply to periods before 1 July 2008 for the following reasons:
- There was no registration system for charities – the proposed rules deal solely with the tax consequences for charities deregistered by Charities Services.
- The legislation before 1 July 2008 provided for charities to self-assess their eligibility for the charities-related tax exemptions. Notwithstanding the Inland Revenue practice of confirming charitable status, we cannot be assured that charities have complied with their rules in periods before 1 July 2008 as there was no formal registration or monitoring of charities.
- It would be very difficult to legislate for an administrative routine (the practice whereby Inland Revenue confirmed eligibility for the charitable tax exemption that existed before 1 July 2008), and to validate that routine with appropriate adjustments to take into account the current policy changes, at the same time.
- Inland Revenue should not be fettered in its ability to reassess non-compliant deregistered charities in periods before 1 July 2008. It is likely, however, that any such reassessment would occur only in the most egregious of cases, such as when fraud or tax avoidance, or serious mismanagement has been identified.
Recommendation
That the submission be declined.
Issue: An exemption from income tax should be given where an entity has a short break in registration
Clause 27
Submission
(New Zealand Law Society, KPMG)
New section CW 41 does not cover the position of an entity whose “tax charity” status, and therefore tax-exempt status, is affected by a short period of non-registration under the Charities Act 2005, even though the entity’s assets and income may be held, or distributed exclusively for charitable purposes at all times. For example, it is not uncommon for entities to seek re-registration under the Charities Act 2005, rather than bearing the cost of disputing the Charities Commission or Board’s decision to deregister an entity, but unless the effective date of re-registration precedes or matches the effective date of deregistration (for example, by way of backdating under section 31 of the Charities Act 2005), there will be a period of non-registration during which the entity is not a tax charity as defined in section CW 41, even under the amended definition of that term.
Consideration should be given to amending section CW 41 to provide for continuity of tax-exempt status in certain circumstances where an entity that is a tax charity is deregistered but then re-registers (for example, applies for and obtains a new registration) under the Charities Act.
Comment
Officials acknowledge that entities which undergo a short period of non-registration face a “broken period” for tax purposes, where they are subject to income tax for the period of non-registration. Under current tax law, the deregistered charity is required to file tax returns for any periods of non-registration.
We accept the submitters’ points that it would reduce compliance if entities which are eventually reregistered were provided with continuity of tax-exempt status in the interim period. The problems that officials encounter with this suggestion are how to provide such continuity, and whether doing so would undermine the charities registration regime.
With the benefit of hindsight, it may be apparent that an entity has a period of non-registration. At the time the entity is deregistered though, there is no way of determining whether that entity will later be reregistered. The proposed rules extend the tax charity status of entities which are compliant with their constitutions to the “day of final decision”. This means that if an entity is deregistered and disputes the deregistration decision it will not face a taxable period before re-registration.
Officials are also confident that the number of entities which encounter periods of non-registration should significantly decrease as a result of new administrative practices implemented by the Department of Internal Affairs. The most common reason for deregistration since the charities register opened has been the failure to file an annual return. Until recently, Charities Services automatically deregistered charities if they had failed to file one annual return. Under a new approach, registered charities will be given more opportunity to file their annual returns.
Officials note giving the Department of Internal Affairs the power to backdate an entity’s re-registration could further reduce the number of entities which have to file tax returns during periods of non-registration. This would, of course, only alleviate the need to file a tax return if the entity applied for reregistration before its tax return was due. However, changes to the Charities Act 2005 are outside the scope of this bill. Officials do not believe the tax consequences for entities facing short broken periods (but which do not form a material breach of tax-exempt status requirements) will be significant. However, officials from the Department of Internal Affairs are investigating options for giving Charities Services the power to backdate an entity’s registration as a charity in appropriate cases.
The issues raised in submissions were also covered in Inland Revenue’s regulatory impact statement New tax rules for deregistered charities.
Recommendation
That the submission be declined.
Issue: New section HR 11 should be broadened to apply to other entities that cease to be eligible for a tax exemption
Clause 107
Submission
(New Zealand Law Society)
The provisions in new section HR 11 could be broadened to apply not only to deregistered charities but also to other entities that are eligible for a general exemption from income tax and then become ineligible because they no longer meet the requirements of that exemption.
Comment
The Income Tax Act 2007 does not provide guidance about what rules apply when an existing entity that is neither a trust nor a deregistered charity enters the tax base.
The submission raises a valid concern that could be considered in the context of the Government’s tax policy work programme when it is next set.
Recommendation
That the submission be noted.
That the submission be considered in the context of the Government’s tax policy work programme when it is next set.
Issue: Guidance should be given on how to establish the cost of prepayments
Clause 104
Submission
(New Zealand Institute of Chartered Accountants)
The amendment to section HC 31 should be expanded to include guidance to trustees, or other persons liable for the satisfaction of the income tax liability of the trustee, on how to establish the cost of prepayments. Including calculation rules for prepayments in section HC 31 will give greater certainty and coherency.
Comment
The submission raises a valid point that should be considered further. We suggest that this matter should be considered in the context of the Government’s tax policy work programme when it is next set.
Recommendation
That the submission be noted.
That the submission be considered in the context of the Government’s tax policy work programme when it is next set.
Issue: Mistakenly applying funds for a non-charitable purpose
Clause 27
Submission
(PricewaterhouseCoopers)
As drafted, the grace-period for charitable status in new section CW 41 can end when the entity fails to act in accordance with its constitution. As a practical matter, charitable entities can apply funding to a large number of projects and causes and there is scope for an individual outlay to, strictly speaking, not be for a charitable purpose.
We submit that consideration should be given to narrowing the scope under which an entity can fail to meet the definition of “tax charity” under the amendment. For example, the previously released issues paper on this topic referred to a failure arising because the entity wilfully failed to comply with its constitutional documents.
Comment
The proposed rules for deregistered charities are triggered by deregistration. Therefore, the matter raised in the submission is directly related to the Charities Services deregistration process.
Recommendation
That the submission be declined.
Issue: Consideration should be given to enacting more tax exemptions
Submission
(PricewaterhouseCoopers)
Entities which are deregistered may continue to apply money they receive in a manner which is beneficial to the community or public. If the entity does not operate a “business”, arguably its revenue is not income under ordinary concepts. Difficulties can arise when determining to what extent expenses including grants and donations are deductible against that income.
In some cases, entities can act as “conduits”, receiving funding or donations and distributing these amounts to other charitable entities. We are concerned that, in this situation, an amount of “income” could arise without a corresponding tax deduction.
Comment
The submission raises an interesting issue that should be considered further. This matter should be considered in the context of the Government’s tax policy work programme when it is next set.
Recommendation
That the submission be declined.
That the submission be considered in the context of the Government’s tax policy work programme when it is next set.
Issue: Exemption for amateur sport promoters
Submission
(Dr Michael Gousmett)
The bill should be amended to require the commercial activities of amateur sport promoters to be liable to income tax at a rate to be determined by the Committee.
Comment
Currently section CW 46 of the Income Tax Act 2007 exempts the income derived by a “club, society or association” established mainly to promote an amateur game or sport. The submission seems to be concerned that the exemption now applies to entities with large commercial operations and so the original intention of the exemption may no longer be valid. Although the submission raises a valid issue more time is needed to consider this matter. We recommend that this matter be considered in the context of the Government’s tax policy work programme when it is next set.
Recommendation
That the submission be declined.
That the submission be considered in the context of the Government’s tax policy work programme when it is next set.