7.1 Because current arrangements contain no obligatory reporting requirements for charities, it is possible for an entity to claim charitable status, and have access to the taxpayer subsidy without the government having knowledge of this, without any monitoring of the entity's activities or the use of the funds it raises. This situation raises the following two concerns for the government.

Cost of the subsidy

7.2 There is no means by which the government can know how much it is spending on the charitable tax exemption, although information is available about the amount of rebates claimed.

7.3 A government decision to not collect tax from a certain sector of society can be regarded as similar to a government expenditure decision. Ideally, then, the government should be in a position to know how much of taxpayers' money is being "spent" as a result of such a decision. Although many charities register under the Charitable Trusts Act, or submit their documentation to Inland Revenue, there is no complete list of organisations benefiting from the tax exemption, or information about the extent to which they are benefiting. Further, the government does not know how much of the subsidy is being spent on charitable purposes outside New Zealand (see chapter 10). If this information were available to the government, it is possible that more accurate targeting of government assistance could take place.

Accountability

7.4 Apart from random Inland Revenue audits and the provisions of the Charitable Trusts Act, there is no process for monitoring whether entities are pursuing the charitable purposes for which they were set up.

7.5 Inland Revenue has a role in monitoring charities to ensure that section CB 4 of the Income Tax Act is being complied with. However, regular monitoring would involve extremely pro-active audit activity on the part of Inland Revenue, as no information is available to the department on which it can make a decision to conduct an audit.

7.6 When the government contracts with voluntary organisations or others to provide services in the community, some form of reporting is always required. The level of reporting varies from sector to sector. It sometimes involves detailed, itemised budgets, and in some cases focuses more on outputs produced. The level of reporting can also depend on the amount of funding involved. Generally, the government expects audited accounts to be provided to ensure that public money is being used for the purposes for which it was intended. No such accountability is required for the charitable tax exemption to be accessed.

7.7 As part of this accountability question, it is not always clear whether profits of commercial operations carried on by, or owned by charities are distributed to the charitable purposes for which the entity was established.

7.8 If a charity is raising funds by means of conducting a profitable business activity, this in theory is no different from raising funds by any other means. However, if profits are not being distributed to charitable purposes but being re-invested into the business, it may be that the charitable purposes are not being met (see chapter 9).

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