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Inland Revenue

Tax Policy

PUBLISHED 20 November 2001

Minister on tax and charities

In a speech today to Philanthropy NZ, Revenue Minister Michael Cullen spoke on the way ahead for the charitable and philanthropic sector now that submissions on the discussion document "Tax and Charities" have closed. In his speech, Dr Cullen covered the main views that emerged from submissions and the government's response. He also described the role of the working party to be set up to look at the proposed system for registration, reporting and monitoring of organisations claiming charitable status for tax purposes. For more information see the Minister's speech.

Hon Dr Michael Cullen
Treasurer, Minister of Finance, Minister of Revenue, Leader of the House 

Address to NZ Association of Philanthropic Trusts

Address to Philanthropy New Zealand

Thank you for inviting me to speak with you today. It is a pleasure to be here with an organisation that makes such an important contribution to the well being of New Zealand.

Philanthropic trusts play an increasingly critical part in building stronger communities and investing in what we now call the social capital of a nation and which can be described as the networks of social relationships characterised by trust and reciprocity and which operate at the individual, family, community and national level.

More and more economists and analysts are recognising what many in the voluntary community have known all along:

  • that the social impact of government policies is as important as the economic impact and they must be considered together, and;
  • that fiscal, social and economic objectives may be complementary rather than competitive.

The effort over the past two decades where New Zealand strove for greater economic efficiency through a programme of restructuring and deregulation, failed to lift our living standards to keep pace with most OECD countries.

I am not denying many of the reforms were necessary and good. They certainly gave this organisation a boost – your membership has grown more than five fold over the past decade through the sale of community banks and energy utilities.

Now, through your hands, many, many millions of dollars each year is donated to charitable organisations, education initiatives, the arts and sporting programmes.

Philanthropy New Zealand has determined that there are three key areas of need amongst your membership: taxation, research and education. So, today I would like to speak with you wearing my Minister of Revenue hat and talk about the way ahead for the charitable and philanthropic sector now that submissions on the "Tax and Charities" discussion document have closed.

As you may know, over the years the tax treatment of charities has been the subject of periodic review in New Zealand, although change has never got past the reporting stage, for various reasons. For instance, in my time as a Cabinet Minister in the eighties, Sir Spencer Russell's group made numerous recommendations on charities and sporting bodies, though few of them were implemented.

I have retained my interest in the subject of charities since then, and sincerely hope there will be some tangible results this time. I also feel there is considerable goodwill in the charitable sector towards improving and clarifying the regulatory environment.

I would like to take this opportunity to thank you for the valuable part you have played during the past few months. I have welcomed and been heartened by the very close consultation we have seen between the charitable sector and the government - especially as over the past decade that relationship has been under some strain. I hope the work we continue to do together helps to rebuild that relationship.

The recent discussion document "Tax and Charities" was part of this Government's review of the tax treatment of charities, to see if the tax measures that are supportive of charities can be better targeted.

It sought viewpoints on a wide range of tax issues relating to charities. The proposals were not necessarily government policy, but were there as possible approaches, as options for discussion.

The response was good, with nearly 1700 submissions received from a wide cross-section of the community. Many of the submissions showed their writers had put considerable effort and thought into them.

Most respondents thought the definition of "charitable purpose" was adequate, and to change it would create too much uncertainty.

Most submissions supported, or at least accepted, the idea of registering charities. They reflected mixed views on the form this registration should take, and who should be the registering authority.

Larger charities were generally comfortable with the idea of providing annual accounts, though not returns. Smaller charities were worried about the compliance costs of providing accounts, particularly if they had to be audited.

Submissions generally supported public disclosure by charities, though some charities that do not publicly solicit funds did not want their accounts to be disclosed to the wider public.

Most found it acceptable to monitor charities regularly to ensure they were adhering to their charitable purposes.

The most contentious issue was the idea of taxing charity-owned trading operations in the same way as other businesses, but making available to them an unlimited deduction for distributions to their relevant charitable purpose. Many submissions expressed concern about the definition of "trading" and how the idea would work in practice.

Most submissions that commented on the subject considered that accumulating funds was part of prudent management - it was not a tax-based competitive advantage. Regular monitoring, it was suggested, would deal with any problems here.

The idea of removing the fringe benefit tax exemption on fringe benefits provided to employees also, it has to be said, failed to win a great deal of support. Many charities felt the exemption was justified because their employees were generally paid below market rates, and fringe benefits were needed and used to compensate. They argued that paying fringe benefit tax would reduce funds available for charitable purposes.

Most submissions that mentioned superannuation schemes for employees of charities favoured retaining the current, case law-based exemption.

On the funding side, submissions supported the government's proposal to increase the donation rebate but considered it to be too low. They also supported the change to the rules on company donations.

Several submissions called for a change to enable imputation credits to be refundable in some form.

Finally, nearly all submissions that commented on the GST issue supported the proposal to clarify the law to verify that charities and other non-profit bodies can claim input tax refunds on non-taxable supplies.

These, then, are the main patterns to emerge from the submissions on the discussion document.

The government announced its decisions on the "Tax and charities" proposals last month, in a package of reforms that I believe, on the whole, should be very acceptable to the sector. Other issues emerging from the discussion document and consultation need further work before any decisions can be made.

As you will know, a key part of the package is the decision, in principle, to introduce registration, reporting and monitoring requirements for organisations claiming charitable status for tax purposes. The aim is to improve the amount of information available to the government and the public about the sector, and so improve decision-making.

We shall be consulting with the charitable sector on the design details, to ensure the new system works well and is widely accepted.

To this end, a working party comprising representatives of the charitable sector will be appointed and asked to come back to the government with recommendations. I shall describe the terms of reference of the working party in a moment.

The tax bill to be introduced in December will include clarification that non-profit bodies can claim GST refunds on all their activities except for exempt supplies.

Legislation to be introduced next year will raise the maximum rebate level for donations from $500 to around $600, the first increase since 1990. We anticipate being able to introduce more frequent increases once better information becomes available through the new system for registration, reporting and monitoring. We will also be simplifying the company deduction rules at the same time.

I am interested in reviewing the issue of refunding imputation credits once better information on the likely costs is available.

I know that your organisation has put a lot of work into developing a proposal for effectively refunding imputation credits through a supplementary dividend mechanism. The mechanism used in the international tax arena is a very good system for refunding non-resident withholding tax. However, if we did decide to refund imputation credits to charities I am not sure we would want to use that type of mechanism or a direct refund mechanism. But I think this is a matter that we can consider once better information is available.

As I announced last month, we are also looking at removing the tax exemption for employee superannuation schemes run by charities. The rationale is that all employees should be treated the same for tax purposes. That reasoning also applies to fringe benefits -- otherwise there are too many opportunities to introduce inequities if there are different rules for charities.

Therefore, while I accept that charitable organisations see the fringe benefit tax and superannuation scheme exemptions as ways of further rewarding employees who might be paid below market rates, I generally do not see the tax system as the best mechanism to deal with that funding problem. The exemption created by the courts for superannuation funds means there are already inequities within the system, and I am not keen to encourage them.

I am aware of your concerns, however, and assure you that I am taking them seriously. We have asked officials to do further work on how the fringe benefit tax exemption might be limited, and to consult on the proposed change to the tax treatment of employee superannuation funds run by charities.

As I described earlier, the working party will be asked to provide recommendations on the type of registration, reporting and monitoring arrangements to be introduced and how they should be implemented.

It will concentrate on the operational aspects of a system that is workable for charitable organisations and useful to both the government and the public.

The ideal system should be simple, efficient, fair and reliable. It should not impose unnecessary compliance costs on charities, nor tie them up in too many administrative duties to the detriment of their real work.

The working party will also be to asked to comment on three further issues:

  1. whether the definition of "charitable purpose" can be improved without altering its overall scope;
  2. the proposal to standardise the various tax assistance rules applying to New Zealand charities operating overseas; and
  3. any wider impacts of the issues of the public benefit test as discussed in the discussion document "Taxation of Maori authorities".

We are still finalising the terms of reference, and I hope to be able to announce their full content and the composition of the working party in the very near future.

In closing, I should point out that New Zealand is not alone in refocusing on the tax treatment of its charities. Other Commonwealth countries are tackling these issues, as well, particularly as regards the definition of "charitable purpose". The United Kingdom government has commissioned a review of the legal and regulatory framework for the voluntary sector, and it is expected to report back early next year. The UK government has also issued a discussion paper outlining a number of options for reform. The Scots are considering adopting a specific charities body along the lines of the Charities Commission in England and Wales. Australia is looking at the definition of "charity" in the wider context of non-profit bodies, and its Inquiry into the Definition of Charities and Related Organisations reported back in June with proposals for a new definition of "charitable purpose".

Given all the international work on the subject that is taking place, I think it would be prudent for New Zealand to await the outcome before committing to any major reform of the definition of "charitable purpose".

Finally, I would like to again, express my appreciation of the important role Philanthropy New Zealand has played in the consultative process, and in developments leading to the establishment of the charities working party. Thank you.