Tax status of community housing entities
2014 amendments confer tax-exempt status and donee organisation status on certain community housing providers.
Sections CW 42B and LD (3)(1)(ab) of the Income Tax Act 2007; section 225D of the Tax Administration Act 1994
Amendments have been made to the Income Tax Act 2007 and the Tax Administration Act 1994 to confer tax-exempt status and donee organisation status on certain community housing providers that meet specified criteria (referred to as "community housing entities"). The amendments clarify the tax status of certain community housing entities that provide pathways to home-ownership for low-income households that cannot afford to buy a home on their own.
Previously, the tax-exempt status and donee organisation status of certain community housing providers who provided financial assistance to low-income households to purchase their own home was not always certain. This was because the charitable status of these entities was not clear. Charities law recognises the relief of poverty as a charitable purpose but entities that offer financial assistance to people to purchase a home tend to fall outside the charities criteria - the ability to purchase a house is an indication that a person is not "in poverty".
The Government believes that community housing providers should be able to offer a range of housing assistance options to their clients, for example, rental and home ownership. If an entity provides affordable home-ownership products aimed at low-income households, but in all other ways would be recognised as charitable in purpose, the Government believes that the provision of home ownership products alone should not disqualify that entity from being entitled to tax-exempt status or donee organisation status.
The Finance and Expenditure Committee recommended a number of clarifications to ensure that the provisions were clear and achieved their purpose. These changes allow:
- community housing entities to provide assistance to people who want to purchase an existing home, not just new homes;
- profits to be distributed to a parent organisation or other entity provided it is also for charitable purposes;
- income earned by a community housing entity from sources other than its housing activities, such as interest or investment income, to also be exempt; and
- the income threshold to apply only at the time a community housing entity starts helping a household, not on an on-going basis.
The amendments should provide greater tax certainty for certain community housing providers, and help to promote home ownership for New Zealanders who would not otherwise be able to afford to buy a house on their own.
- Section CW 42B of the Income Tax Act 2007 confers an income tax exemption on certain community housing providers which meet specified criteria as listed in the section. This entity is referred to as "community housing entity".
- Section LD (3)(1)(ab) of the Income Tax Act 2007 confers donee organisation status on a community housing entity, and ensures that donors who give monetary gifts of $5 or more to the entity qualify for tax relief on their donations.
- Section 225D of the Tax Administration Act 1994 provides for a regulation to be set describing who can be a client or beneficiary of a community housing entity.
The amendments apply from 14 April 2014 to coincide with the beginning of the new registration regime for community housing providers under the Housing Restructuring and Tenancy Matters Act 1992.
New income tax exemption
Under section CW 42B of the Income Tax Act 2007, the income of a community housing entity will be exempt from income tax.
To be a "community housing entity", an organisation must:
- be either a company or trust;
- be involved predominantly in the provision of housing;
- not be carried on for the private pecuniary profit of any individual;
- retain its profits, or distribute or apply its profits only to the following groups of people:
- community housing entities; or
- beneficiaries or clients of the entity; or
- tax charities; or
- persons to whom distributions would be in accordance with charitable purposes, and
- ensure that no individual is able to exert control over the activities of the entity to direct or divert amounts from those activities to their own benefit or advantage;
- be a registered community housing provider under the Housing Restructuring and Tenancy Matters Act 1992.
The majority of these criteria are similar to those described in sections CW 42(5), (6), (7) and (8) of the Income Tax Act 2007. They ensure that only community housing entities that operate under a non-profit model are eligible for the proposed income tax exemption.
There are also rules about the beneficiaries or clients of community housing entities. Even if an entity meets all of the requirements set out above, it will not be a "community housing entity", and its income will not be exempt if:
- less than 85 percent of its beneficiaries or clients are, at the time of first becoming beneficiaries or clients, described in regulations made under section 225D of the Tax Administration Act 1994; and
- the quality and standard of the housing provided by the entity is not consistent across all the recipients of the housing assistance.
Classes of recipients described in section 225D of the Tax Administration Act 1994
Section 225D of the Tax Administration Act 1994 permits the Governor-General to make regulations specifying people, or classes of people who are counted as beneficiaries or clients of the entity.
The factors which may be used to specify these beneficiaries or clients are:
- the person's geographic location in New Zealand;
- the composition of the household a person lives in;
- the income of the person or household relative to a maximum set by taking into account the lower quartile of household income based on household economic survey data published by Statistics New Zealand and adjusting the income maximum by an appropriate economic factor; geographic, household composition or otherwise; and
- the person's assets.
The regulation will contain income and asset thresholds. This will help community housing entities to determine what proportion of the recipients of their assistance meet the requirements, and therefore if they have breached the 85 percent rule described above.
The 85 percent rule means that an entity can still be a "community housing entity" if up to 15 percent of its beneficiaries or clients breach the income and asset thresholds set out in the regulation.
The income and asset thresholds are to be applied at the point at which a client or beneficiary first registers for housing assistance with the community housing provider, and are not to be measured on an on-going basis. This means assessments to determine whether an entity breaches the income and asset threshold's 15 percent limit must also be done at the point of entry.
Although up to 15% of the beneficiaries or clients that a community housing entity takes on are allowed to breach the income and asset thresholds, there is a requirement that the provision of housing to these people must not be substantially different to the provision of housing to the rest of the entity's beneficiaries or clients. This rule ensures that the quality and standard of the homes provided by the entity is consistent across all of the recipients of the housing assistance and avoids the entity being used to provide expensive homes to people on moderate to high incomes.
These criteria ensure that the income tax exemption is aimed at community housing entities that are involved in providing housing products to people who are on low incomes and who could not otherwise afford to buy a home without Government assistance.
The Minister for Housing and the Minister of Revenue will be responsible for establishing a framework for determining who can be an eligible recipient of housing assistance for the purposes of the proposed exemption. This framework is currently being developed.
Donations tax relief for donations to tax-exempt housing entities
Under current tax law, donors who make cash donations of $5 or more to donee organisations are entitled to tax relief based on their donation. In the case of individuals, this relief is in the form of a tax credit; in the case of corporate or Māori authority donors, in the form of a tax deduction.
The amendment to section LD 3(2) of the Income Tax Act 2007 confers donee organisation status on community housing entities.