5.1 The definition of "charitable purpose" could be reformed in several ways, ranging from minimal to radical change. This chapter discusses two possible options: maintain the current broad definition but incorporate safeguards or use a new, broader definition with built-in safeguards. The government has also considered the possibility of using a radically limited definition, an approach described in detail below. However, because a large number of existing charities would no longer qualify as a charity for tax purposes if this definition were adopted, the government has decided not to proceed with this approach.

5.2 As discussed in chapter 1, both the options require some reporting requirements to be introduced. Reporting issues are discussed in Part III.

Option 1: Maintain the current definition but with safeguards

5.3 This option recognises the difficulty of rewriting the current definition of "charitable purpose" completely, despite its acknowledged problems as identified in chapter 4. A reason for no change would be to avoid the uncertainty and the transitional problems that a new definition would create.

Proposal

5.4 The four categories of "charitable purpose", as are currently applied in New Zealand, would remain central to the definition. However, the tax exemption would be available only to registered charities (see chapter 8), and the wording of section CB 4 of the Income Tax Act 1994 would be amended so that an entity need not only be established for charitable purposes, but also must continue to carry out these charitable purposes for as long as it claims the tax exemption.

5.5 A variation could involve the government (on the recommendation of the Minister of Finance) having the ability to override any registration and to deregister a charity. This would be in keeping with recognising the tax exemption as an expenditure decision by the government and would allow the government to target those entities undertaking activities that it wishes or does not wish to support. To ensure that any such changes could be made within a reasonable timeframe and were transparent, they could be promulgated by Order in Council, and gazetted, and apply from the beginning of the following tax year.

Advantages

5.6 The advantages of maintaining the status quo in respect of the four categories of charitable purpose are simply that a large body of law already exists on what is a charitable purpose, and the rules have been relatively stable, although developing, for a long time. It would also avoid the transitional problems that would arise with a new definition. Some charities may have the power in their trust deeds to amend their trust purposes. There is otherwise no power to vary the purposes of a charitable trust unless it has become impossible, impractical, or inexpedient to carry them out (Charitable Trusts Act 1957, section 32).

5.7 The advantage of allowing the government the power to deem a particular entity not to be charitable is that it would allow decisions about government resources to be made in a manner consistent with evolving views on what constitutes a charitable purpose.

Disadvantages

5.8 The definition would still be wide, although the problems identified in chapter 4 could be managed to some extent by the registration process, and/or the government's discretion or override.

Option 2: Replace the existing definition with a new, general definition assisted by detailed guidelines on how the definition should be applied, with specific approval required.

5.9 The specific references to poverty, education and religion would be removed but the entities covered by those categories could still qualify under the new definition on a case-by-case basis, subject to specific approval. This option would involve the same breadth of definition in general terms but would be quite different in its manner of operation, in particular because a specific approval would be required.

5.10 An example of generalised wording would be:

"A charitable purpose means a humanitarian purpose that, when viewed objectively, makes a direct positive contribution to the well-being of society as a whole."

5.11 The reason for adopting this approach would be to move away from existing case law, which may have expanded the boundaries of what is charitable to such an extent that it is now too easy to become a charity. One issue would be to ensure that the definition would be sufficiently different that the courts could not continue to apply the current case law. This definition would implicitly or explicitly be subject to the public benefit test.

5.12 A set of detailed guidelines would be required to give the general definition meaning and focus. The guidelines could be set by Order in Council and in that respect, could be more readily varied over time as the public perception of what is a charitable purpose changes.

5.13 Because specific approval would be needed before charitable status was conferred, responsibility for this would have to be undertaken by either a government department or some other body. The decision-maker would have to have regard to all relevant guidelines. In all but the most clear-cut cases, it would be a matter of fact and degree as to whether, after taking into account the relevant guidelines, a particular purpose was charitable. It would, of course, be up to each applicant to show the relevant benefit to society. The specific approval process is also discussed in chapter 8.

5.14 Possible guidelines could cover:

• whether and to what extent the stated purpose complements or supplements the government's measures on providing housing, food, education and other basic necessities of life;
• whether and to what extent the stated purpose promotes education;
• whether and to what extent the stated purpose promotes culture or the arts;
• whether and to what extent the stated purpose propagates any religion or any set of beliefs, and if so, the nature of the principles, tenets or teachings sought to be promoted;
• whether and to what extent the stated purpose provides support for people requiring health care or suffering some kind of disability, distress or suffering; and
• whether and to what extent the stated purpose is directed to the protection and rescue of animals.

5.15 The government override discussed in option 1 could also be applied to this option.

Advantages

• This option would not immediately exclude a great number of current charities from the tax exemption.
• It retains the flexibility of the fourth Pemsel category, although it requires that the charitable purpose makes a genuine contribution to the enhancement of society's welfare.
• It does away with the current Pemsel categories, thereby ensuring that no one purpose could claim to be prima facie charitable just because it falls within any one of the those categories.
• It provides transparency of decision making by the promulgation of guidelines which the decision-maker is required to have regard to.
• A specific approval process would increase certainty for an organisation that it qualifies as a charity for tax purposes.
• A specific approval process, by covering both applications for income tax exemption and donee status,¹⁸ would reduce compliance costs.

Disadvantages

• Given that there is criticism that the current definition is too wide and uncertain, this option could be criticised as being no better.
• Some of the guidelines could be criticised as being vague and difficult to apply.
• Given that there would be a specific approval process, the information required from applicants to determine if they meet the definition could be considered onerous.
• If the decision-maker were to be an independent body there could be high costs involved in setting up and maintaining such a body to grant specific approvals.
• The transitional costs could be high as existing charities become subject to the new rules.

Alternative approach: Limit the definition to the relief of poverty, illness, distress or other suffering

5.16 The government has also considered the approach of defining a charitable purpose to be the relief of poverty, illness, distress or other suffering. This is a similar concept to that outlined in the dictionary definition referred to in chapter 1. In essence, this limits the definition to only one of the categories of charitable purpose under current law. As is the case under current law, this definition would not be subject to the public benefit test.

5.17 The range of entities that would qualify for charitable status would narrow dramatically, and it is likely that a large number of entities now accepted as charitable under current law would not qualify under these criteria. Significantly, entities such as independent schools and affiliated organisations, universities and religious organisations (unless they form separate entities that have the purposes of the relief of poverty and other hardship) would not qualify.

5.18 This approach could be modified by defining charitable purpose by reference to the concept of "needs", rather than the possibly more restrictive concept of "poverty". A possible alternative definition could incorporate some phrases from section 61A of the Charitable Trusts Act 1957 and could provide that:

"charitable purpose means any purpose -

(a) that improves the conditions of life of persons, who, by reason of their youth, age, infirmity, disablement or social or economic circumstances, are in need of any such assistance; or

(b) that relieves any illness, suffering or other hardship."

5.19 The definition might also incorporate the following phrases, based on section 38 of that Act:

"Without in any way limiting the generality of [the definition of charitable purpose] purposes that improve the conditions of life of those persons requiring the assistance include -

(a) the supply of the material needs of those persons;
(b) the education, counselling and teaching of life-skills of those persons;
(c) the provision of housing, shelter and food for those persons.
(d) the provision of health and medical services for these persons."

Advantages

• From the point of view of targeting government support of charities, narrowing the definition would mean that more resources were available to support those organisations that fall within it.
• There is already a body of law in relation to "poverty" with which people are familiar, and the relief of illness, distress and other suffering have traditionally been "charitable" under the current definition.
• This approach reflects the popular perception that charities are organisations having as their goal the alleviating of hardship and the provision of aid and assistance to the suffering and the needy.

Disadvantages

• A significant number of entities that are currently charities and the public has long acknowledged to be charitable (such as schools and churches) would fall out of the definition, except to the extent they were providing for the relief of poverty, and would have to adjust their expenditure to compensate for having to pay tax. This in turn means that there would be less money for those particular purposes, which by and large the community continues to support.
• There could be confusion over the fact that many entities would remain charities for other purposes, say, for the purpose of the Charitable Trusts Act 1957, but would not be "charitable" for tax purposes.

5.20 Given these significant disadvantages, the government has decided not to proceed with this approach.

Blood ties, contractual arrangements and the public benefit test

5.21 The public benefit test must be satisfied before an entity qualifies as a charity, except in the case of a charity for the relief of poverty. Although the question of whether the public benefit test is satisfied is considered on the facts of each case, the courts have developed a number of general tests for determining whether the group benefiting constitutes the public or an appreciably significant section of the public. Through cases such as Re Compton¹⁹ and Oppenheim v Tobacco Securities²⁰ it has been established that the number of beneficiaries must not be negligible. In addition, even if the number of beneficiaries is large, if those beneficiaries are determined on the basis of a personal relationship such as blood or contractual ties, the entity will not be for the public benefit. Rather it will be for the benefit of private individuals and, therefore, not charitable.²¹

5.22 The House of Lords (Lord Cross) in Dingle v Turner²² has questioned the Re Compton and Oppenheim tests, suggesting that the existence of a personal connection such as blood ties or a contract should not be determinative of whether an entity provides a public rather than a private benefit. Rather, consideration should also be given to the nature of the entity and the charitable purpose for which it was established, the number of beneficiaries and the degree of connection between the beneficiaries. Although the Re Compton and Oppenheim tests have continued to be applied in the English courts, Lord Cross's comments have been noted with approval in two recent New Zealand cases.²³ Consequently, there is now a degree of uncertainty in New Zealand as to whether trusts for the benefit of persons who are determined by either a blood or contractual relationship will satisfy the public benefit test.

5.23 The inability of an entity to qualify for charitable status when its beneficiaries are determined on the basis of bloodlines has been raised by the Maori community as a major concern, although it is by no means an issue limited to Maori. Although Maori authorities often provide benefits of a charitable nature to iwi and hapu, they might not qualify for an exemption because their benefit extends to a specified group of people connected by blood ties. This issue is being considered as part of the government review of the taxation of Maori authorities.

Proposal

5.24 One proposal likely to emerge from the government's review of the taxation of Maori authorities is that an entity will not cease to be eligible for charitable status by reason only of the fact that its purpose is to benefit a group of people connected by blood ties. Other factors such as the nature of the entity, the number of potential beneficiaries, and the degree of relationship between beneficiaries would then have to be considered in determining whether an entity benefited a sufficient section of the public.

5.25 Although this proposal is especially relevant to iwi and hapu-based entities, it would apply to both Maori and non-Maori entities. Entities would no longer be prevented from having access to the charitable tax exemption solely because the potential beneficiaries might be related in some way. Submissions received in relation to this proposed change to the public benefit test will be considered in relation to both the review of the taxation of charities and the review of the taxation of Maori authorities.

Specific issues for consultation Submissions are sought on these options, and the following issues, in particular: Do you consider that the current definition of "charitable purpose" is too wide? Do you consider the definition remains appropriate to New Zealand society in the 21st century? If the current, or a new, definition were modified by guidelines, are those expressed above at option 2 appropriate? Do you agree that the public benefit test should be liberalised to cover blood ties and contracts?

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