Remedial amendments clarifying the rules for registration of charities

2008 amendments clarify the rules for registration of charities and resolve uncertainties for tertiary institutions, non-resident charities and schools.

Sections CW 41(5), CW 55C, LD 3(2)(bb) and (bc) of the Income Tax Act 2007, sections 32E(2)(kb) and (kc) of the Tax Administration Act 1994, sections 73 (2)(jb) and (jc) of the Estate and Gift Duties Act 1968

Amendments have been made to the Income Tax Act 2007, Tax Administration 1994 and the Estate and Gift Duties Act 1968 to resolve certain tax uncertainties that have emerged in the lead-up to the 1 July deadline for charities to register with the Charities Commission.

Background

Under law that came into force on 1 July 2008, charitable entities had to be registered with the Charities Commission by that date to be entitled to the charity-related income tax exemptions and for gifts to them to be exempt from gift duty. However, a number of associated gaps and uncertainties had been revealed in the lead-up to the 1July deadline.

A number of different types of entities were unclear about whether they had to register with the Charities Commission to retain their tax-exempt status. Concerns had also been raised by Inland Revenue over how it would deal with charities that had not completed the registration process by the deadline and with non-resident charities that are unable to register with the Charities Commission.

Key features

The amendments provide that:

  • Tertiary education institutions and certain non-resident charities will not be subject to income tax.
  • Those making gifts to state and state integrated schools, tertiary education institutions and certain non-resident charities will not need to pay gift duty on those gifts.
  • Those making cash donations to state and state integrated schools or tertiary education institutions can claim a charitable tax credit on the cash donation.
    The transitional changes allow Inland Revenue, in limited circumstances, to continue to treat an entity as tax-exempt as a charity if it has not completed the registration process by 1 July.

The amendments will mean that tertiary education institutions and state and state integrated schools will not need to register with the Charities Commission to retain their current tax-exempt treatment. However, they may still choose to register as a charitable entity under the Charities Act 2005 to have access to other benefits that flow from registration - for example, registered charity status can be a prerequisite for securing funding from other charitable organisations or can be a means of branding for some organisations.

Application date

The amendments will apply from 1 July 2008, the date on which the tax provisions in the Charities Act 2005 came into force.

Detailed analysis

State and state integrated schools

New tax provisions will apply to state and state integrated schools that are run by boards of trustees constituted under Part 9 of the Education Act 1989.

  • Section LD 3(2)(bb) of the Income Tax Act 2007 includes state and state integrated schools in the entities that are donee organisations. Donations made to donee organisations qualify for the charitable donations rebate for individuals and tax deductions for companies and Maori authorities.
  • Section 73 (2)(jb) of the Estate and Gift Duties Act 1968 exempts from gift duty gifts made to state and state integrated schools.
  • Section 32E(2)(kb) of the Tax Administration Act 1994 allows state and state integrated schools to apply for a Certificate of Exemption for resident withholding tax purposes.

Tertiary education institutions

New tax provisions will apply to tertiary education institutions (universities, polytechnics, specialist colleges and wananga) that are established under Part 14 of the Education Act 1989:

  • Section CW 55C of the Income Tax Act 2007 exempts from income tax the income derived by a tertiary education institution.
  • Section LD 3(2)(bc) of the Income Tax Act 2007 includes tertiary education institutions in the entities that are donee organisations.
  • Section 73(2)(jc) of the Estate and Gift Duties Act 1968 exempts from gift duty gifts made to a tertiary education institution.
  • Section 32E(2)(kc) of the Tax Administration Act 1994 allows tertiary education institutions to apply for a Certificate of Exemption for resident withholding tax purposes.

Charities that need more time to complete the registration process

New section CW 41(5)(ii) of the Income Tax Act 2007 deals with transitional tax consequences for charities that need more time to complete the registration process. It applies to entities that:

  • started, before 1 July 2008, to take reasonable steps in the process of preparing an application for registering as a charitable entity under the Charities Act 2005
  • intend to complete the process of preparing an application in future
  • have not been notified by the Inland Revenue that they are not a "tax charity";.

Inland Revenue has developed administrative guidelines on what organisations will need to do to be eligible for the transitional relief. These guidelines can be viewed in News and updates.

Charities that qualify for this transitional relief will continue to be treated as income tax-exempt, and gifts made to them will not attract gift duty.

Non-resident charities

New section CW 41(5)(iii) of the Income Tax Act 2007 enables Inland Revenue to approve certain non-resident charities as income tax-exempt on grounds of their having charitable purposes. Gifts made to these approved charities will not attract gift duty.

To be eligible for the proposed treatment, a non-resident charity must carry out its charitable activities outside of New Zealand and must not have a strong connection to New Zealand such that the Charities Commission is able to exercise its monitoring and enforcement functions under the Charities Act 2005.

Inland Revenue will develop a set of administrative guidelines on how it will assess whether a non-resident charity is eligible for the exemptions. These guidelines will be available on Inland Revenue's website.