This review

1.1 This discussion document has been issued as part of the consultation stage in a review undertaken by government of the tax treatment of charities. The charitable sector receives assistance through the tax system in the form of the exemption from income tax (section CB 4(1)(c) and (e) of the Income Tax Act 1994); the donations rebate for giving by individuals (section KC 5(1)); the company donation deduction (section DJ 4), and the exemption from gift duty for gifts to a charity (section 73(1) of the Estate and Gift Duties Act 1968). The government's intention is to maintain at least the same level of assistance to charities through the tax system as it currently provides. However, it recognises that if that assistance is not appropriately targeted, the available resources may be spread too thinly.

1.2 In determining whether assistance is appropriately targeted, two potential problems are the scope of the current application of the exemption, and the relevance, today, of the possibly archaic definition of "charitable purpose".

1.3 In addressing these problems, and indeed in determining whether these problems are real or merely perceived, this review focuses on three areas: whether the definition of "charitable purpose", which derives from English law at least 400 years old, remains appropriate to New Zealand society in the 21st century; whether the level of information provided to the government by charities is appropriate; and some specific tax issues affecting the sector. These areas are covered in this document in Parts II, III and IV, respectively.

1.4 It is important to note that this review deals mainly with charities, and only with issues that relate to taxation. Thus, apart from the GST issues discussed in the last chapter, it does not deal with other tax-exempt organisations. Nor does it deal with governance issues, except to the extent of reporting for tax purposes, as discussed in Part III. The discussion on the definitional issues is intended to apply only for tax purposes, so would not affect other areas of law such as the Charitable Trusts Act 1957 and the Perpetuities Act 1964.

Other reviews

1.5 The last major review of the law of charities in New Zealand was undertaken by the Working Party on Charities and Sporting Bodies in 1989. The major recommendation of that review was that a Commission for Charities be established, to increase accountability of charities to the public. This discussion document does not deal with the range of issues covered by that working party as many of them are outside the scope of the present review. However, the working party did make several recommendations in relation to direct tax matters, including that the income tax exemption be retained, and that the limits on deductions and rebates be regularly adjusted. Those issues are discussed in this document.

1.6 The appropriateness of the current broad tax exemption for charities and other non-profit organisations, as well as their ability to earn business income free of tax, were also discussed by the Committee of Experts on Tax Compliance. The committee was particularly concerned about the issue of competitive advantage, given the ability of charities to earn business income free of tax.

1.7 Work is being undertaken in other areas that is potentially relevant to this review. It includes the Tax Review 2001, which will look at the use of the tax system to influence behaviour; the government review of gaming; and the Community and Voluntary Sector Working Party, which reported in April 2001.

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