Charities and Donee Organisations
Tax Alert - February 2022
By Veronica Harley & Melissa Parmar
Inland Revenue has published a new draft operational statement on charities and donee organisations, split into two parts: Part 1: Charities (ED0238a) and Part 2: Donee organisations (ED0238b). This is a second round of consultation following earlier statements (ED0207a, and ED0207b) released in early 2020. The 2021 versions have almost doubled in size with more detail and examples provided, although minimal technical changes have been made between drafts. That said, for the most part it is a pretty comprehensive resource on all matters that concern charities and donee organisations. We have outlined some of the key points from these statements below.
New Zealand has a diverse not-for-profit sector. Tax charities are a part of this not-for-profit sector and are generally treated favourably for tax purposes. Providing a favourable tax treatment is one way the Government can provide support to entities that contribute to the wellbeing of New Zealanders.
Part 1 of the Operational Statement focusses on what a charity is, what charitable purposes are, the roles of the Charities Service and Inland Revenue, registration, tax concessions, deregistration, Maori Organisations, Charitable Trusts and some administrative matters.
Charitable Purposes & Public Benefit
For an organisation to be a charity, they must have a charitable purpose that is of a public benefit. Broadly under both charities law and tax law, a charitable purpose is defined as “includes every charitable purpose, whether it relates to the relief of poverty, the advancement of education or religion, or any other matter beneficial to the community”.
To meet the public benefit test, the benefit must be available to a large section of the community and the activities must not result in a private benefit or profit to any individual. A charity does not have to be a registered charity to accept funds from the public, but it does have to be registered with Charities Services and fulfil charitable purposes to receive concessionary tax treatment.
The purpose of having registration of societies, institutions and trusts under the Charities Act 2005 is to promote public trust and confidence in the charitable sector and to encourage and promote the effective use of charitable resources. Importantly, it is the registration process that makes a charity eligible for the concessionary tax treatment.
Charities Services, part of the Department of Internal Affairs, registers and monitors charitable entities, collects, processes and make available publicly annual returns and financial information, investigates serious wrongdoing involving registered charities, supplies information to Inland Revenue and finally supports and educates charities on good governance and management practice. Charities Services also maintain a publicly searchable register of registered charities.
Concessionary Tax Treatments
Favourable tax treatment is provided in the Income Tax Act 2007, primarily through income tax exemptions, including exemptions for both non-business (passive) income and business income (subject to meeting the exemption rules). The Operational Statement provides detailed explanations on the qualifying requirements for these rules. Other tax issues also discussed in the statement include resident withholding tax (RWT) exemptions, fringe benefit tax (FBT) exclusions, goods and services tax (GST) treatments and interest-free student loans concessions. The tax treatment of both Maori organisations and charitable trusts have their own specific rules and the statement discusses these in depth. Finally, the concessionary tax treatment of non-resident charities is reviewed.
It is important that charities keep sufficient records to calculate any tax liability and/or demonstrate eligibility for tax exemptions or concessions. Depending upon the entity and its activities, this may include receipt and payment account books, bank statements and invoices. Charities must self-assess each year that they still meet the tax concession requirements. They must also comply with the usual GST, PAYE and FBT return filing requirements.
The statement also describes the circumstances when a tax charity will cease and the process for what happens in that regard.
Part 2 of the Operational Statement focuses on donee organisations, including the criteria for becoming a donee organisation and the associated obligations. It also includes the benefits available to donors. The main advantage being a donee organisation is the tax benefit it brings to donors who make charitable donations, in the form of tax credits that can be used to offset tax liability. The statement provides details on the specific tax benefits of donation tax credits, payroll giving tax credits and income tax gift deductions.
Types of donee organisations
A “donee organisation” is specifically defined in the Income Tax Act 2007 and is “a society, institution, association, organisation, or trust that is not carried on for the private pecuniary profit of an individual, and whose funds are applied wholly or mainly to charitable, benevolent, philanthropic, or cultural purposes within New Zealand”.
There are four types of donee organisations and the approval of donee status depends on the type of entity. The first type are “most entities registered with Charities Services”. To qualify for and maintain donee status, a registered charity must apply its funds “wholly or mainly” to charitable, benevolent, philanthropic, or cultural purposes within New Zealand.
Practically speaking, entities registering with Charities Services are required to indicate if they intend to receive donations and the percentage of the entity’s funds that will be applied towards carrying out charitable, benevolent, philanthropic, or cultural purposes overseas. If the registered charity intends to receive donations, then Inland Revenue uses the percentage information to determine whether the entity meets the “wholly or mainly” requirement of section LD 3(2) of the Income Tax Act 2007 and is therefore eligible for donee status, without the registered charity having to make a separate application to the Commissioner.
The second type of donee organisation is an entity with a benevolent, philanthropic, or cultural purpose that is not registered with the Charities Services and has approval by the Commissioner. There are differing requirements for different types of entities to obtain the Commissioner’s approval of donee status and the statement provides details on these entities and the requirements. Once approved, the entity is listed in the Approved Donee Organisations list.
The third type of donee organisation is an entity that automatically qualifies by definition. This includes some community housing entities, school Board of Trustees and tertiary institutions. These entities do not need to seek the Commissioner’s approval or be on the list of Approved Donee Organisations.
The final type are charities that are approved as donee organisations by Parliament. These entities apply their funds for other than charitable, benevolent, philanthropic, or cultural purposes within New Zealand. The Commissioner will make a recommendation to Cabinet on whether an application should be granted or not and if approved by Parliament as a donee organisation, then the entity is listed in schedule 32 of the Income Tax Act 2007.
The last part of this statement discusses the importance of record keeping, with all donee organisations required to keep sufficient records of eligibility of tax exemptions and concessions. Donee organisations are also required to self-assess their position and notify Inland Revenue of any changes. If a charity is deregistered and it was also a donee organisation, then it will also lose its donee status.
Overall, the operating statements are quite comprehensive and provide useful guidance on the tax treatment of both charities and donee organisations. Submissions on the draft statements close on 28 February 2022.
While we have summarised the main points above, the tax law around charities and done organisations can be complex and if you need assistance or want to know more, please contact your usual Deloitte advisor.
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