Income Tax Exemption for Charities

Charitable groups, please take note - legislative change to apply from 1 April 2020 (for standard balance dates)

Registered charities carrying out their charitable purpose in New Zealand are exempt from income tax on their business profits; under current legislation this exemption also extends to business profits of an entity that is carried on for the benefit of the registered charity.

This extension of tax-free status would ordinarily apply to a company that is wholly-owned by a registered charity (perhaps a trust).  In this case, the current position would not require the company to be registered as a charity in its own right for the exemption to apply; effectively the concessionary treatment passes down from the charitable trustee owner.

This treatment has been met with uneasiness from the policy makers that, due to the wide drafting of the business income exemption, entities could take advantage of the concessionary treatment without being subject to the reporting obligations imposed on registered charities (in accordance with the Charities Act 2005).

The Government has confirmed that this is not as intended and is concerned with maintaining the public’s trust and confidence in the charitable sector. As a response, the business income exemption is therefore amended to apply only to entities which are registered charities and explicitly makes reference as such.  The amendment applies from the commencement of the 2020/21 income year, i.e. 1 April 2020 for those reporting to a standard balance date (31 March).

It is therefore crucial, if you were previously relying upon another party’s charitable registration for tax-free status, to register the entity itself under the Charities Act 2005 before the relevant commencement date. Failure to register will result in the exemption from income tax no longer applying.

In our experience this legislative change will largely impact upon charitable trusts with sole ownership in companies that undertake business activities; although of course it may be felt more widely.

Please contact your local BDO adviser if you have any questions about how the new legislation will apply to you.