Chapter 3 - Charities-related tax concessions
3.1 As mentioned earlier, one of the benefits of registration is that the entity will be entitled to charities-related tax concessions under the Income Tax Act 2007.
3.2 The charities-related tax concessions are:
- an income tax exemption;
- a fringe benefit tax exemption; and
- recognition as a “donee” organisation for the purposes of the donation tax relief provisions. This means donors to a registered charity are eligible to receive certain tax credits on their donations.
3.3 Although Charities Services determines whether an entity qualifies for registration as a charitable entity, Inland Revenue administers charities-related tax concessions. Generally, Inland Revenue accepts Charities Services’ decision so that registration will, in most cases, lead to tax-exemption or “donee organisation” status.
Income tax exemption
3.4 A charity must be a “tax charity” to be eligible for an income tax exemption on charitable grounds.
3.5 A “tax charity” is defined in section CW 41(5) of the Income Tax Act 2007 as the following:
A trustee or trustees of a trust, a society, or an institution, registered as a charitable entity under the Charities Act 2005;
A trustee or trustees of a trust, a society or an institution who, before 1 July 2008, commenced the process of registering with the Charities Commission but had not completed its registration; or
A trustee or trustees of a trust, a society, or an institution that is or are non-resident and carrying out its or their charitable purposes outside New Zealand, and which is approved as a tax charity by the Commissioner in circumstances where registration as a charitable entity under the Charities Act 2005 is unavailable.
3.6 Under section CW 41 of the Income Tax Act 2007 a tax charity is exempt from income tax on its non-business income. In general, a registered charity will be treated by Inland Revenue as qualifying for this exemption because the requirements of registration correspond to the requirements of section CW 41.
3.7 Under section CW 42 a tax charity is exempt from income tax on business income it derives either directly or indirectly so long as that income is applied to charitable purposes within New Zealand, and no person with some control over the business activities of the charity is able to direct or divert income derived from the business to their benefit or advantage. Registration as a charitable entity is not therefore sufficient in itself to qualify for the business income tax exemption. Registered charities must also meet the “in New Zealand” and “no direct control” requirements.
3.8 For completeness, the business income tax exemption can apply to income derived by the registered charity either directly (in other words, the business activities are carried out by the charity itself) or indirectly (where the business activities are carried out by an entity separate from the charitable entity). These separate entities do not need to be registered under the Charities Act 2005. The registered entity is not itself conducting the business operation, but the operation is being run, for example, by a company that carries on the business solely for the registered entity’s benefit. Although these companies are not also required to be registered, if they also have charitable purposes, they may do so.
Fringe benefit tax exemption
3.9 Registered charities may also be entitled to an exemption from fringe benefit tax (FBT) on non-cash benefits paid to their employees who are employed in the non-commercial operations of the charity.
3.10 Under section CX 25 of the Income Tax Act 2007 a “charitable organisation” that provides fringe benefits to its employees will in general not need to pay FBT unless:
- the employee receives the benefit mainly in connection with their employment; and
- the employment involves a business whose activity is outside a charity’s benevolent, charitable, cultural or philanthropic purposes.
3.11 A “charitable organisation” is an association, fund, institution, organisation, society or trust to which section LD 3(2) or schedule 32 of the Income Tax Act 2007 applies. In other words, a “donee organisation” qualifies as a charitable organisation for the purposes of the FBT exemption.
3.12 In theory, all registered charities could meet the requirements of “donee organisation” status and so they could qualify for the exemption from FBT.
Recognition as a “donee organisation”
3.13 Donors who make cash donations to donee organisations are entitled to tax concessions based on their donation. These concessions are contained in section DB 41 (the company donation deduction), section DV 12 (the Māori authority donation deduction) and section LD 3(2) (the individuals’ donation tax credit) of the Income Tax Act 2007.
3.14 A “donee organisation” is defined in section YA of the Income Tax Act as:
An entity described in section LD 3(2) or an entity listed in schedule 32 of that Act.
3.15 In section LD 3(2) a donee organisation includes any society, institution, association, organisation, or trust that is not carried on for the private pecuniary profit of an individual, and whose funds are applied wholly or mainly to charitable, benevolent, philanthropic, or cultural purposes within New Zealand. Schedule 32 contains a list of 80 organisations whose charitable purposes are largely carried out overseas.
3.16 As previously mentioned, most registered charities will meet the requirements to be a donee organisation, provided their funds are applied to charitable purposes mainly in New Zealand (or overseas, if the entity is a schedule 32 entity).
3.17 In Chapter 4 we discuss the implications when an organisation no longer meets the criteria of a “charitable entity” and becomes deregistered.