Imputation

12.1 Charitable organisations that receive dividends with imputation credits attached cannot use those credits. The reason is that charities are exempt from tax, so do not have tax liabilities against which they might apply the tax credits. Because imputation credits are not refundable, the benefit of imputation credits is effectively lost to charities. This means, in effect, that their income from domestic equity is taxed.

12.2 The same problem does not arise in respect of active domestic investment, overseas equities or debt. When a charity owns a business outright, that business's profits are exempt from tax. In the case of debt, charities are eligible to obtain a certificate exempting them from resident withholding tax on interest. In respect of offshore equity investments, the issue of imputation credits does not arise.

12.3 This means that charities are discouraged from investing in domestic equity. One way of resolving this would be to allow charities, and possibly other exempt or loss-making entities that cannot use imputation credits, a refund of the tax paid on their behalf by the company (represented by the imputation credit).

12.4 As discussed at Part I, this review is intended to be broadly fiscally neutral. Because the cost of such a measure is potentially high, significant savings would have to be made in other areas of the tax treatment of charities before such a measure could be considered. Moreover, the issue would have to be considered in the wider context of any initiatives in relation to the treatment of other exempt entities and non-residents.

12.5 For these reasons, the government does not intend to address this issue at present. Once the government has more information on charities' activities, it will be in a better position to assess the relevant fiscal cost.

Fringe benefit tax

12.6 Section CI 1(m) of the Income Tax Act 1994 provides that benefits provided to employees of charitable organisations are not subject to fringe benefit tax, although this exemption does not apply to employees of businesses run by charities. It is proposed that the existing exemption from fringe benefit tax be removed.

12.7 Employees of tax-exempt organisations are taxed on their employment income. Fringe benefit tax is a substitute for the income tax that would be paid by an employee on remuneration received in monetary form. There is no reason that employees of charities should be exempt from tax on remuneration paid in kind. It follows, therefore, that there is no reason that the charities employing those people should be exempt from fringe benefit tax if they choose to remunerate their staff by payment in kind.

12.8 This view is consistent with a recommendation of the Committee of Experts on Tax Compliance.

Superannuation schemes for employees of charities

12.9 A similar issue, also raised by the Committee of Experts, is the tax treatment of superannuation schemes for the benefit of employees of charities. In the case of Presbyterian Church of New Zealand Beneficiary Fund,³¹ the court held that the income earned by a fund to provide an annuity to retired ministers was exempt from tax. This was on the basis that by providing financial security for retired ministers who were an integral part of the church, the fund fostered the charitable purpose of the employer.

12.10 The Committee of Experts recommended that the Income Tax Act be amended to clarify that superannuation schemes for the benefit of employees of charities should not have charitable status. The basis for this recommendation is that income earned by such schemes accrues to the benefit of the individual employees and is equivalent, from a policy perspective, to salary and wages, which are taxed.

12.11 This issue is intertwined with the definition of "charitable purpose" and, as such, may be implicitly addressed under the options outlined earlier for that definition. Alternatively, the issue may need to be addressed more explicitly, as recommended by the Committee of Experts.

Specific issues for consultation Should superannuation schemes for employees of charities have charitable status?

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