Chapter 1 - Introduction

1.1 This issues paper discusses problems with the current tax treatment of deregistered charities, and suggests a possible solution for clarifying the tax consequences for these entities by prescribing in legislation rules to deal with their new tax-paying status.

Current problem

1.2 A “deregistered charity” refers to an entity that has been removed from the Charities Register by the Department of Internal Affairs – Charities Services (formerly the Charities Commission).

1.3 Recent high-profile cases involving deregistered charities particularly where the entity continues in existence have shown that these entities can face a range of complex tax consequences that can be retrospective, transitional and prospective in nature. These consequences give rise to questions such as when should the entity start its life as a tax-paying entity; how should the entity treat its depreciable property or financial arrangements when it becomes a tax-paying entity, and what tax provisions should apply to the entity going forward.

1.4 The nature and extent of the potential tax consequences ultimately depends on the underlying reason why the entity was deregistered. These consequences may be more onerous (and may involve retrospective tax liabilities) if the deregistered charity is found never to have had a “charitable purpose” or had ceased being charitable in purpose at some time in the past, compared with the situation when a deregistered charity has simply failed to file the required annual return with Charities Services.

1.5 Current tax law does not adequately deal with the full range of tax consequences facing deregistered charities. This gives rise to additional compliance costs and stress for a group that, in general, is under-resourced and unsophisticated in terms of administrative functions.

1.6 For these reasons, and given the significance of the charitable sector in providing social services in New Zealand and the importance of ensuring the associated tax concessions are correctly targeted, we do not consider the status quo to be sustainable.

Suggested solution

1.7 We acknowledge that addressing the problems with the tax treatment of deregistered charities may require a mix of both legislative and operational measures, and that Inland Revenue and Charities Services would need to work together to ensure a seamless and robust process for deregistered charities to follow.

1.8 Given the range and complexity of the potential tax consequences that could face deregistered charities, officials seek feedback on the solution suggested in this paper and, in particular, whether a legislative approach is an appropriate way to address the matter or whether additional measures would be helpful.

1.9 Under the suggested solution, specific legislative rules would:

• clarify how the general tax rules, including the company, trust or other entity -specific regimes, apply to deregistered charities;
• establish the opening values of any depreciable property or consideration for any financial arrangements held by a deregistered charity when it becomes a tax-paying entity;
• prescribe specific timing rules for the application of the taxing provisions; and
• apply from the 2014–15 income year.

1.10 The suggested solution should help to ensure that the charities-related tax concessions are correctly targeted and desired policy intentions are met.

1.11 This means that the majority of former charities that have in good faith tried to meet their registration requirements should find that the solutions proposed will provide them with greater certainty about their tax obligations. On the other hand, the very small minority of deregistered charities that have wilfully refused to meet their registration requirements will face onerous tax consequences under the proposals outlined in this paper.

1.12 Officials invite submissions on the suggested solution and any other proposals that would address the stated problem. Submissions will be taken into account when we make recommendations to the Government on any necessary legislative changes. These changes would be included in a tax bill introduced in Parliament later this year.

Submissions

1.13 Submissions should include a brief summary of major points and recommendations. Submissions should also indicate whether it would be acceptable for officials to contact the submitter to discuss the points raised, if required.

1.14 Submissions should be made by 23 August 2013 and be addressed to:

“Deregistered charities”
C/- Deputy Commissioner, Policy and Strategy
Inland Revenue Department
P O Box 2198
Wellington 6140

1.15 Or emailed to [email protected] with “Deregistered charities” in the subject line. Electronic submissions are encouraged.

1.16 Submissions may be the subject of a request under the Official Information Act 1982, which may result in their publication. The withholding of particular submissions on the grounds of privacy, or for any other reason, will be determined in accordance with that Act. Submitters who consider that their submission or any part of it should properly be withheld under the Act should indicate this clearly.