OS 22/04: Charities and Donee Organisations – Part 1 Charities
A complex area of tax law is the tax treatment of non-profits.
IRD has issued OS 22/04 with the purpose of providing a better understanding of the tax benefits and obligations of those in the not-for-profit sector. This is a very in-depth document surrounding charities and donee organisations. To provide easier understanding, we have summarised the key points below.
A charity has been defined by IRD as an organisation with a purpose that is for public benefit in a way recognised by the law. The activities of the charity must not result in private benefit to any individual. The government supports charities by providing them with favourable tax treatment. In order to qualify for this favourable tax treatment, a charity must meet the registration requirements.
What are the requirements for registering as a charity?
In order to be registered, the organisation must be sustained exclusively for charitable and not private purposes. For trustees to be registered there must be a relationship in place where the income derived by trustees is for charitable purposes. The registration and monitoring of charities is then governed by the Charities Service. This service maintains a public register of all charities, collects and processes annual returns, supplies information to IRD and support and education to charities.
What is the tax treatment available for charities?
Charities are supported by the NZ govt primarily through exemptions. These include the non-business income and business income exemptions. Other tax treatment available to charities includes RWT exemptions and GST concessions.
Income Tax Exemptions
An income tax exemption is provided to charities for non-business income. Examples of this include investment and dividend income. There is also an exemption available for business income given the requirements are met. These requirements are that the income must be derived directly/indirectly from a business, the business must be carried on for the benefit of a tax charity, the charity must be registered at time income is derived and the territorial and control restrictions must be satisfied.
The territorial restriction addresses that the charity may have operations outside of NZ. It states that only income derived in NZ can be exempt. The control restriction states that no person with control over the charitable organisation can stand to benefit from the income derived.
Resident and Non-Resident Withholding Tax Exemption for a charity
Charities are exempt from RWT for the duration of their registration. A charity must register as a payer of NRWT if they pay out dividends or interest to non-residents. They can then deduct NRWT from the payment and remit it to the Commissioner.
GST for Charitable Organisations
The GST registration threshold and record keeping requirements are the same for non-profits and any other entity. Any payments received as gifts are not to subject to GST. Non-profits can claim a GST deduction for most goods/services that they acquire, even if they cannot be directly linked to the production of taxable supply. GST cannot be claimed on goods/services used in the production of exempt supplies e.g., the sale of donated goods is not liable to GST.
Tax Treatment of Māori Organisations
Many Māori organisations are registered non-profits, and their tax treatment is consistent with that of charities. However, Māori organisations are also considered as having a charitable purpose where their structure is on Māori reservation land and if funds are used for the maintenance of the land and structure of marae.
Māori organisations are eligible for many payments including subscriptions, grants, subsidies and donations. A Māori charitable organisation can be registered with the Charitable Services. More information on Māori Organisations can be found in OS 22/04 published by IRD.
Administration of charities in New Zealand
Under the Charities Act, charities are subject to reporting requirements and standards which they must follow. Sufficient business records must be kept including source documents such as receipts, bank statements and invoices. These should allow the charity to calculate tax liabilities and prove eligibility for exemptions/concessions.
The law around charities is quite complex and while we have provided a summary of the key points, it is recommended to consult with one of our advisors for the best advice.
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