3.1 Whether an entity, be it a trust, incorporated society or a limited liability company qualifies as a charity entitled to tax concessions depends on whether it meets the following tests:

• It must have been established exclusively for charitable purposes.³
• It must have been established for the benefit of the community as a whole or an appreciably significant section of it ("the public benefit test"). The courts have exempted charities for the relief of poverty from the public benefit test.
• The charitable purposes cannot be carried on for the private pecuniary profit of any individual.

3.2 Furthermore, in the case of a business, the exemption from income tax is not available to the extent the charitable purposes are outside New Zealand. Nor is it available if a person associated with the charity is able to receive some financial benefit from it.

Charitable purposes

3.3 "Charitable purpose" is defined in section OB 1 of the Income Tax Act 1994, as including:

"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".

3.4 The categories of relief of poverty, education, religion or other community benefits are known as the four "heads" of charity, and are based on the Charitable Uses Act 1601 (sometimes also known as the Statute of Elizabeth).⁴ But they are not defined in any legislation. Instead their meaning is to be found in court decisions both in New Zealand and the United Kingdom.

Historical influences

3.5 The Charitable Uses Act 1601 was a regulatory tool which provided for commissioners to investigate the misuse of funds that had been endowed for the benefit of charitable causes. The preamble to the Charitable Uses Act listed the following as examples of charitable purposes:

"The relief of aged, impotent and poor people; the maintenance of sick and maimed soldiers and mariners, schools of learning, free schools and scholars in universities, the repair of bridges, ports, havens, causeways, churches, sea-banks and highways; the education and preferment of orphans; the relief, stock or maintenance for houses of correction; the marriage of poor maids, the supportation, aid and help of young tradesmen, handicraftsmen and persons decayed; the relief or redemption of prisoners or captives; and the aid or ease of any poor inhabitants concerning payment of fifteens, setting out of soldiers and other taxes."

3.6 One of the historical influences on the definition was the Mortmain Act 1736, which operated to invalidate any legacies of money or land to charitable purposes if strict procedures were not followed. That Act appeared to have a distorting influence on the definition of "charitable purposes" throughout the eighteenth and nineteenth centuries, as testators' families challenged legacies made to entities or purposes outside the family circle. The courts, in order to protect the families' interests, found more and more purposes to be charitable so that the Mortmain Act could apply to them, and potentially invalidate legacies that had not complied with the required procedures.⁵

3.7 The Mortmain Act lost its influence on the development of the law of charities when it was liberalised in the late nineteenth century. However, the courts have continued to develop the law on what constitutes "charitable purposes".

3.8 In looking at the definition of "charitable purpose", it needs to be borne in mind that the definition has two purposes. At common law a trust for a purpose (as opposed to a trust for a person) is valid only if it is charitable. The courts have therefore found a purpose trust to be charitable wherever possible, in order to avoid the consequences of invalidity. In this way, the definition of "charitable purpose" has broadened over the years. In the tax context, however, the definition of "charitable purpose" provides a threshold for tax relief. At present, "charitable purpose" has the same meaning in both contexts, but an option is to explore whether that need be so.

3.9 The first major decision to consider the meaning of charitable purpose in the income tax context was Commissioners for Special Purposes of the Income Tax v Pemsel⁶ ("Pemsel's case"). The judgment of Lord Macaghten embedded into law the four categories of charitable purposes (or heads) of charity. Pemsel's case held that for the purposes of exemption from income tax the definition of "charitable purpose" should be the legal and technical definition deriving from the Charitable Uses Act 1601.⁷ Subsequent cases have refined what comes within each category. It is beyond the scope of this discussion document to do any more than canvas these cases briefly. This is done by reference to New Zealand cases, and English cases where relevant to New Zealand law.

Case law in relation to the four categories of charitable purpose

Relief of poverty

3.10 It has been held by the courts that "poverty" does not mean utter destitution. It simply means a need of some sort, either for a home, or for the means to provide for some necessity.⁸

3.11 This category of charitable purpose also encompasses relief of the aged and impotent described in the preamble to the Charitable Uses Act. In Re Bingham,⁹ it was held that a gift for the care of aged women was charitable under this category. It seems necessary, in this context, that some element of "need" associated with aging (for example, illness, infirmity or poverty) be present.

3.12 More recently, the New Zealand High Court held in D V Bryant Trust Board v Hamilton City Council¹⁰ that a retirement village in Hamilton which charged rentals for units at well below market rates so that it was available to the elderly of moderate means was a charity. It was accepted that the trust that ran it was a substantial benefactor to the people of the Waikato and did not confer private benefits to any person.

Advancement of education

3.13 The courts have interpreted the category of advancement of education liberally. It has been said that education is not restricted to the narrow sense of schools and universities, and includes increasing and promoting the appreciation of arts and culture. Thus, the promotion of choral singing has been held to be charitable in the United Kingdom. In New Zealand it has been held by the Court of Appeal in CIR v New Zealand Council of Law Reporting¹¹ that the publication of law reports by the Council of Law Reporting (a non-profit body) is a charitable activity under this head. More recently, the High Court held in Educational Fees Protection Society Inc v CIR¹² that an incorporated society that had as its objectives the payment of the fees of school pupils on the death of a parent was charitable under this head.

3.14 Sporting purposes are not charitable in themselves.¹³ However, sporting purposes have historically been charitable when undertaken through an educational facility. In IR Commrs v McMullen¹⁴ the House of Lords held as charitable under the education head a trust to improve the sporting facilities available to students. The definition in New Zealand is broadened by section 61A of the Charitable Trusts Act 1957, under which it is charitable to provide, in the interests of social welfare, facilities for recreation or leisure time occupation.

Advancement of religion

3.15 With respect to the advancement of religion, there is no distinction in case law between one religion and another or one sect and another, so the advancement of any religious doctrine could be considered charitable. The advancement of religion simply means the promotion of spiritual teaching in a wide sense. In Centrepoint Community Growth Trust v CIR¹⁵ Tompkins J found that the trust, which had as one of its purposes the advancement of the spiritual education and humanitarian teaching of Herbert Thomas Potter, was charitable as being a trust established for the advancement of religion. For the purposes of the law, the criteria of religion are the belief in a supernatural being, thing or principle and the acceptance of certain canons of conduct in order to give effect to that belief.

3.16 This category includes a wide variety of activities associated with religion, such as the repair of churches, and the installation and building of stained glass windows and spires. It has also been held by the court that this charitable purpose includes a superannuation fund established to provide an annuity to ministers of religion in their retirement.¹⁶ The fund's objectives were the protection of its ministers of religion, by ensuring that they were provided with sufficient income throughout their life in accordance with their lifelong commitment to the church. The retired ministers who received a financial benefit were an integral part of the structure and workings of the church and without them the church would cease to exist.

Any other matter beneficial to the community

3.17 As would be expected, the fourth category of the Pemsel classification has the greatest variety of activities and purposes that have been considered charitable. It was held by the majority of the New Zealand Court of Appeal in CIR v Medical Council of NZ¹⁷ that the Medical Council, which is a statutory body established, among other things, to maintain a formal system of registration of medical practitioners, was a charitable body. The court held that the purpose of the Medical Council was the protection of the public by ensuring that only those persons properly qualified could practise medicine. Perhaps more importantly, the court confirmed that the correct approach today is that objects that are beneficial to the community or are of public utility are prima facie charitable under the fourth category unless there are good reasons why they should not be.

3.18 Within this category, all manner of activities, including protection of animals, rehabilitation of prisoners, increasing the efficiency of the armed forces and promoting cremation as a means of disposing of the dead, have been held to be charitable. Political activities have been held not to be charitable.

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