OS 06/02

Issued

01 Dec 2006

Interaction of tax and charities rules, covering tax exemption and donee status (Dec 2006)

OS 06/02 outlines how the Charities Commission and IR will manage charitable entities and tax exemption requirements.

This Operational Statement also appears in Tax Information Bulletin Vol 18, No 11 (December 2006).

Introduction

This statement outlines how the Charities Commission and the Inland Revenue Department will monitor and advise charitable entities of the requirements for income tax and gift duty exemptions and donee status following the opening of the Charities Commission register on 1 February 2007.
The Government has acknowledged the enormous contribution that the charitable sector makes to New Zealand. To aid in the funding of charitable organisations the Government provides a subsidy in the form of an exemption from income tax that allows such entities' spending on charitable purposes to be made out of untaxed income. Other tax benefits are also provided. Many charities and other organisations also receive an indirect subsidy through allowing donors to qualify for a rebate from their income tax.
However, it is acknowledged that there is little or no monitoring of the activities of charitable organisations. There is a lack of information about who benefits, and how, from the tax assistance provided. Furthermore, the charitable organisations have to deal with many different Government agencies on a regular basis.
The Charities Commission has been established to promote public confidence in the charitable sector, to promote the effective use of charitable resources and educate and assist charities in relation to matters of good governance and management. The Commission's functions include advising charities on matters of good governance, establishing and maintaining a charities register, monitoring registered charitable entities and reporting on matters relating to charities.
In accordance with the goals of the Charities Act 2005, Inland Revenue and the Charities Commission will work together to provide information on the tax status of charitable entities. The Commission's website may be accessed at www.charities.govt.nz for general information and information on to how to apply for registration.

Application

This Operational Statement will apply from 1 February 2007.

Background

Income tax exemptions are available to trusts, societies and institutions that meet the requirements of the Income Tax Act 2004 in terms of deriving income for charitable purposes. Exemptions from income tax are provided for under section CW 34 (non-business income) and CW 35 (business income) of the Income Tax Act 2004. Under the self assessment regime an organisation must assess for itself whether these income tax exemptions apply to it.
Although taxpayers are required to self assess their tax obligations, the practice has been that charities have sought the opinion of the Commissioner of Inland Revenue on their tax status.
In accordance with one of the aims of Government in establishing the Charities Commission there will, as much as possible, be a seamless interface between registration and entitlement to tax exemptions. From 1 July 2008, it will be a pre-requisite for charities wishing to obtain these tax exemptions that they are first registered with the Charities Commission as "charitable entities" under the Charities Act 2005. Once registered, charities will still need to assess for themselves whether they meet the requirements of the tax legislation to obtain a tax exemption or advantage. Inland Revenue can challenge their decision at a later date, generally by audit, but will not be involved in giving advice on charitable status prior to registration.
A working protocol has been agreed between Inland Revenue and the Charities Commission through which entities that register as charitable entities under the Charities Act 2005 will also be advised of the requirements for the charities tax exemptions.
Where the charities legislation and the Income Tax legislation do not align (business income and donee status) this Operational Statement provides advice to organisations so they can ensure compliance with the requirements for tax exemption. The Charities Commission and Inland Revenue will work together to ensure that charitable entities are aware of relevant tax information.
To enable the Charities Commission and Inland Revenue to work together provision is made for the exchange of information between the Charities Commission and Inland Revenue. Section 30 of the Charities Act provides for the supply of Charities Register information by the Charities Commission to Inland Revenue for the performance of the functions of the Revenue Acts.

Summary

The following is a summary only and more detail is provided within this operational statement. In brief, Inland Revenue's operational practice will be:
1. entities with non-business income that are registered with the Charities Commission will prima facie qualify for the income tax exemption in respect of that income;
2. for entities that derive business income, registration alone will not be sufficient for the business income tax exemption and they must self assess the extent to which their charitable purposes are carried out in New Zealand ;
3. entities that currently enjoy income tax exemption should register with the Commission by 1 July 2008. Failure to do so will result in the loss of their tax exempt status until they are subsequently registered;
4. entities currently listed as donee organisations will continue to enjoy donee status even though they may decide not to register with the Charities Commission;
5. newly registered charities will generally not need to make separate application to Inland Revenue for donee status;
6. organisations that choose not to become registered charitable entities may still apply to Inland Revenue for approval as donee organisations;
7. during the transitional period (from 1 February 2007 to 30 June 2008 ) charities will retain their existing tax exempt status for income tax, gift duty and resident withholding tax;
8. the exemption from gift duty for gifts to charitable trusts, societies and institutions will cease from 1 July 2008 where the entities have not registered with the Commission;
9. from 1 July 2008 Inland Revenue will not issue certificates of exemption from resident withholding tax to charitable entities unless they are registered with the Commission;
10. charitable organisations are still required to have IRD numbers;
11. after 30 June 2008 Inland Revenue will attempt to contact charitable organisations that our records show have an exemption from income tax, and have not registered with the Charities Commission, to determine their position; and
12. in the past Inland Revenue has suggested there be restrictions in their rules preventing entities from altering certain clauses without prior approval. Inland Revenue strongly recommends that organisations remove any requirement in their rules for Inland Revenue to consent to rule changes. To enable this to happen, Inland Revenue hereby consents to an amendment removing any such rule. Inland Revenue will not otherwise give specific approval to any rule changes.

Operational Practice

On becoming registered with the Charities Commission an entity will receive a letter from the Commission notifying them that their application has been successful and enclosing Inland Revenue information as to the implications for their tax position as a charity.
Trusts, societies or institutions with non-business income that are registered under the Charities Act will prima facie be treated by Inland Revenue as qualifying for the income tax exemption. There is one exception to this prima facie treatment by Inland Revenue. This relates to council-controlled organisations (CCOs) discussed at paragraph 46 below. Such entities are not necessarily entitled to the non-business income tax exemption and are encouraged to contact Inland Revenue's Large Enterprises Unit for further advice.
Inland Revenue's practice (as set out in the booklet Charitable organisations (IR 255 December 2002) at pages 38 to 45) has been that an organisation would forward a copy of its founding documents and these, which could be in draft form, would then be considered and advice given as to whether or not the organisation met the requirements for the tax exemption(s) sought. Generally we will no longer be doing this. Charities will not require, and should not expect, clearance from Inland Revenue before applying for registration with the Charities Commission. The booklet Charitable organisations is being revised and should be available in February 2007. It is recommended that you refer to this booklet for further information.

Business income
Trusts, societies or institutions that derive income from a business (excluding income derived by a council-controlled organisation (CCO) or local authority from a CCO) are exempt from income tax to the extent that the income is applied to charitable purposes within New Zealand, provided that no person with some control over the business is able to direct or divert income derived from the business to their benefit or advantage.

Business income - extent to which charitable purpose carried out in New Zealand and diversion of amounts derived from the business
For trusts, societies or institutions that derive business income, registration alone will not (as in the case of non-business income) be sufficient for the business income tax exemption. The trusts, societies or institutions must also self assess the extent to which their charitable purposes are carried out in New Zealand. Furthermore, it is required that no person with some control over the business may able to divert an amount derived from the business to their own benefit, and neither may the trust, etc be carried on for the private pecuniary profit of any individual.
Where the charitable purpose is not limited to New Zealand, the income is apportioned between those purposes within New Zealand and those outside New Zealand and taxed accordingly. This self assessment must be undertaken year by year.
Whether a person is able to divert an amount by materially influencing decisions is a matter of fact and degree. In any audit the documentation of charitable entities (trust deeds or constitutions, etc) will be examined to determine whether a person with some control over the business is able to exert influence that would enable that person to receive a benefit or advantage. A determination has to be made as to whether a benefit is gained or is able to be gained by a person (who has some control of the business) had it not been for the influence of that person.
A person does not have some control over a business merely because they provide professional services to the business and their ability to determine the benefit or advantage arises (i) in the course of a professional public practice, or because they are (ii) a trustee company, (iii) the Public Trust or (iv) the Maori Trustee.
If it is clear that the establishment of any benefit or advantage has been undertaken in a manner to ensure that no more than market value was paid, Inland Revenue will accept that there has been no material influence.
A payment for the provision of services or goods at market value will not be considered to be a benefit or advantage.

What happens if a charity doesn't register with the Charities Commission by 1 July 2008?
The Charities Act provides for amendments to the tax legislation requiring a charity to be registered to qualify for a "charitable" tax exemption. If a charity is registered before the date that the amendments to the tax legislation come into force (1 July 2008), it is likely to be in a position to "seamlessly" continue to assess itself as tax exempt. However, if an organisation registers after the tax amendments are in force, that charity may not qualify for income tax exempt status for the whole year. For an entity with a 31 March balance date that is registered with the Charities Commission as of 1 February 2009 the situation would be:

Period from 1 April 2008 to 30 June 2008 tax exempt
Period from 1 July 2008 to 31 January 2009 liable for tax
Period from 1 February 2009 to 31 March 2009 tax exempt.

Accordingly it would have to file a return for the year ending 31 March 2009 to account for the period from 1 July 2008 to 31 January 2009. Inland Revenue will attempt to contact those charitable organisations that it has a record of as currently having an exemption from income tax and do not register with the Charities Commission by 1 July 2008. The purpose of this contact will be to ascertain the current intention of the organisation as to registration.

Donee status
The Commissioner of Inland Revenue's approval is required for donee status whether or not the entity is registered as a charity. This is a separate process from applying to the Charities Commission for registration as a charity. In order to determine whether a rebate can properly be claimed by a donor, Inland Revenue needs to consider whether the society to whom the money was donated is of a kind referred to in section KC 5 of the Income Tax Act 2004. If an entity is currently a donee organisation then its donee status will continue even though it decides not to register with the Charities Commission unless Inland Revenue has information to the effect that it no longer qualifies.
There are four general categories of donee organisations defined in paragraphs (aa) to (ad) and the Commissioner of Inland Revenue is required to be satisfied that an entity complies with the relevant requirements before giving approval. Where approval is sought under paragraph (aa) for example, there are, in addition to considering whether its purposes are charitable, benevolent, philanthropic or cultural, two further questions to be considered. These are whether the funds are applied wholly or principally within New Zealand and whether the entity is carried on for the private pecuniary profit of any individual.
Registration as a charitable entity does not itself confer donee status. The granting of this status will continue to be administered by Inland Revenue but the process will be simpler for many organisations.
Once a charitable entity becomes registered then, provided it has ticked the box indicating that donations are a source of income on the form it completed when applying to be registered, Inland Revenue will automatically consider whether to grant donee approval. Where donations are a source of income and the registered charitable entity has indicated that its funds are applied wholly within New Zealand then donee status will be granted. Where a charity applies a proportion of its funds overseas then Inland Revenue will need to consider whether overall the entity's funds are applied principally to charitable purposes within New Zealand. Entities will receive advice from Inland Revenue as to whether they have qualified for donee status. Registered charities which already have that status will receive a letter of confirmation.
Entities that choose not to register with the Charities Commission may continue to enjoy donee status where approval has previously been given. Where an entity would like to have donee status but does not wish to become registered as a charity, or where its purposes are benevolent, philanthropic or cultural rather than charitable, then it will need to apply to Inland Revenue for approval as a donee organisation. The booklet Charitable organisations IR 255 provides assistance.
Where an entity has had its application for registration as a charity declined, it is unlikely that it will qualify for donee status on the ground that its purposes are charitable. However approval will be granted where its purposes, although not meeting the standard of being charitable, are nevertheless benevolent, philanthropic or cultural.
Inland Revenue may review donee status where an entity which currently has that status finds that its application for registration with the Charities Commission is declined.
Although an entity may not itself qualify for donee status, a fund may be established and managed within a non-charitable organisation and such a fund may qualify for donee status. See the IR 255 Charitable organisations for information on applying for donee status.
However Inland Revenue may reconsider an entity's existing donee status where that entity applies to register as a charitable entity but its application is declined by the Charities Commission. If an entity is not a donee organisation, the donation information provided with the application to register as a charity will be forwarded to Inland Revenue for consideration. Newly registered charities will not need to make a separate application to Inland Revenue for donee status where they have indicated in their application for registration with the Commission that they will be or are in receipt of donations.
A council-controlled organisation cannot gain an exemption from income tax but may nevertheless qualify for donee status under section KC 5.

Gift duty exemption
Section 73(1) of the Estate and Gift Duties Act 1968 provides an exemption from gift duty in respect of any gift creating a charitable trust, or establishing any society or institution exclusively for charitable purposes, or any gift in aid of any such trust, society, or institution. From 1 July 2008 (the date that the tax amendments made by the Charities Act 2005 come into force) any such society, institution, or trustees of a trust must be registered as a charitable entity under the Charities Act 2005 in order to take advantage of the exemption. Registration may be backdated to the date of a gift to which section 73(1) applies – see section 20 of the Charities Act 2005. Section 73(2) declares that certain classes of gifts (e.g. to the Health Research Council of New Zealand) shall not constitute dutiable gifts. The classes of gifts defined in section 73(2) will continue to be exempt from gift duty even if the organisations covered by section 73(2) are not registered with the Charities Commission. Entities referred to in Section 73(2) may of course choose to register for other reasons.

IRD numbers
Charitable organisations are still required to have IRD numbers.

Discussion

All legislative references are to the Income Tax Act 2004 (the Act) unless otherwise stated.

Income tax exemption

Under the Act income tax exemptions are available to charitable entities for income derived for charitable purposes.
From 1 July 2008, for the income tax exemptions to apply the entity must be registered as a charitable entity under the Charities Act 2005. An exception is where the charitable entity derives income indirectly from a business. Where the entity is not itself conducting the business enterprise, but the enterprise is being run, for example, by a company that carries on the business for the entity's benefit, that company is not also required to be registered (though if it itself has charitable purposes it may choose to do so). It will still need to contact Inland Revenue to ensure that we have listed it as being exempt from tax. Section 13 of the Charities Act provides for registration as a charitable entity.

13. Essential requirements-
(1) An entity qualifies for registration as a charitable entity if,-

(a) in the case of the trustees of a trust, the trust is of a kind in relation to which an amount of income is derived by the trustees in trust for charitable purposes; and

(b) in the case of a society or an institution, the society or institution-
1. is established and maintained exclusively for charitable purposes; and
2. is not carried on for the private pecuniary profit of any individual; and
(c) the entity has a name that complies with section 15; and

(d) all of the officers of the entity are qualified to be officers of a charitable entity under section 16.
Where trusts and societies or institutions have obtained binding rulings under the Tax Administration Act 1994 for exemptions under sections CW34 (Charities: Non-Business Income) and/or CW35 (Charities: Business Income), they will be considered to meet the "charitable purposes" component of the requirements for registration.
Where a trust, society or institution is deregistered from the charities register under section 31 of the Charities Act 2005, income earned by the trust, society or institution will no longer be exempt from the date of deregistration.

Charities: Non-Business Income

Section CW 34 of the Act (see the Appendix) provides for income tax exemptions for the non-business income (for example investment income such as interest, dividends and rent) of trusts and societies or institutions. An amount of income derived by a trust for charitable purposes is exempt from tax. Income derived by a society or institution is also exempt from income tax where the society or institution is established and maintained exclusively for charitable purposes and is not carried on for the private pecuniary profit of any individual.
The requirements for registration as a charitable entity under the Charities Act and the requirements for the non-business income tax exemption under the Income Tax Act are similar in nature.
Trusts, societies or institutions that comply with the registration requirements under the Charities Act will prima facie be treated by Inland Revenue as qualifying for the income tax exemption in section CW 34, except for council-controlled organisations.
Charitable entities will, however, still be subject to audit by Inland Revenue.
The non-business income exemption for charitable trusts, and societies or institutions established and maintained exclusively for charitable purposes, does not extend to income derived by council-controlled organisations ("CCOs") or income derived by local authorities from CCOs. According to the Income Tax Act definition, a CCO includes an entity (not being a company) that operates a trading undertaking for the purpose of making a profit and in respect of which one or more local authorities have: (i) control of 50% or more of the votes at any meeting of the members, or (ii) the right to appoint 50% or more of the trustees, directors, or managers. It also includes a company in which equity securities carrying 50% or more of the voting rights at a meeting of the shareholders of the company are: (i) held by one or more local authorities, or (ii) are controlled by one or more local authorities.

Charities: Business Income

Where a trust or a society or institution carries on a business then the income derived directly or indirectly from the business (excluding income derived by a CCO or local authority from such organisation), by, or for, or for the benefit of the trust, society or institution, is exempt to the extent that it is applied to charitable purposes within New Zealand, provided that no person with some control over the business is able to direct or divert income derived from the business to their benefit or advantage.
Where a trust, society or institution derives business income, registration alone will not (as in the case of non-business income) be sufficient for the entity to be exempt from income tax. There is the requirement that at to least to some extent the trust, society or institution carry out its charitable purposes in New Zealand (an apportionment test), and the further requirements that no person with some control over the business is able to divert an amount derived from the business to their own benefit, and that the trust, etc is not carried on for the private pecuniary profit of any individual.
Under the self assessment regime taxpayers are obliged to assess their own tax obligations. In the case of trusts, societies or institutions that derive income from a business it is imperative that the entity self assesses its tax status correctly. Inland Revenue may monitor registered charitable entities that are in business for compliance with section CW 35. The following paragraphs are provided for the assistance of charitable entities that derive business income.
Section CW 35(1) also applies to companies that carry on a business for the benefit of a trust, society or institution and do not have charitable purposes or objects. Such a company does not have to register with the Charities Commission in order for the business income that is directed to a trust, society or institution to be exempt. The amount of business income so directed will be exempt from income tax provided the recipient trust, society or institution-
- carries out its charitable purposes in New Zealand ; and
- the trust, society or institution is itself registered with the Charities Commission.

In New Zealand

Income derived directly or indirectly from a business is exempt to the extent that the charitable purpose is performed in New Zealand. Where the charitable purpose is not limited to New Zealand, the income is apportioned between those purposes within New Zealand and those outside New Zealand. (See section CW 35(4) below.)
For example, income derived from a business for the benefit of a trust for the education of Pacific Island children, will be exempt to the extent that the income is used for the education of Pacific Island children in New Zealand. Income from the business used for the education of Pacific Island children outside of New Zealand would not be exempt.
It is advisable that funds used in New Zealand and outside New Zealand are separately recorded within the accounting records.

Control over business

Where a person (by virtue of their capacity as a trustee, settlor, shareholder or director) has some control over the business and is able to divert an amount derived from the business to his/her own benefit or advantage, the income derived by the business will not be tax exempt. Situations in which persons are treated as having some control are defined in subsections (5), (6) and (7) of section CW 35 of the Act (see the Appendix). Private pecuniary profit is a criterion for registration and will be looked at by the Charities Commission when making a decision on registration. Where there is the potential for private pecuniary profit it is likely to mean that the organisation would not be registered. However Inland Revenue has a duty to apply the tax legislation and so may, notwithstanding registration, decide whether or not in any particular case the exemption for business income should apply.
The section CW 35 tax exemption will not apply if a person having some control of the business has the potential to benefit. It is not necessary for the benefit or advantage to be actually received.
In any audit, Inland Revenue will examine the affairs of the entity including any documentation, etc. The documentation of charitable entities (trust deeds or constitutions, etc) will be examined to ensure that no person with some control over the business is able to exert influence that would enable that person to receive a benefit or advantage. A determination has to be made as to whether a benefit is gained or is able to be gained by a person (who has some control of the business) were it not for the influence of that person. The person's legal as well as practical ability to influence will be examined (CIR v Dick (2001) 20 NZTC 17,396).
There is a wide spectrum of situations in which a person may be able to exercise some control over a business. At one extreme would be situations of duress or oppressive conduct, or where the person controls the decision making in terms of majority voting rights, or with associated persons controls the board or where the trust instrument grants a right of veto over decisions to that person. At the other end of the spectrum are cases where the settlor is consulted but has no power to direct, or the person in question is only one of a number of trustees or directors involved in decision making.
Whether a person is able to exert material influence is a matter of fact and degree. It will depend upon the facts, the particular arrangement, the degree of relationship of the parties, the documentation of the charitable entity and the way it makes its decisions.
Where there is a sole trustee, it would be implied that the sole trustee would be able to exert the requisite influence.
In instances where there are two or more persons that are able to influence a decision, whether a person is able to materially influence may depend on whether the person actually participates in the discussion and decision making. Even if in a minority on the decision making group, material influence could still be exerted. For example, a person whose advice is well regarded by the trustees is able to influence the other trustees to his/her own advantage.
The past behaviour of the entity, that is, the pattern of distributions or whether any benefits have been afforded at any time to any person who is able to influence the entity by virtue of his or her status, can be a guide as to whether in practice the person in question is able to materially influence the setting of benefits. For example, in CIR v Dick Glazebrook J stated (paragraph 65) that:

In the situation where benefits and income have never been accorded and where the practice has been to utilise any surplus for the charitable objects of a trust it would not be reasonable for the Commissioner to take the view that any of the persons having the requisite capacities were for those income years able to influence materially the amount of benefits or income.
Adequate records (e.g. minutes of meetings) will have to be kept to show how decisions were made.
Companies that are in business are in some cases subject to rights granted to shareholders and directors under the Companies Act 1993. Where such rights enable a person to influence the decisions of a business, so that the person obtains a benefit, or is able to obtain a benefit or advantage, the income derived from that business will not be exempt from tax. Special provisions may be required eliminating such powers that enable a person to influence company decisions.

Benefit or Advantage

A benefit or advantage that is received or is able to be received by a person is defined widely in section CW 35(8) of the Act.
Where a person in some control of a business receives any one of these benefits, or any other amount covered by subsection (1)(b), the section CW 35 business income exemption does not apply. Something acquired through the provision of services or goods at market value is not considered to be a benefit or advantage.
Where a person is able to materially influence a benefit or advantage while providing professional services to the trust or company by which the business is carried on and they provide the services in the course of a professional public practice, or as a trustee company, or the Public Trust or Maori Trustee, that person is deemed not to have control over the trust or the company for their own benefit (subsection CW 35(7)). The term company includes a society or institution.
Furthermore, where it is clear that the setting of any benefit or advantage has been undertaken in a scientific manner to ensure that no more than market value is paid Inland Revenue will accept that there was no material influence ( CIR v Dick (2001) 20 NZTC 17,396).

Donee organisations

Section KC 5 provides for a tax rebate in respect of donations of money of $5 or more to a society, institution, association, organisation, trust, or fund, the funds of which are, in the opinion of the Commissioner of Inland Revenue, applied wholly or principally to any charitable, benevolent, philanthropic, or cultural purposes within New Zealand. Entities given approval are known as donee organisations or as having donee status. Note, the rebate does not apply to certain bodies including Public Authorities and Maori Authorities.
Section DB 32 provides that a company (not being a close company unless its shares are listed on a recognised exchange) may claim a deduction for gifts of money to these organisations. The deduction for all gifts made in a tax year is limited to 5% of the amount that would otherwise be the company's net income in the tax year. A similar deduction is allowed under section DV 11 to a Maori authority for donations made to any Maori association (as defined in the Maori Community Development Act 1962 for the purposes of that Act) or to donee organisations.
In order to determine whether a rebate can properly be claimed, Inland Revenue needs to consider whether the society, etc. is of a kind referred to in section KC 5 of the Act. The information contained in the application for registration of the society as a charitable entity will assist in this process.
Approval as a donee organisation does not necessarily carry an implication of charity. This is because section KC 5 also applies to benevolent, philanthropic or cultural purposes. Applications for approval as a donee organisation under these other grounds should continue to be sent directly to Inland Revenue. Approval as a benevolent, philanthropic, or cultural organisation does not imply that the organisation is accepted as a charity. However, in most cases charitable organisations would qualify as donee organisations.
Where an approved donee organisation applies funds for purposes both within and outside New Zealand it is advisable that the use of the funds in and outside New Zealand be separately recorded within the accounting records.
The entity will also need to show in its constituting documents that its funds will be applied wholly or principally within New Zealand. Should an audit later be conducted then the entity must also be able to show that it has complied with the relevant requirements of section KC 5.
An organisation whose funds will be applied mainly overseas would need to approach the Government via Inland Revenue for legislation enabling it to be specifically included in the list of donee organisations. This is because of the express limitation in section KC 5 itself that the funds must be applied principally for charitable purposes within New Zealand.
For those organisations applying funds mainly overseas Cabinet will only consider, for inclusion within section KC5, organisations whose funds are principally applied towards:
1. the relief of poverty, hunger, sickness or the ravages of war or natural disaster; or
2. the economy of developing countries (recognised as such by the United Nations); or
3. raising the educational standards of a developing country.

Specifically excluded are charities formed for the principal purpose of fostering or administering any religion, cult or political creed.

When forwarding your application to Inland Revenue it would be helpful if it is supported with the following:

an indication of the amount of donations likely to be received in any year;

an indication of the proportion of annual income which is likely to be applied to charitable purposes outside New Zealand ; and

any other information which you would like used to support your case.

Receipts

To qualify for the rebate a person must produce a receipt from the approved donee that meets the following criteria:

be officially stamped with the name of the approved donee or branch of the organisation,
clearly indicate that it is a donation and the amount,
show the date the donation was received, and
be signed by a person authorised by the approved donee to accept donations.

Resident withholding tax

Certificates of exemption from resident withholding tax (RWT) are issued to, among others, persons who derive exempt income under section CW 34 Charities: non-business income, section CW 35 Charities: business income and section CW 36 Charitable bequests of the Act. Where these persons or entities claim to be charities then they will need to register with the Charities Commission. O n becoming registered entities may apply to Inland Revenue for certificates of exemption. Inland Revenue will accept registration with the Commission as proof that they are charitable.
In the transitional period from 1 February 2007 until 30 June 2008 Inland Revenue will accept applications for exemption without evidence of registration or tax exempt status. However, after 30 June 2008 these entities will be checked and if they have not registered they must return their income in their annual income tax returns. Any exemption certificates will be cancelled.

Record keeping

Under section 32 of the Tax Administration Act 1994 all gift-exempt bodies must keep sufficient records in the English language to enable Inland Revenue to determine both the sources of donations and the application, within New Zealand or within a country or territory outside New Zealand, of their funds. The Commissioner of Inland Revenue may, however, authorise a gift-exempt body to keep those records in a language other than English if the gift-exempt body applies in writing to the Commissioner for the authorisation.
Section 58 of the Tax Administration Act provides that every gift-exempt body may be required to furnish, if requested, a return of its funds derived or received in any tax year and showing the source and application of those funds.

Alterations to the founding documents

In the past Inland Revenue has suggested that organisations have clauses in their founding documents which restrict them from altering certain clauses without prior approval from the Commissioner. The relevant clauses would be those defining the charitable purposes or objects, the clause relating to personal advantage, the rule change clause and the winding up clause. Inland Revenue will no longer give prior approval to clause changes and strongly recommends that organisations remove any such requirement in their rules. To enable this to happen, Inland Revenue hereby consents to an amendment removing any such rule.
The Charities Commission will however require any rule changes to be notified to them within 3 months after the changes have been made to ensure that a charity retains its registration. The Commission will not review draft documents including draft amendments to an entity's objects and rules. Where such a change is made the executed documents should be filed with the Commission.

This Operational Statement is signed on 14th of November 2006.

Graham Tubb
Group Tax Counsel
Assurance

Appendix - Legislation

Income Tax Act 1994

CW 34

Exempt income

(1) The following are exempt income:

(a) an amount of income derived by a trustee in trust for charitable purposes:

(b) an amount of income derived by a society or institution established and maintained exclusively for charitable purposes and not carried on for the private pecuniary profit of any individual.

[Effective on 1 July 2008]

Exclusion: trustees, society, or institution not registered

(1B) This section does not apply to an amount of income if, at the time that the amount of income is derived, the trustee or trustees of the trust, the society, or the institution is not, or are not, registered as a charitable entity.

Exclusion: business income

(2) This section does not apply to an amount of income derived from a business carried on by, or for, or for the benefit of a trust, society, or institution of a kind referred to in subsection (1).

Exclusion: council-controlled organisation income

(3) This section does not apply to income derived by -

(a) a council-controlled organisation; or

(b) a local authority from a council-controlled organisation.

CW 35 Charities: business income

Exempt income

(1) Income derived directly or indirectly from a business carried on by, or for, or for the benefit of a trust, society, or institution of a kind referred to in section CW 34(1) is exempt income if -

(a) the trust, society, or institution carries out its charitable purposes in New Zealand ; and

[Effective on 1 July 2008]

(ab) the trustee or trustees of the trust, the society, or the institution is or are, at the time that the income is derived, registered as a charitable entity; and

(b) no person with some control over the business is able to direct or divert, to their own benefit or advantage, an amount derived from the business.

Subsections (3) to (8) expand on this subsection.

Exclusion

(2) This section does not apply to income derived by -

(a) a council-controlled organisation; or

(b) a local authority from a council-controlled organisation.

Carrying on a business: trustee

(3) For the purposes of subsection (1), a trustee is treated as carrying on a business if -

(a) the trustee derives rents, fines, premiums, or other revenues from an asset of the trust; and

(b) the asset was disposed of to the trust by a person of a kind described in subsection (5)(b); and

the person retains or reserves an interest in the asset; or
the asset will revert to the person.

Charitable purposes in New Zealand and overseas

(4) For the purposes of subsection (1)(a), if the charitable purposes of the trust, society, or institution are not limited to New Zealand, income derived from the business in a tax year is apportioned reasonably between those purposes in New Zealand and those outside New Zealand. Only the part apportioned to the New Zealand purposes is exempt income.

Control over business

(5) For the purposes of subsection (1)(b) for a tax year, a person is treated as having some control over the business, and as being able to direct or divert amounts from the business to their own benefit or advantage if, in the tax year, -

(a) they are, in any way, whether directly or indirectly, able to determine, or materially influence the determination of, -

the nature or extent of a relevant benefit or advantage; or
the circumstances in which a relevant benefit or advantage is, or is to be, given or received; and

(b) their ability to determine or influence the benefit or advantage arises because they are -

a settlor or trustee of the trust by which the business is carried on; or
a shareholder or director of the company by which the business is carried on; or
a settlor or trustee of a trust that is a shareholder of the company by which the business is carried on; or
a person associated with a settlor, trustee, shareholder, or director referred to in any of subparagraphs (i) to (iii).

Control: settlor asset disposed of to trust

(6) For the purposes of subsection (5), a person is treated as a settlor of a trust, and as gaining a benefit or advantage in the carrying on of a business of the trust, if -

(a) they have disposed of an asset to the trust, and the asset is used by the trust I n the carrying on of the business; and

(b) they retain or reserve an interest in the asset, or the asset will revert to them.

No control

(7) For the purposes of subsection (1)(b), a person is not treated as having some control over the business merely because -

(a) they provide professional services to the trust or company by which the business is carried on; and

(b) their ability to determine, or materially influence the determination of, the nature or extent of a relevent benefit or advantage arises because they -

provide the services in the course of and as part of carrying on, as a business, a professional public practice; or
are a trustee company; or
are Public Trust; or
are the Maori Trustee.

Benefit or advantage

(8) For the purposes of subsection (1)(b), a benefit or advantage to a person -

(a) may or may not be something that is convertible into money:

(b) unless excluded under paragraph (d), includes deriving an amount that would be income of the person under 1 or more of the following provisions:

section CA 1(2) (Amounts that are income):
sections CB 1 to CB 21 (which relate to income from business or trade-like activities):
section CB 28 (Property obtained by theft):
sections CC 1 (Land), CC 3 to CC 8 (which relate to income from financial instruments), and CC 9 (Royalties):
section CD 1 (Income):
sections CE 1 (Amounts derived in connection with employment) and CE 8 (Attributed income from personal services):
section CF 1 (Benefits, pensions, compensation, and government grants):
section CG 3 (Bad debt repayment):
sections CQ 1 (Attributed controlled foreign company income) and CQ 4 (Foreign investment fund income):

(c) includes retaining or reserving an interest in an asset in the case described in subsection (3), if the person has disposed of the asset to the trust or the asset will revert to them:

(d) does not include earning interest on money lent, if the interest is payable at no more than the current commercial rate, given the nature and term of the loan.

Non-exempt business income

(9) If an amount derived from the carrying on of a business by or for a trust is not exempt income because of a failure to comply with subsection (1)(b), the amount is trustee income.

CW 36 Charitable bequests-

Exempt income

(1) An amount of income derived by a deceased's executor or administrator is exempt income to the extent to which the requirements in subsections (2) and (3) are met, having regard to all relevant matters including-

(a) the terms of the deceased's will, including the rights of annuitants, legatees, and other beneficiaries; and

(b) the nature and extent of the debts and liabilities of, and other charges against, the estate and their likely effect on the income and assets available for distribution to the beneficiaries; and

Gift to charity

(2) The first requirement is that the amount arises from or is attributable to assets of the estate that have been left to a trust, society, or institution of a kind referred to in section CW 34(1).

Exempt in hands of charity

The second requirement is that the amount, if derived by the trust, society, or institution or by a business carried on by, or for, or for the benefit of it, would be exempt income under section CW 34 or CW 35.

[The following 3 subsections come into force on1 July 2008]

Registration as charitable entity not required until end of income year that follows income year in which deceased died

(4) An amount of income derived by a deceased's executor or administrator that is derived during the period beginning on the deceased's date of death and ending at the end of the income year that follows the income year in which the deceased died is not prevented from being exempt income under this section merely because the trustee or trustees of the trust, the society, or the institution is not, or are not, registered as a charitable entity.

(5) For the purposes of subsection (4), until the end of the income year that follows the income year in which the deceased died, the requirements in sections CW 34 and CW 35 for the trustee or trustees of the trust, the society, or the institution to be registered as a charitable entity must be disregarded when applying those sections for the purposes of this section.

(6) This section does not apply to an amount of income derived after the end of the income year that follows the income year in which the deceased died if, at the time that the amount of income is derived, the trustee or trustees of the trust, the society, or the institution is not, or are not, registered as a charitable entity.

History

Section CW 36 (4), (5) and (6) inserted by the Charities Act 2005 (No 39 of 2005), section 67, effective on 1 July 2008 (SR 2006/300).

Defined in this Act:

amount, business, distribution, exempt income, income, New Zealand

DB 32 Gifts of money by company -

Who this section applies to

(1) This section applies to -

(a) a company that is not a close company:

(b) a close company that has its shares quoted on the official list of a recognised exchange.

Deduction

(2) The company is allowed a deduction for a gift of money that it makes to a society, institution, association, organisation, trust, or fund of any of the kinds described in section KC 5(1) (Rebate in respect of gifts of money).

Amount of deduction

(3) The deduction for the total of all gifts made in a tax year is limited to 5% of the amount that would be the company's net income in the tax year if this section did not exist.

Link with subpart DA

(4) This section supplements the general permission. The general limitations still apply.

Defined in this Act:

amount, close company, company, deduction, general limitation, general permission, net income, recognised exchange, share, supplement, tax year

DV 11 Maori authorities: donations -

Deduction

(1) A Maori authority is allowed a deduction for -

(a) a donation that it makes to a Maori association, as defined in the Maori Community Development Act 1962, for the purposes of the Act:

(b) a gift of money that it makes to a society, institution, association, organisation, trust, or fund of any of the kinds described in section KC 5(1) (Rebate in respect of gifts of money).

Amount of deduction

(2) The deduction for the total of all donations and gifts made in a tax year is limited to 5% of the amount that would be the Maori authority's net income in the tax year if this section did not exist.

Link with subpart DA

(3) This section supplements the general permission and overrides the capital limitation. The other general limitations still apply.

Defined in this Act:

amount, capital limitation, deduction, general limitation, general permission, Maori authority, net income, supplement, tax year

KC 5 Rebate in respect of gifts of money

(1) A taxpayer, other than an absentee, or a company, or a public authority, or a Maori authority, or an unincorporated body, or a trustee liable for income tax under sections HH 3 to HH 6 and HZ 2, is allowed as a rebate of income tax the amount of any gift (not being a testamentary gift) of money of $5 or more made by the taxpayer in the tax year to any of the following societies, institutions, associations, organisations, trusts, or funds (being in each case a society, an institution, an association, an organisation, a trust, or a fund in New Zealand), namely:

(aa) a society, institution, association, organisation, or trust which is not carried on for the private pecuniary profit of any individual and the funds of which are, in the opinion of the Commissioner, applied wholly or principally to any charitable, benevolent, philanthropic, or cultural purposes within New Zealand:

(ab) a public institution maintained exclusively for any 1 or more of the purposes within New Zealand specified in paragraph (aa):

(ac) a fund established and maintained exclusively for the purpose of providing money for any 1 or more of the purposes within New Zealand specified in paragraph (aa), by a society, institution, association, organisation, or trust which is not carried on for the private pecuniary profit of any individual:

(ad) a public fund established and maintained exclusively for the purpose of providing money for any 1 or more of the purposes within New Zealand specified in paragraph (aa): ...

NF 9 Certificates of exemption -

(1) Any of the following persons may apply to the Commissioner to be issued with a certificate of exemption:…

OB 1 Definitions

For the purposes of this Act, unless the context otherwise requires, - ...

registered as a charitable entity means registered as a charitable entity under the Charities Act 2005.

Estate and Gift Duties Act 1968

73. Exemption for gifts to charities and certain bodies -

Any gift creating a charitable trust, or establishing any society or institution exclusively for charitable purposes, or any gift in aid of any such trust, society, or institution, shall not constitute a dutiable gift if, at the time that the gift is made, the society, institution, or trustees of the trust is or are registered as a charitable entity under the Charities Act 2005.

Editorial Note
The words in italics are an amendment made by section 72 of the Charities Act 2005 and come into force on 1 July 2008.

Charities Act 2005

13. Essential requirements -

(1) An entity qualifies for registration as a charitable entity if, -

(a) in the case of the trustees of a trust, the trust is of a kind in relation to which an amount of income is derived by the trustees in trust for charitable purposes; and

(b) in the case of a society or an institution, the society or institution -

is established and maintained exclusively for charitable purposes; and

is not carried on for the private pecuniary profit of any individual; and

(c) the entity has a name that complies with section 15; and

(d) all of the officers of the entity are qualified to be officers of a charitable entity under section 16.

(2) The trustees of a trust must be treated as complying with subsection (1)(a) if, -

(a) in accordance with a ruling made under Part 5A of the Tax Administration Act 1994, -

an amount of income derived by the trustees in trust is treated as having been derived by the trustees in trust for charitable purposes for the purposes of section CW 34 of the Income Tax Act 2004; or

income is treated as having been derived directly or indirectly from a business carried on by, or for, or for the benefit of the trustees in trust for charitable purposes for the purposes of section CW 35 of the Income Tax Act 2004; or

(b) the income derived by the trustees is deemed to be income derived by trustees in trust for charitable purposes under section 24B of the Maori Trust Boards Act 1955.

(3) A society or an institution must be treated as complying with subsection (1)(b) if, in accordance with a ruling made under Part 5A of the Tax Administration Act 1994, that society or institution is treated as being a society or institution that is established and maintained exclusively for charitable purposes and not carried on for the private pecuniary profit of any individual for the purposes of section CW 34 or section CW 35 of the Income Tax Act 2004.

(4) Subsections (2) and (3) cease to apply in relation to an entity if-

(a) the period for which the ruling applies has expired; or

(b) the ruling has ceased to apply because of section 91G of the Tax Administration Act 1994; or

(c) the ruling has otherwise ceased to apply to the entity.

(5) Despite subsections (1) to (3), an entity does not qualify for registration as a charitable entity if -

(a) the entity is designated under section 20 or section 22 of the Terrorism Suppression Act 2002 as a terrorist entity or an associated entity; or

(b) the entity has been convicted of any offence under sections 7 to 13D of the Terrorism Suppression Act 2002.

30. Commissioner may supply register information for purposes of Inland Revenue Acts -

(1) The Commission may supply any register information or documents to a person for the purpose of assisting the person in the exercise of the person's powers under any of the Inland Revenue Acts or in the performance of the person's functions under any of the Inland Revenue Acts if, in the opinion of the Commission, it is in all the circumstances appropriate to do so.

(2) For the purposes of this section, "register information or documents" means -

(a) information or documents that are contained in the register:

(b) information or documents that would have been contained in the register but for the exercise of a power under section 25 to omit or remove that information or those documents from the register.

Reference

OS 06/02

Issued

01 Dec 2006