Tax-exempt charities may have to justify sitting on millions of dollars in funds

Friday, 2 July 2021

The multi-billion-dollar charity sector may have to be more open about what it does with the money it earns from business activities and receives in donations. (First published July 2021)

A huge North Island farming conglomerate and a small Christchurch business selling recycled doors and windows have one key thing in common.

Trinity Lands and Musgroves are both registered charities, exempt from paying income tax and using their profits to fund religious activities and do other good works.

They are among 28,000 charities that last year spent $18 billion, own $65b in assets, and potentially face new rules as a result of a review of the Charities Act.

Aimed at improving public trust and confidence in the sector, proposed changes could see charities having to justify accumulating large reserves, in some cases millions of dollars.

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The Department of Internal Affairs Te Tari Taiwhenua is overseeing the review, which finally resumed in May after a year-long hiatus because of Covid-19, and there are concerns about its narrow scope.

It will not consider whether it is still appropriate for businesses registered as charities to be exempt from tax.

Nor is it going back to basics and looking at “charitable purpose,” currently defined as relieving poverty, advancing education or religion, and other activities beneficial to the community.

Community and Voluntary Sector Minister Priyanca Radhakrishnan says an amendment to modernise the Charities Act is likely to be drafted next year, and it may include changes to the appeal process for Charities Registration Board decisons that “will better enable case law to develop around charitable purpose”.

According to its website registered charity Trinity Lands harms 6400ha, producing 6 million kilograms of milk and 2.2 million trays of kiwifruit a year.

Radhakrishnan says transparency about the finances of businesses registered as charities is important, and it is a fine balance between supporting charities to do vital work in the community, while ensuring the public retains trust and confidence in the sector.

A number of options are on the table.

Charities could be required to have a distribution plan outlining when and how money will go to charitable activities, and they may be obliged to provide more detail about accumulated funds and reasons for retaining them.

Making charities distribute a certain amount annually (at least 5 per cent of net assets has been mooted) was opposed by two thirds of the 184 organisations and individuals who made submissions during initial consultations.

In the case of Trinity Lands, which last year reported net assets of $346m, 5 per cent amounts to $17.3m.

Last year $9.6b of charities’ income came from services and trading, $4b from koha and fundraising, $3.4b from grants and other funding, and $2.5b from other sources.

The charitable trust, a major player in dairying and kiwifruit production, is one of a number associated with the Open Brethren Church, and its stated purpose is to “support and spread the Christian gospel by any means possible,” and to further other religious and charitable purposes as the directors see fit.

For the year ended May 31, the company paid a dividend of $11m to three shareholder charities for them to distribute, and gave $424,000 directly to community causes ranging from a fire rescue vehicle to junior rugby.

Trinity’s chief financial officer Ngaire Smith says the amount it donates has increased from 50 to 55 per cent of essentially “what we have received in cash”.

Dr Michael Gousmett, a charities expert, says it is wrong for St George’s Hospital to claim $3.5m in Covid-19 wage subsidies.

It does not include income such as a one-off $21.8m gift from a related trust that was wound up, or value gains for land and investments.

In 2018 Trinity Lands was investigated by the Department of Internal Affairs after a complaint about its links with associated trusts, companies and charities, a web of investments and loans, and concerns that it was distributing less than a third of its funds for charitable purposes.

The inquiry concluded there was no evidence of wrongdoing, and the concerns were either unfounded or not covered by the Charities Act which does not stipulate how a charity distributes its funds or the percentage it gives away.

Sanitarium, owned by a Seventh-Day Adventist Church charitable trust, has faced criticism for its entry fees for the Weet-Bix Kids Tryathlon, but the company argues that it helps disadvantaged children and communities take part in the event, and heavily subsidises about 10 per cent of participants.

Trinity Lands chief executive Peter McBride, chairs the board of Fonterra and is a director and former chairman of Zespri.

In his submission on the Charities Act review he says operating a business means a charity does not have to depend on donations, or on government support for staff salaries.

Last year Trinity’s accumulated surplus increased by $38m to just under $125m, and McBride’s submission makes the point that some income may need to be retained due to the nature of the business and to replace long term assets.

Charities researcher and Canterbury University, adjunct fellow Dr Michael Gousmett, is among those approached by Internal Affairs for its recent targetted consultation over changes to the act.

He arrives at an interview with Stuff carrying an empty Weet-Bix box, a pottle of Lisa’s Hummus, and a bottle of Mission Estate wine as examples of products made by businesses owned by tax-exempt charities.

Musgroves director Rodger Vickers estimates the charitable business has helped up to 250 people over the past 12 months by supporting mainly faith-based youth and community groups around Christchurch. (File photo)

Gousmett is adamant that such businesses have a commercial advantage over competitors who pay tax, and he says the public has a right to know whether surpluses or reserves are being reinvested in commercial businesses instead of being applied to charitable purposes.

He therefore has no problem with more stringent disclosures over accumulated surpluses, but he rejects the minimum 5 per cent distribution of net assets as unworkable.

Many charities with assets tied up in property or other investments simply don’t have cash on hand to give, so they would be bankrupt, “and you could end up distributing just to comply with the regulations and waste money.”

Gousmett’s other peeve is the use of consolidated accounts, and he cites the seven charities that report under the umbrella of The Society of Mary New Zealand Companies associated with the Catholic Church, including the company that owns the Mission Estate Winery.

He says it is not possible to see how much each entity is contributing when they are all bundled together, and although he has recommended that separate accounts be filed, it is likely to be ruled out on the grounds of commercial sensitivity.

“As taxpayers we subsidise these entities [through] income tax and resident withholding tax exemptions, then tax credits for donations, so I argue that we have a right to know how those subsidised funds are being applied for the public benefit.”

The review of the Charities Act attracted 155 submissions on charitable business, with nearly half considering it a legitimate way to raise funds if the money is applied to charity work.

About a third wanted annual reports to be more transparent about business activities, so the public have a better idea of how money flows between the business and the rest of the charity.

Ngāi Tahu Seafood is part of the iwi’s stable of businesses which are exempt from paying tax. Te Rūnanga o Ngāi Tahu’s policy, which deviated last year due to the impact of Covid-19, is that 4 per cent of the market value of equity goes to charitable distributions. Since the Ngāi Tahu Settlement in 1998 it has put about $600m into wellbeing initiatives for whānau.

Change is already on the way.

From January next year larger charities with annual expenses of more than $2m will have to include “service performance” details in their annual reports, explaining what they aim to achieve, how they will meet those goals, and the effect of their work over the year.

Musgroves is at the smaller end of the business charity scale and director and trustee Rodger Vickers says they plan to put information about donations on the company website.

About half the business’ stock is recycled construction material, it employs up to 14 full-timers, last financial year revenue was $2m, and it donated $2000 from a total profit of $45,000.

“Our motto is we give people and materials a second chance,” says Vickers who thinks setting a minimum distribution rate would be “pretty rigid”.

He aims to donate what they would have paid in tax based on a business tax rate of 28 per cent.

“Historically we give between 5 per cent and 65 per cent of our operating profit. We’ve had some lean years, in fact we’ve made some losses, but we’ve still been giving. Business ebbs and flows.”

Vickers says people are struggling with the rising cost of housing and that affects the level of personal donations, so there is definitely a place for charitable businesses.

If they had to pay tax, and only received deductions on the amount donated to charity, as is the case in Britain, he says that would have a significant impact on start-up businesses or those trying to grow.

Tax elephant in the room

Tax-exemptions for charity businesses was considered by the Government’s tax working group in 2018, and it recommended looking at whether changes were needed once the Charities Act review was completed.

A report to the working group from Inland Revenue and the Treasury estimated about 8500, or 30 per cent of registered charities, were likely to be involved in some sort of trading activity, ranging from op shops to substantial operators such as Ngāi Tahu’s farming, fishing and tourism enterprises.

The report noted that an increasing amount of business income was moving from the tax base into the tax-exempt charity sector, and a growing number of start-up businesses were registering as charities and seeking donations to support their business activities.

Officials said tax concessions did not give charity businesses a competitive advantage because they were motivated by the need to make a profit when setting prices, and tax-exempt status alone should not lead to the undercutting of rivals.

Te Rūnanga o Ngāi Tahu kaiwhakahaere (chairwoman) Lisa Tumahai says the iwi spent more money meeting its charitable obligations than it would have paid in tax, had it been a tax paying entity.

“For those who object to this model, I’d like to put to them whether they are willing to give all their profit to charity, because that’s what the iwi does with our model.”

Philanthropy New Zealand represents trusts, foundations and other grant makers, and chief executive Sue McCabe is among those unhappy about the limited nature of the Charities Act review.

She says charities make a massive contribution to the Government’s social, economic and environmental goals, and changes to the act need to encourage that.

“We're seeing more integrated ways of doing good, you’re no longer a business or a charity, now we have blends of both, and we should be finding ways to support good businesses and charities who are making money in new ways.”

Like Radhakrishnan, McCabe says it is all about getting the balance right.

“Making sure we get don’t come down too heavily on enforcement, and there are all these amazing businesses and charities that get caught up in it.

“We need to think, how do we support the good, and how do we manage the risks?”