December 3, 2024 • 7 mins
Charities are going to be seeing some changes to their taxes from next year.
Finance Minister Nicola Willis has confirmed that there will be tweaks to the charity tax regime, but she is mindful of striking the right balance.
They want to ensure that people can’t structure their affairs as charities while building up funds that aren’t used for charitable purposes.
Best Start and Sanitarium were examples she gave of such trading entities.
Bruce Bernacchi, tax expert and partner at Dentons Kensington Swan, told Kerre Woodham that charities are well regulated in New Zealand, and running one isn't for the faint of heart.
He says that while the changes may result in additional scrutiny for smaller charities, the real focus is likely to be on business income, and whether that income is distributed and applied to charitable purposes.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:06):
You're listening to the Kerry Wood of Morning's podcast from
News Talk sed B.
Speaker 2 (00:11):
Finance Minister Nicola Willis as we've been discussing as promising
tax changes ahead for charities in the closing of loopholes.
It'll be announced in next year's budget. Join now, yes,
my lips, God's ear, or rather Helen put in the
call said we really need to talk to our favorite
tax expert, Bruce Binaki about this. Denton's Kensington Swan partner
and tax expert. He joins me Our morning to you, Bruce.
(00:33):
You weren't at the lunch, Yes to.
Speaker 3 (00:34):
Good morning Kerry. No, no, I was just working waiting
for my invite in the mail from you, but it
never arrived. I would have loved to have come, but
clearly that was not a charitable and not for profit
lunch given the prices that were being charged.
Speaker 2 (00:45):
Oh I know, well, I was just staff, so I
wasn't really invited.
Speaker 3 (00:49):
I was.
Speaker 2 (00:50):
I was your working stiff. Basically fair enough, so long overdue.
Everybody's been saying this, isn't it having that it.
Speaker 3 (01:00):
Has been talked about for a while. I think, you know,
particularly some businesses that are in competition with businesses that
are owned by charities and therefore, by extension, are able
to apply for and get charitable status and don't pay
income tax. You know, have been getting grumpy for a
while that you know, arguably these some of some of
these businesses just businesses that just happen to be owned
(01:22):
by charities rather than really being there too. Their only
reason for existence is to support the charity.
Speaker 2 (01:28):
Well, yes, I mean you've got an example quoted by
at Canterbury University Department of Accounting Chairpey who said christ College,
you know, has an shareholder in a forestry company. The
boys don't go and learn how to chop down trees,
they just profit from the forestry company. So that's not
really a charity, is it.
Speaker 3 (01:48):
Well, look, I don't know the exact dances, what they've
been what they've been doing. I mean, look, I think
it's fair to say charities are really well regulated in
New Zealand. So we have this broader concept of non
profits and charities are sort of like a subset of that.
And for an organization to be a charity, you know,
it's governed by the Charities Act. It has to exist.
(02:10):
For the Relieving Poverty, Advancing Educational religion or benefiting the community.
And there are tons of charities out there, and that
there are lots, they're subject to a lot of regulations.
So in order to benefit from the income tax exemption
and indeed for donors to get a tax deduction when
they donate to them, you have to register with Charity Services,
which is run by the Department of Internal Affairs. You
(02:31):
have to register all your employee, your trustees. Rather, you
have to have a clear sort of trustee or company
constitution that makes it clear that all the earnings of
the charity can only be applied for charitable purposes. You
have to file financial statements and if you are a
certain size, you have to have those financial statements audited.
So there's a lot of there's a lot of scrutiny
(02:54):
that is involved. And I'm a trustee in a charity.
Trust me, it's not for the it's not for the
fainthearted to be involved in running one of these things.
That there's a lot of work.
Speaker 2 (03:02):
I imagine there is, but if you're a charihan isn't.
And it's good that charities make money so that they
can then keep going, you know, so that it's us
having a charity that gives all its money away and
then folds and disappears. But I mean, how on are
the other people supposed to compete with charities?
Speaker 3 (03:23):
Yeah, and I think I think that's the issue. The
government hasn't come out and said exactly, you know with
this review what they're looking at. But I think what
it comes down to is the issue of really, is
this income that's been exempted from tax, is it then
being applied to support the charity or not? And so
if you've got the business it's any exempt income and
(03:45):
divoting up or but otherwise passing up all the profits
that it's made to the charity, and the charity is
applying that for its charitable purposes. No issue. I think
where the concern comes in is if you have these
businesses owned by charities that are just that are not
distributing out their income. I mean, any prudent business will
want to retain some income and invest for the future
(04:06):
and grow so it can generate more income. But if
it's not to me, if it's not distributing it out
a significant amount of its income, and so that that
income is actually applied for charitable purposes. I think that's
where the perceived mischief is and I think that will
be probably the focus of the review.
Speaker 2 (04:25):
Can some charities feel brassed off that the bigger charities
are the ones bringing the spot light down on the sector?
Speaker 3 (04:37):
Oh look, I think the entire sector, everybody's going to
get a chance to make submissions on this, and I think,
and we'll go through a full public consultation process. I mean,
the charitable sector is so important to New Zealand. And possibly, yes,
the smaller ones may be if it does result in
additional scrutiny. But I think the real focus will not
(05:00):
be on non business income because they're actually two you know,
if I get technical here, there are two different exemptions
in the Tax Act. One is for non business income
other sources of income et cetera, donations, gifts, whatever, that
a charity earns. That that's not a focus. It's business income.
And that business income can be earned by the charity.
You know, the charitable trust, for example, you might often
(05:20):
have sitting up at the top of the structure. It
owns a company that carries on a business. That company
itself has to be registered and a registered charity. But
I think and then carries on the business, and I
think the focus will be on the business income and
the business activities and whether that income is distributed and
actually applied towards the ultimate charitable purposes. So I mean maybe,
(05:44):
but it will just be to the extent of scrutiny.
We don't know that yet.
Speaker 2 (05:48):
But call me old fashioned, but I would have thought
that would have been done anyway. Like if you want
to be a charity, you have to show in your
books that you've given away your profit.
Speaker 3 (05:58):
Or no, you've just got to prove that it's been
applied for charitable purposes. So which does not necessarily mean
all of your money has to have been distributed out
as I say, you know, it's proved for any business
to retain some money and invest for the future so
they can grow and earn more money. But so but
I just don't there's not enough sort of spec specificity
(06:20):
in the tax Act at the moment and the scrutiny
of a charities with respect on I mean, because I'm
a tax gik carry, I've got to act here in
front of me, and it's got to be income derived
directly or indirectly from a business, carried on by, or
for or for the benefit of a essentially thinkers tax charity.
So it doesn't say doesn't you know, so that being
(06:42):
applied for the benefit of that doesn't say it has
to be like during the tax year or in the next.
It doesn't. There's no sort of time frame on that.
So you can say, well, look and I'm going to
derive some income today and yeah, I'm going to you know,
I'm not eventually years I'll give it away. You find
it way, yeah, but but but there's no sort of
time frames around that.
Speaker 2 (07:01):
There should be. There's work to do, isn't there in
terms of tightening it up.
Speaker 3 (07:06):
I think so. It has been an issue that has
been around for a while. As I say, like the
vast bulk of charities shouldn't shouldn't be concerned at all.
Most of them don't make very money. They're much money,
They run on a shoe string. They're doing wonderful things
for the community. They're important part of of of the
New Zealand economy and the and being able to and
(07:27):
also you know, having a support for all these these
wonderful causes out there. I think it's just it's really
a handful that are operating sort of significant businesses that
were the focus might.
Speaker 2 (07:39):
Be thank you so much as always for your expertise
where as I really do appreciate it and if I
don't see you, we don't talk to you before the
end of the year. Are very Merry Christmas to you.
News Talks Said
Speaker 1 (07:50):
Be For more from Kerry Wood and Mornings, Listen live
to News Talks Said Be from nine am weekdays, or
follow the podcast on iHeartRadio.
You're listening to the Kerry Wood of Morning's podcast from
News Talk sed B.
Speaker 2 (00:11):
Finance Minister Nicola Willis as we've been discussing as promising
tax changes ahead for charities in the closing of loopholes.
It'll be announced in next year's budget. Join now, yes,
my lips, God's ear, or rather Helen put in the
call said we really need to talk to our favorite
tax expert, Bruce Binaki about this. Denton's Kensington Swan partner
and tax expert. He joins me Our morning to you, Bruce.
(00:33):
You weren't at the lunch, Yes to.
Speaker 3 (00:34):
Good morning Kerry. No, no, I was just working waiting
for my invite in the mail from you, but it
never arrived. I would have loved to have come, but
clearly that was not a charitable and not for profit
lunch given the prices that were being charged.
Speaker 2 (00:45):
Oh I know, well, I was just staff, so I
wasn't really invited.
Speaker 3 (00:49):
I was.
Speaker 2 (00:50):
I was your working stiff. Basically fair enough, so long overdue.
Everybody's been saying this, isn't it having that it.
Speaker 3 (01:00):
Has been talked about for a while. I think, you know,
particularly some businesses that are in competition with businesses that
are owned by charities and therefore, by extension, are able
to apply for and get charitable status and don't pay
income tax. You know, have been getting grumpy for a
while that you know, arguably these some of some of
these businesses just businesses that just happen to be owned
(01:22):
by charities rather than really being there too. Their only
reason for existence is to support the charity.
Speaker 2 (01:28):
Well, yes, I mean you've got an example quoted by
at Canterbury University Department of Accounting Chairpey who said christ College,
you know, has an shareholder in a forestry company. The
boys don't go and learn how to chop down trees,
they just profit from the forestry company. So that's not
really a charity, is it.
Speaker 3 (01:48):
Well, look, I don't know the exact dances, what they've
been what they've been doing. I mean, look, I think
it's fair to say charities are really well regulated in
New Zealand. So we have this broader concept of non
profits and charities are sort of like a subset of that.
And for an organization to be a charity, you know,
it's governed by the Charities Act. It has to exist.
(02:10):
For the Relieving Poverty, Advancing Educational religion or benefiting the community.
And there are tons of charities out there, and that
there are lots, they're subject to a lot of regulations.
So in order to benefit from the income tax exemption
and indeed for donors to get a tax deduction when
they donate to them, you have to register with Charity Services,
which is run by the Department of Internal Affairs. You
(02:31):
have to register all your employee, your trustees. Rather, you
have to have a clear sort of trustee or company
constitution that makes it clear that all the earnings of
the charity can only be applied for charitable purposes. You
have to file financial statements and if you are a
certain size, you have to have those financial statements audited.
So there's a lot of there's a lot of scrutiny
(02:54):
that is involved. And I'm a trustee in a charity.
Trust me, it's not for the it's not for the
fainthearted to be involved in running one of these things.
That there's a lot of work.
Speaker 2 (03:02):
I imagine there is, but if you're a charihan isn't.
And it's good that charities make money so that they
can then keep going, you know, so that it's us
having a charity that gives all its money away and
then folds and disappears. But I mean, how on are
the other people supposed to compete with charities?
Speaker 3 (03:23):
Yeah, and I think I think that's the issue. The
government hasn't come out and said exactly, you know with
this review what they're looking at. But I think what
it comes down to is the issue of really, is
this income that's been exempted from tax, is it then
being applied to support the charity or not? And so
if you've got the business it's any exempt income and
(03:45):
divoting up or but otherwise passing up all the profits
that it's made to the charity, and the charity is
applying that for its charitable purposes. No issue. I think
where the concern comes in is if you have these
businesses owned by charities that are just that are not
distributing out their income. I mean, any prudent business will
want to retain some income and invest for the future
(04:06):
and grow so it can generate more income. But if
it's not to me, if it's not distributing it out
a significant amount of its income, and so that that
income is actually applied for charitable purposes. I think that's
where the perceived mischief is and I think that will
be probably the focus of the review.
Speaker 2 (04:25):
Can some charities feel brassed off that the bigger charities
are the ones bringing the spot light down on the sector?
Speaker 3 (04:37):
Oh look, I think the entire sector, everybody's going to
get a chance to make submissions on this, and I think,
and we'll go through a full public consultation process. I mean,
the charitable sector is so important to New Zealand. And possibly, yes,
the smaller ones may be if it does result in
additional scrutiny. But I think the real focus will not
(05:00):
be on non business income because they're actually two you know,
if I get technical here, there are two different exemptions
in the Tax Act. One is for non business income
other sources of income et cetera, donations, gifts, whatever, that
a charity earns. That that's not a focus. It's business income.
And that business income can be earned by the charity.
You know, the charitable trust, for example, you might often
(05:20):
have sitting up at the top of the structure. It
owns a company that carries on a business. That company
itself has to be registered and a registered charity. But
I think and then carries on the business, and I
think the focus will be on the business income and
the business activities and whether that income is distributed and
actually applied towards the ultimate charitable purposes. So I mean maybe,
(05:44):
but it will just be to the extent of scrutiny.
We don't know that yet.
Speaker 2 (05:48):
But call me old fashioned, but I would have thought
that would have been done anyway. Like if you want
to be a charity, you have to show in your
books that you've given away your profit.
Speaker 3 (05:58):
Or no, you've just got to prove that it's been
applied for charitable purposes. So which does not necessarily mean
all of your money has to have been distributed out
as I say, you know, it's proved for any business
to retain some money and invest for the future so
they can grow and earn more money. But so but
I just don't there's not enough sort of spec specificity
(06:20):
in the tax Act at the moment and the scrutiny
of a charities with respect on I mean, because I'm
a tax gik carry, I've got to act here in
front of me, and it's got to be income derived
directly or indirectly from a business, carried on by, or
for or for the benefit of a essentially thinkers tax charity.
So it doesn't say doesn't you know, so that being
(06:42):
applied for the benefit of that doesn't say it has
to be like during the tax year or in the next.
It doesn't. There's no sort of time frame on that.
So you can say, well, look and I'm going to
derive some income today and yeah, I'm going to you know,
I'm not eventually years I'll give it away. You find
it way, yeah, but but but there's no sort of
time frames around that.
Speaker 2 (07:01):
There should be. There's work to do, isn't there in
terms of tightening it up.
Speaker 3 (07:06):
I think so. It has been an issue that has
been around for a while. As I say, like the
vast bulk of charities shouldn't shouldn't be concerned at all.
Most of them don't make very money. They're much money,
They run on a shoe string. They're doing wonderful things
for the community. They're important part of of of the
New Zealand economy and the and being able to and
(07:27):
also you know, having a support for all these these
wonderful causes out there. I think it's just it's really
a handful that are operating sort of significant businesses that
were the focus might.
Speaker 2 (07:39):
Be thank you so much as always for your expertise
where as I really do appreciate it and if I
don't see you, we don't talk to you before the
end of the year. Are very Merry Christmas to you.
News Talks Said
Speaker 1 (07:50):
Be For more from Kerry Wood and Mornings, Listen live
to News Talks Said Be from nine am weekdays, or
follow the podcast on iHeartRadio.
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