Transition from tax-exempt status
Issue: The application of other income tax exemptions to deregistered charities
Clause 107
Submission
(New Zealand Institute of Chartered Accountants, New Zealand Law Society, Sue Barker)
New section HR 11 clarifies how a deregistered charity should establish its initial tax base – such as the opening values of its assets and consideration for its financial arrangements. These tax base calculations are required to be undertaken on and after the date that a deregistered charity ceases to derive exempt income.
New section HR 11 does not take into account the possibility that a deregistered charity may be eligible for one of the other income tax exemptions in the Income Tax Act 2007 (for example, the exemption for local and regional promotion bodies, amateur sports promoters or scientific or industrial research entities) which would avoid the need to undertake the tax base calculations in new section HR 11.
The wording of new section HR 11 should be clarified to confirm that it will not apply if a deregistered charity is exempt under a provision other than section CW 41 or section CW 42.
Comment
We accept the submitters’ points that an entity which is removed from the charities register may still be eligible for an income tax exemption under another provision of the Income Tax Act 2007. We did not consider it necessary to set out in legislation that other exemptions would still apply to these entities because it was clear that they would. Even so, given the concerns raised by submitters, this matter should be clarified in the legislation.
Recommendation
That the submissions be accepted.
Issue: Market value should be an option for valuation
Clause 107
Submission
(Ernst & Young, New Zealand Institute of Chartered Accountants, Sue Barker)
New section HR 11 does not allow a market value option in the valuation of an entity’s assets or financial arrangements. A market value option would be helpful in situations when historical cost information for valuing the entity’s assets or financial arrangements is not available.
Comment
We accept that some deregistered charities may not have sufficient records on the actual historical cost of their assets and financial arrangements because either they were not required to keep those records, or have low administrative capability which is common in smaller charities. Consequently, it would be difficult for them to establish the tax costs of their property, plant, equipment and trading stock. In this regard, having an alternative means of establishing the cost values would be helpful. However, we have concerns with using market value as an alternative because it could lead to higher depreciation deductions and present a risk to the revenue base.
We note that there is a requirement under section 41 of the Charities Act 2005 for registered charities to furnish to the Charities Board an annual return containing financial information about the assets and liabilities of the charity. For charities that do not have historical cost records they will be able to use the cost data provided in their annual returns.
Recommendation
That the submission be declined.
Issue: The operation of new section HR 11(5) should be clarified
Clause 107
Submission
(Ernst & Young)
Clarification would be desirable that any prepayment or deferred employment payment deductions allowed under the proposed section HR 11(5) would still be subject to subsequent balance date add-backs under sections EA 3 and 4, CH 2 and 3 of any amounts then remaining unexpired.
Comment
We agree that the operation of new section HR 11(5) should be clarified in the Tax Information Bulletin following enactment of the bill.
Recommendation
That the submission be accepted.
Issue: Entities should be able to elect to be a Māori authority retrospectively
Submission
(Te Ohu Kai Moana Trust)
If a deregistered charity is eligible under section HF 2 to be a Māori authority, it should be able to elect to be a Māori authority with effect from the date at which the charitable exemption in section CW 41 ceases to apply to it.
Comment
Under the proposed amendments, a deregistered charity will be taxed in accordance with the general tax rules of the Income Tax Act 2007 from the point at which it ceases to be eligible for the charitable income tax exemption. In the absence of another income tax exemption applying, these entities will be subject to tax based on their legal form or the activities that they carry out. For example, a company will be taxed as a company and subject to tax on its income at the corporate tax rate of 28%, a trust will be taxed as a trust and subject to tax on its trustee income at the rate of 33%, and a Māori authority will be taxed at the rate of 17.5%.
An entity which is eligible may choose to become a Māori authority by notifying the Commissioner of Inland Revenue. The election then takes effect prospectively. The rules concerning elections to become a Māori authority do not contemplate a retrospective election.
If a deregistered charity that is eligible to be a Māori authority is removed from the charities register and has ceased to act in compliance with its constitution or rules, its election to become a Māori authority would only take effect prospectively. This will result in that entity being taxed at a higher rate for its retrospective tax obligations than its prospective tax obligations.
We consider that deregistered charities which are eligible to be Māori authorities should be able to make a retrospective election to become a Māori authority.
Recommendation
That the submission be accepted.