|
Discussion Document |
Home | Contents | Previous | Next |
Chapter 8 - Options for change |
Part III |
8.1 This chapter details several proposals for improving reporting requirements for charities. They include registration, filing annual audited accounts (possibly to be made public), filing tax returns and other regular monitoring.
8.2 Administration of any of the reporting requirements discussed here could be undertaken by Inland Revenue, another government department, or an independent body. It may be that a party other than Inland Revenue would be in a better position to undertake this administration, given that the secrecy provisions of the Tax Administration Act 1994 would inhibit transparency. In some cases, if Inland Revenue were the appropriate body, the Tax Administration Act might have to be amended to avoid this problem.
Registration
8.3 At present, there is no requirement that a charitable entity be registered as such.
Proposal
8.4 It is proposed that in order to qualify for the various tax subsidies, an entity would have to officially notify the government, by means of a set procedure, that it considers itself to be a charity for tax purposes. Under this proposal, there would be no formal approval process, although the entity might be required at a later stage to demonstrate that it meets charitable purposes. This process would not, however, preclude application to Inland Revenue for informal confirmation that the founding documents prima facie demonstrate charitable purposes.
8.5 Registration could be with Inland Revenue, another government department or an independent body. However, the list of registered charities should be publicly available, so if the register were maintained with Inland Revenue, it should not be subject to the usual Inland Revenue secrecy provisions.
8.6 This registration requirement would apply to existing as well as new charities. For existing charities, there could be a period within which registration must take place, say, one year, before the tax exemption would be withdrawn.
8.7 The registering body would have power to de-register a charity if it were found not to be pursuing its stated charitable purposes, or if it had failed to meet other obligations imposed upon it (for example, if charities were required to file tax returns, or annual accounts, and had failed to do this).
Advantages
8.8 The government and the public would have access to better information about the number and type of entities benefiting from the tax exemption.
Disadvantages
8.9 The only real disadvantage of registration requirements would be increased compliance costs, although they should be one-off and not particularly onerous. Many charities already seek Inland Revenue's view as to their charitable status or donee status.
Approved registration
8.10 As an alternative, the government has considered a procedure which is common overseas, whereby registration would be approved before the tax subsidies were available. This approach was referred to, together with its advantages and disadvantages, in chapter 5 when discussing the option of replacing the current definition of "charitable purpose" with a new, general definition. But it could be applied to any of the definition options.
8.11 The approval requirement would apply to existing as well as new charities, which would raise transitional issues that would have to be dealt with.
8.12 Essentially, approved registration would involve an assessment of whether the purposes for which the entity was established were charitable, and would likely be binding on both the charity and Inland Revenue. Because of the binding nature of the decision, it would have to be administered by an independent body. Issues would then arise as to the funding, composition and role of such a body. The role of the courts would be confined to that of judicial review of the decision-making process. It would also likely involve on-going monitoring by that body of the activities of the charity.
Annual accounts
8.13 As noted earlier, most organisations receiving government funding are required to provide audited annual accounts, for accountability of the public money they receive. Given that the tax subsidies are a form of public funding, in principle those taking advantage of them should also be required to provide accounts. Even with a registration process in place, some form of continuous monitoring is important, to ensure continued adherence to the relevant charitable purposes.
Proposal
8.14 Each registered charity should be required to prepare audited annual accounts. These should be filed with an appropriate body, and made publicly available. The accounts would be in accordance with New Zealand accounting standards, and should, at a minimum, show all amounts actually distributed to charitable purposes, both in New Zealand and overseas.
Advantages
8.15 If these accounts were required to be made public, not only would the government have information about how the tax forgone had been spent, but the public would have access to information about how its donations had been spent.
Disadvantages
8.16 As with registration, the only disadvantage of this proposal is increased compliance costs for charities. However, many charitable organisations prepare accounts already and, in fact, some make these public.
Possible threshold
8.17 For some smaller charities, preparation and auditing of annual accounts may give rise to disproportionate compliance costs. It may be that an income threshold should be introduced for those smaller charities that should not be required to comply to the same extent. For these smaller charities, it may be that a simple income and assets statement would be sufficient.
Tax returns
Proposal
8.18 Charities would file an annual income tax return with Inland Revenue. The Commissioner already has power, under section 58 of the Tax Administration Act, to require "gift-exempt" organisations to file returns, although this provision is rarely used. The return could require details of:
- income - amounts and sources;
- expenditure - including details of amounts distributed to charitable purposes (including amounts distributed overseas);
- assets and liabilities; and perhaps
- remuneration bands for senior staff.
Advantages
8.19 The advantage of filing annual income tax returns, over and above any requirement to provide accounts, would be that more accurate information about the amount of tax forgone would be available to the government. The administration costs involved in Inland Revenue reviewing the accounts of all charities to extract this information are likely to be higher than the compliance costs involved for charities in filing a tax return, given that they would be preparing annual accounts.
Disadvantages
8.20 Again, compliance costs are the only disadvantage. The government has considered whether smaller charities (say, those who would not have to file audited accounts) should be exempt from this requirement. However, if those smaller charities were to prepare an income and asset statement, it might not be unduly onerous to convert that information into a tax return.
Other forms of regular monitoring
8.21 The purpose of the charitable tax exemption is to subsidise spending on charitable purposes. If profits are not being distributed to the relevant charitable purpose, the objective of the tax exemption is not being met.
8.22 The government envisages that the activities of charities would be regularly monitored to ensure that an organisation was charitable at law and was applying its funds for charitable purposes. A charity that was accumulating significant funds, for example, could be asked to explain the reasons for such accumulation.
8.23 A list of registered charities, combined with information from annual accounts and returns would enable the design of a better-targeted audit programme by Inland Revenue. One option is to tie the provision of tax returns to an Inland Revenue audit programme so that only those that are audited would be required to file returns. This approach has recently been adopted in the United Kingdom. This approach would not require legislative change in New Zealand, given section 58 of the Tax Administration Act.
8.24 Although this discussion assumes that regular monitoring would be conducted by Inland Revenue, it would be possible for this activity to be undertaken instead by another government department or an independent body. If registration were to involve specific approval, the body that undertook that approval process could also undertake other functions such as auditing.
|
Specific issues for consultation
|