Are charities about to start paying income tax?

Saturday, 17 August 2024

New Zealand’s $80b tax-exempt charities sector is in the Government’s sights, but those running multimillion-dollar businesses within it are fighting back.

Most of the country’s 29,000 charities are small, but some such as private schools and corporate iwi enjoy vast wealth and tens of millions of dollars in revenue each year, much of it from commercial interests. All those The Press spoke to this week argued this did not make their charity a business.

“You’re either charitable or you’re not,” Christ’s College board chair Hugh Lindo said.

The Government has made a point this term of singling out the charities sector when discussing tax policy. In April, Prime Minister Christopher Luxon said he was open to reviewing tax exemptions for churches. (Charitable status is granted to organisations if its purpose is to relieve poverty, advance education or religion, or perform any other activity “beneficial to the community”. This exempts them from income tax and grants other concessions like tax credits on donations.)

Last month, Finance Minister Nicola Willis was more explicit, telling the Finance and Expenditure select committee she was concerned not all charities were behaving charitably: “We don’t want to see [tax concessions] being exploited for activities which are more commercial in nature.”

This week, Revenue Minister Simon Watts told The Press only that the issue was “still under consideration”. A recent report by IRD to Watts on charities and tax, released under the Official Information Act, redacted an entire section headed ‘Future policy work’.

“More commercial in nature” is the sticking point. On the face of it, Christ’s College looks wholly commercial. Its most recent annual report put its equity at $131m. In the year to January it earned $33m in revenue and in March added another $6.5m to its coffers from the sale of 21.5ha at Worsley Spur to a developer, weathering a $959,000 penalty interest bill in the process (the $12m sale dates back to 2022).

But the quantum of money isn’t the point, Lindo said. It’s what a charity does with it.

“You should be free to generate your revenue for [a charitable] purpose from multiple sources,” he said. “What business has Christ’s College got in being a commercial landlord? My response is we’ve got a range of investments…[and] we apply all of those investments and assets to a single purpose ‒ educating young men.”

Since the earthquakes, Christ’s has divested most of its property portfolio, retaining only its Kimihia site near Lincoln that houses PGG Wrightson’s seed research centre and earns $730,000 a year in rent.

Lindo said the Christ’s College Foundation has about $60m in capital reserves ‒ a perpetual fund to pay for its scholarship programme ($1.6m in the year to January) and keep the school running.

“You need a large fund to generate enough income to cover that,” he said. “[Our] heritage campus costs an absolute fortune to maintain and insure.” The school recorded a $5.3m surplus last year, and a $3.1m loss the year before.

South Island iwi Te Rūnanga o Ngāi Tahu is an order of magnitude bigger again. In 2022/23 it reported $1.77b in equity. It earned $377m in revenue from its business interests which include its property group, numerous tourism operations, farming and fisheries. It also posted a $3m operating loss.

Kaiwhakahaere Justin Tipa said in a statement that the iwi was keenly aware of its charitable imperative. “We take this obligation seriously and our charities have spent about $750m meeting this…since the establishment of Te Rūnanga. The Te Rūnanga distributions help fund intergenerational Ngāi Tahu initiatives that enhance whānau wellbeing across health, culture, identity, education, and te taiao. Our charitable structure creates jobs and contributes to the oranga of our whānau.”

Distribution is the key. Last year, Parliament passed the Charities Amendment Act, which introduced a string of changes, most notably a new requirement for large charities to explain why they are accumulating funds. The Tax Working Group (TWG) took a similarly nuanced view on the sector in its 2019 report after receiving “many submissions” arguing charities’ income tax exemption conferred an unfair trading advantage: “The Group considers that the underlying issue is more about the extent to which charities are distributing or applying the surpluses from their activities for the benefit of their charitable purposes.”

“If a commercial operation, instead of paying tax, is passing [money] through to the charity…there’s no competitive advantage,” said Andrea Black, a tax expert who advised the TWG. “If the value is staying in the commercial operation then that is an issue.”

Of course, every organisation with charitable status will argue it meets these obligations. The Christchurch City Mission most recently reported accumulated funds of $16m.

“You have to have some reserves,” city missioner Corrine Haines said. “Ten years ago [our] expenses were $2 to $3m a year. It’s $13m this year. We have 160 employees, not all full-time, relying on us to run a continuing sustainable operation…Our payroll is $300,000 every pay. How many months worth of that salary do you need [in reserve] to feel comfortable?”

Haines is just as worried about the other big concession charitable status brings ‒ tax break on donations. No matter how much donors give to a charity, all get a third of their money back as a tax credit. Haines said the city mission gets 30% of its income this way ‒ around $4m a year. “I’m not sure whether we’d still get $4m a year if people weren’t getting that rebate.”

“There probably are some charities who are not as charitable as the government would like them to be and I know that’s why they will be looking at people who have a business alongside a charity and are calling themselves a charity. Someone like the mission, which has been around for 95 years, I would imagine hopefully the Government would not look closely at in terms of justifying these tax rebates or exemptions.”

So what counts as “more commercial in nature”? “If a decision was made to change that policy to partially remove exempt status to schools…that would have a massive impact across the education sector,” Hugh Lindo said. “I'd be surprised if [Willis] was talking about charities like us…I hope she’s not.”