High Court backdates charity's registration and confirms that the transitional definition of "tax charity" does not apply once a charity is registered

Summary

The High Court backdated the National Council of Women of New Zealand Incorporated's ("NCW") registration as a charity so that its registration was continuous. The NCW was, therefore, not liable for income tax during the period it was deregistered.

Impact of decision

The Commissioner of Inland Revenue ("the Commissioner") is required to refund the tax paid by the NCW.

The transitional definition of "tax charity" in s CW 41(5)(b) of the Income Tax Act 2007 ("ITA") has limited application so there are no considerable wider implications for this case.

Facts

This case involved two proceedings. The first proceeding was an appeal by the NCW against the decision of the Charities Registration Board ("CRB") not to backdate the NCW's registration beyond the date of its application to be registered as a charity ("the appeal").

The second proceeding was a challenge by the NCW against the tax assessed against it by the Commissioner during the period that it was not registered as a charity ("the tax challenge").

The NCW is a charitable organisation established in 1896. On 4 June 2009, following the enactment of the Charities Act 2005 ("CA"), the NCW was registered as a charity by the Charities Commission ("CC"). The effective date of registration was 30 June 2008.

On 22 July 2010, the CC revoked the registration decision with effect from 19 August 2010 ("the date of deregistration").

On 10 September 2012, the NCW applied to the CRB, the successor to the CC, for reregistration as a charitable entity. The NCW requested that it be registered from the date of deregistration so as to avoid any potential exposure to income tax during the period of its deregistration.

On 15 April 2013, the CRB granted the NCW's reregistration application but with effect from 10 September 2012, not 19 August 2010. That meant that during the period from 19 August 2010 to 10 September 2012 ("the deregistration period"), the NCW was not registered as a charity.

The Commissioner assessed the NCW for income tax for the deregistration period on the basis that it was not exempt from income tax.

Decision

The appeal

Counsel for the NCW argued that s 20(2)(b) of the CA is to be interpreted literally. She contended that as the NCW had lodged a properly completed application on 28 May 2008, the CRB's backdating power could have applied to any date after 28 May 2008.

Dobson J disagreed. His Honour found that the power to backdate registrations was "of a more confined scope", and that the CRB did not have the discretion to backdate under s 20 of the CA where there had been a deregistration decision (following an initial application and acceptance as a charitable entity) and a second application to the CRB (at [38] and [40]).

However, his Honour went on to consider whether the Court itself had a wider power to backdate under s 61 of the CA. Section 61(4) of the CA states that the High Court "may make any other order that it thinks fit".

Dobson J found that s 61 afforded wider powers to the Court on appeal than those granted by the CA to the original decision-maker (at [52]). Given the overall purpose of the CA is to encourage and promote the effective use of charitable resources, he concluded that an order backdating the NCW's registration to the date of deregistration was justified. Accordingly, his Honour ordered that the NCW is to be registered as a charity from 19 August 2010 (at [55]).

The tax challenge

The order backdating the NCW's registration was sufficient to resolve the tax challenge (at [56]). As previously acknowledged by the Commissioner, backdating the NCW's registration removed the basis for the assessments and, in those circumstances, the tax paid is to be refunded.

However, in case he is found to have been wrong in making that order, Dobson J went on to consider the competing positions raised by the parties.

In respect of the NCW's argument that it was a "tax charity" under the transitional definition in s CW 41(5)(b) of the ITA because it had started to take reasonable steps in the process of preparing an application for registration before 1 July 2008 and intended to complete the process of applying for registration, Dobson J stated that there was "an artificiality" in the NCW's contentions (at [70]). He stated:

• … NCW cannot accurately be described as having taken reasonable steps in the process of preparing an application before 1 July 2008 when it had in fact completed and lodged the application prior to that date. Furthermore, it is artificial to treat NCW as having an intention to complete the process of preparing an application from 1 July 2008, when the product of that work was already lodged with the Commission.

Dobson J stated that the NCW was "inarguably outside the scope of the transitional provision in paragraph (b) because it was registered" and that "there are no circumstances in which it could reasonably be contemplated that the transitional provision in paragraph (b) of the definition would be resurrected" (at [71] and [72]). Accordingly, his Honour rejected the NCW's interpretation of the definition of "tax charity" in s CW 41(5) and upheld the Commissioner's contention that the transitional provision in s CW 41(5)(b) ceased to apply when the NCW lodged its application for registration with the then CC (see [66]).

In respect of the NCW's argument that the Commissioner had a discretion to recognise it as a tax charity throughout the period of its deregistration, Dobson J accepted the Commissioner's position that there was no such discretion in s CW 41(5) to allow a care and management solution. He found that the Commissioner does not have discretion to disregard the law.

Accordingly, Dobson J stated that if he was wrong in backdating the NCW's registration, then he would dismiss the NCW's tax challenge.