March, 2017 - Parry Field Lawyers

Was able to attend some of the Living Economies Expo held in Lyttelton. They had an interesting line up of speakers and topics for the three day event. Information about it can be accessed here.

Because 31 March was financial year end I was in the office most of the day trying to get a major business sale completed but that’s the way things go sometimes! However I was able to get out for the panel discussion and have dinner.

The model for the event itself is worth commenting on as it was pitched as a “co-created event” – one example of that was we were asked to bring our own plates and cutlery. Volunteers ran it and the amount they paid to attend could reflect the contribution they had made in non-monetary terms. This is an interesting model in an era of corporate events and made the entire thing feel very “grass roots” – in a good way. It also fit in very well with some of the concepts discussed and being looked at by those attending such as alternative currencies that complement money (eg the Lyttelton Time Bank).

There was a wide range of ages and stages represented and it was really good to see the exchange of ideas taking place across generations. The pitch for it was: “Imagine a country which respects the living planet; whose people enjoy fair land tenure, good housing, good health, wholesome food, a rewarding livelihood, free education, a compassionate justice system, and an adequate income: a country with an inclusive democracy grounded in vibrant communities. This could be Aotearoa New Zealand – together, we can make this vision a reality.”

The panel discussion featured Nicole Foss, Phil Stevens, Raf Manji and Daryl Taylor on “Policies that encourage and facilitate” (bios are on the website here) – it was an interesting discussion about many topics including the future and need to develop systems and ways of operating that are an alternative to the “standard way” that things are done now. As an example, over dinner I chatted with some people who were involved in savings pools where many people deposit money and it can then be accessed by others for different purposes (rather than needing to go to a traditional bank and obtain a loan).

I enjoyed attending and learning about some of the thinking that is going on in this area.

This article contains a discussion of a fascinating case that came out at the end of 2016. The reason it is interesting is that the Judge had some frank words about the process that the Charities Registration Board had followed when looking at applications from two related groups for charitable status. In her conclusion the Judge notes that, “The Board has simply made mistakes”. Let’s have a look at what went on in more detail and see what we can learn from what happened. Most important let’s see what conclusions this may have for charities involved in research of some kind and whether they can (or cannot) obtain charitable status.

Two entities had applied for incorporation as charities. They were involved in research into “cryonics” and the extension of human life through preservation of humans and their reanimation in the future. They applied for charitable status in late 2011 and were declined in July 2013. There were many requests for additional information in between the application and the decision. The key finding by the Board was that:

“…the Foundation is not qualified to be registered as a charitable entity … we consider that the Foundation pursues an independent purpose to fund cryonics research (research into the cryopreservation and reanimation of people). This purpose does not advance education and or any other purpose that is charitable at law. Further, we are also not satisfied that the Foundation’s purposes provide sufficient public benefit, which is a requirement for charitable status.”

So what was the reasoning behind this conclusion? The Board felt that cryonics research was not an “accepted academic discipline” or that it was an area of “current science” or had any benefit to be researched. The Judge noted that in coming to this conclusion there had been independent research by the Board of material on the internet which helped it to come to that decision. The Judge had a dim view of that extra research which went beyond the information that had been provided by the applicants – this could be the subject of a whole article itself but the following quote gives the flavour: “…the perils of the internet are legend. It is possible to obtain web support for almost any proposition one cares to name… I consider the Board was wrong to put any store in the information obtained from the internet by the chief executive here.”

As for the conclusion regarding their educational purpose and whether there was sufficient usefulness of the research being done, the Judge disagreed on the conclusion and commented on why:

“…what all the authorities make clear is that “usefulness” as that term is applied in the cases constitutes a minimal standard designed only to exclude the “nonsensical” – areas of research and study that are demonstrably devoid of merit. While the concept of merit may raise more difficult, subjective, issues of “taste” where (for example) literature or art is the focus of an educational advancement analysis. I would think that such difficulties are much less likely to arise in matters of science. There may be some areas of research whose objects are so at odds with provable reality that purported scientific pursuit of them can be dismissed as nonsensical or an exercise in certain futility. Attempting to prove that he earth is flat might be one such endeavour. But absence of merit of that sort will be easy to establish (or refute) by reference to objective evidence.

The existence of scientific or academic controversy in a particular area is far from determinative. Nor is an acknowledgement that the goals of the research might only be achieved in the relatively distant future. By way of example only, the mars Society New Zealand Charitable Trust, whose purposes are to encourage and inspire space science and research leading to New Zealand’s participation in the exploration and settlement of Mars, was registered as a charity … the pursuit of such long term goals is likely to yield much useful knowledge along the way, regardless of whether the endpoint is ever achieved. And if that research that will be undertaken in order to work towards such a goal is likely to advance the sum of human knowledge the “usefulness” threshold will be met.”

This analysis is very helpful because it shows just what the Court will view as being “useful” – clearly it is to be interpreted in its widest sense. This is helpful to understand for any charities which may be involved in research and wondering if what they do will qualify. Having performed that analysis above, the Judge turned to the facts of the particular case before her and concluded:

“The evidence is that the proposed research is likely to lead to advances in areas such as organ transplant medicine, in vitro fertilisation, stem cell research, treatment of a range of diseases and disorders and enabling biodiversity…in the absence of clear evidence that cryonics research is “nonsense” and will not advance human knowledge, it matters not whether such research is presently “accepted academic discipline” or “current science” (whatever those terms may actually mean)… In my view the Board erred in its interpretation and application of the “usefulness” test.”

The Judge also concluded based on this that the purposes were clearly charitable under the “advancement of education” head of charitable purposes. For more on charitable purposes see here.

We hope this summary is useful and will help to better understand what research will qualify as being useful. If you have any questions about it feel free to contact us to discuss your situation. We are providing new updates on other cases and developments in the charity sector regularly so sign up for our newsletter to stay up to date with the latest developments.

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation.  Reproduction is permitted with prior approval and credit being given back to the source. Contact Steven Moe at stevenmoe@parryfield.com to request this or for any other questions.
 Copyright © Parry Field Lawyers 2017.

It is really encouraging to read the new report published this month by JB Were on the charity sector in New Zealand. A lot of number crunching has gone on to provide an analysis and it give some fascinating insights into this sector.

It can be accessed here.

One of the key points noted in the report is that there are more not for profits in New Zealand than other comparable countries. Australia has one for every 422 Australians, the US has one for every 339 Americans and in Britain there is one for every 393 people in Britain. This is compared to New Zealand which has one for every 170 people. This probably confirms what those in this sector already know – that there are a lot of different charities and not for profits out there. It also indicates a bent or leaning towards philanthropy among Kiwis that is stronger than other places too.

One of the other points noted is that 45 percent of income is generated not from donations or Government grants but from trading or membership fees. That is really interesting because as there is an increasing focus on “social enterprise” and generating income to help support the good work being done it is likely that this number will increase in the future as people look for new and innovative ways to fund the good work they are part of (rather than relying on donations).

I am still reading the report so will post another time with other observations about what they say but I encourage others to download the report and have a look through for yourself. What do the observations and conclusions mean for your organisation?

Clean Water Package Controversy

The government recently announced its Clean Water Package. The release has caused considerable controversy, largely around the proposed target of 90% of rivers and lakes being ‘swimmable’ by 2040 and, in particular, the E.coli guidelines for swimmable rivers being 540 E.coli per 100mls.

The Green Party and Labour Party were vociferous in their criticism of the government’s announcement largely because the amount of E.coli that can be present in swimmable water has doubled.As well, Forest and Bird advised the Minister for the Environment, Dr Nick Smith and the Minister for Primary Industries, Nathan Guy that it was withdrawing from the Land and Water Forum. Forest and Bird is a very influential pressure group in this arena; it took legal action in relation to the proposed Ruataniwha Dam and that matter is still being litigated.

The Land and Water Forum brings together groups of stakeholders such as industry groups, electricity generators, environmental and recreational bodies, iwi, scientists and other organisations with a stake in fresh water and land management. The purpose of the forum is to try to develop a common direction for fresh water management and provide advice to the government on this issue. There are 67 non-government participants, and 13 central and local government partners that include local authorities and various government departments.
The issue of fresh water standards for waterways is highly political and is likely to remain this way in the foreseeable future.

Where to from here for farmers?

Where does this government announcement leave farmers? Is their position any different from that set out in our article in the Autumn 2016 issue of Rural eSpeaking which covered the Resource Legislation Amendment Bill 2015 which, when (or if), enacted will give the government power to prescribe regulations to fence waterways?
In answer to the questions posed above, the release of the Clean Water Package doesn’t change the position of farmers at all. Sheep and cattle have been identified as major contributors to the level of E.coli in rivers and streams, and any attempt to control levels of that bacteria will involve keeping animals out of those waterways as far as possible.

The government’s tinkering with the definition of ‘swimmable’ will have little effect on the need to keep animals as far as possible away from our streams and rivers.
As much as anything, the current furore over the government’s package shows that the issue remains highly political – particularly with 2017 being an election year. There are well-funded and high-powered pressure groups involved; farmers cannot expect any relaxation in the fencing proposals that are currently on the table.
Interestingly enough shortly after the Clean Water Package was announced, the Environmental Defence Society released a report entitled ‘Last Line of Defence: Compliance, monitoring and enforcement of New Zealand’s environmental law.’

Local authority compliance

One of the areas that the report examined was resourcing, as well as the technical capacity, for local authorities’ compliance functions. While the report noted that regional authorities have been demonstrating increasing technical capacity for their compliance function, there is still a concern that there is political influence on decision-making, including the allocation of resources.
Clearly, monitoring compliance with the fencing of rivers and streams is going to impose a considerable burden upon our regional and unitary authorities.
In the meantime, however, we will keep you informed on the debate around the Clean Water Package.

Copyright of NZ Law Limited, 2017

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. Please contact Paul Owens at Parry Field Lawyers (348-8480) paulowens@parryfield.com

One of the interesting things about being involved in a relatively new sector like social enterprise is that there are often assumptions about what is being talked about. This article deconstructs one of the most commonly misunderstood points – what actually is a “social enterprise”? In doing this there are a lot of concepts and ideas that will be thrown on to the table – some of them contradictory – but it is hoped that by doing this there will be a clearer understanding about the issues involved and that will foster better discussion and understanding.

The term “social enterprise” will likely have different meanings for different people, depending on the background and experience of the person hearing that term for the first time. As one objective reference point outside of New Zealand, it is useful to see how the European Social Enterprise Law Association defined it in their paper, “Developing legal systems which support social enterprise growth”. They said there were three key elements:

– entrepreneurial dimension: engagement in continuous economic activity;
– social dimension: primary and explicitly social purpose; and
– governance dimension: mechanisms to ensure priority of social purpose.

They conclude that a good definition is: “an autonomous organisation that combines a social purpose with entrepreneurial activity“. It is interesting in this definition that there is no mention of the organisation being exclusively not for profit or for profit.

Canada has many similarities to New Zealand, so it is good to look at some of the thinking going on in that jurisdiction. The Canadian Community Economic Development Network includes a description on their website (https://ccednet-rcdec.ca). It gives a slightly different angle with more of an emphasis on the non-profit nature: “The term “social enterprise” is used to refer to business ventures operated by non-profits, whether they are societies, charities, or co-operatives. These businesses sell goods or provide services in the market for the purpose of creating a blended return on investment, both financial and social. Their profits are returned to the business or to a social purpose, rather than maximizing profits to shareholders.” It goes on to say: “Others use a broader definition that includes privately owned ventures that have a very strong blended financial and socially responsible return on investment.”

Closer to home, Akina (www.akina.org.nz) has been doing a great job and worked for years to promote social enterprises in New Zealand. The definition they put forward on their website seems to focus more on a distinction between an entity which is “for profit” and one which is “for purpose”. They summarise this down to: “Social enterprises are purpose-driven organisations that trade to deliver social and environmental impact”.

All these definitions are helpful and, focussing on the point of difference, it comes down to some part of the entity being involved in an aspect that is more than just the traditional goal of making money for shareholders. But there is clearly a spectrum ranging from “self focussed” to “other focussed” and it is worth asking at what point an organisation crosses over and can be given the label of a social enterprise. For example, is there a certain percentage of “good” that they need to be involved in – and how is that defined? How do you reconcile this focus on a “purpose” with the fact that simply providing employment for people is very important as that helps individuals provide for their families and communities to thrive. Where is the cut-off point?

Turning to that idea of a spectrum on which different legal forms of entity sit, it can perhaps be described like this – with some overly broad characterisations thrown in as headings to make the point.

Really ‘good’
Not for profit – these are usually traditional charities and do not exist to create a profit but instead help disadvantaged or others.

‘Good’
Social enterprises – these have community purposes at their heart but operate as businesses and do make profits that support their purpose.

Pretty ‘good’
Businesses which donate – these are companies focus on profits but do set aside a proportion of their profits for some community purpose as well.

Not as ‘good’
Profit focussed companies – these have no charitable or community purpose (except perhaps a token gift to disaster relief from time to time).

Is such an analysis really fair? It seems to overly weight the “goodness” of some organisations over others. There is a danger of going too far either way. Obviously the above is a really crude analysis, but it has been done through certain lenses. As mentioned above, the fact that an organisation offers employment to staff and contributes some product surely has immense positive value. So the challenging point is perhaps to take these lenses off and not to think in these sorts of terms at all. Instead, work out how to encourage all organisations to begin to take on board some of the concepts underlying social enterprise motivations. Even a “for profit” company could switch its sourcing of products and services in order to help some social enterprises become economically viable. How do you increase engagement with such companies, so it is not just left to “social enterprises” to be the ones who are seen to have some responsibility in this area?

One example of a label which some companies are applying for to show where they fit on the spectrum is “B Corporations”. It is worth describing them in some detail as it is another dimension to consider. The B stands for “Benefit” and it involves a certification system for companies which meet certain criteria that show they have a focus on more than just profits. B Corporations are certified by B Lab which is a not for profit organisation. Probably the most famous example of a company which has done this is Ben & Jerry’s ice cream. The B Corporation website says: “B Corps meet the highest standards of verified social and environmental performance, public transparency, and legal accountability, and aspire to use the power of markets to solve social and environmental problems”. To learn more about this have a look here: http://www.bcorporation.net/

When I first became involved in this sector I was confused by the terms and concepts so I hope this article will help to explain some of the things to consider regarding what a “social enterprise” actually is. The great part is that this is a growing and evolving area so it is actually possible to be part of the debate and even shape what happens next. In a New Zealand context it will be important to look at all the different definitions and discussions overseas and use that as a basis for constructive dialogue. This article has provided an overview of some of the key issues with the purpose of enabling a more informed discussion.

One of the most confusing aspects about setting up a social enterprise is getting the legal structure right. You might have thought the hard work was done when you had the great idea that you hope can become a self funding business that also achieves good in the community. In fact that is just the beginning of the journey because you also need to find the right type of entity (separate to you as an individual) which can move the idea forward.

In New Zealand there is currently no legal structure which is specifically aimed at being a vehicle that social enterprises can use with confidence. In another article this lack has been discussed in more detail and that issue can be further explored here. For now, we need to make do with the legal structures which are available and the two most common are setting up as a company, or setting up as a trust. This article looks at both of those options.

One of the key points to consider before we look at the detail of each option is to remember that you need to “tell your story” in a compelling way to future investors, funders and the community. Choosing the right structure is therefore really important because that becomes a fundamental part of that story. Will it be easy to explain to funders who offer grants that you have a company structure and are the sole shareholder? Probably not. If you want investors who are seeking returns on their investment then will they easily understand that you have set up as a trust? You get the idea. So thinking through who your story needs to be told to will be important when thinking through the structure that is most appropriate.

Why set up as a Company?

A company structure offers a model which is well known and is easily explained. We see this used quite a lot in New Zealand not just in “for profit” scenarios. The word “limited” at the end of all company names in New Zealand is there for a reason – it is an effective way of limiting and containing liability that the entity may incur. That provides comfort for shareholders who will not be personally liable if the venture does not succeed. The contrast with trying to run a social enterprise in your personal name should be obvious – in that situation you have 100% control but could also be personally liable for debts that are incurred.

One of the other main advantages of this structure relates to governance. The founders who had the great idea can also be the shareholders and therefore retain control over the direction of the company. The company will have a board made up of at least one director and they are usually appointed by the shareholders which again offers another level of control to those who founded the company.

One of the downsides of setting up as a company has been hinted at earlier: people assume that a company structure is being used because there is a desire to make a profit. If your strategy is to approach foundations or other groups who might provide large scale funding for your idea then that can make it tough to explain. One of the ways to deal with this is to try and hard wire your purpose into the company structure itself by stating clearly in the founding document (in the case of the company, the Constitution) what the purpose of the company will be. This will be essential if you decide to apply for registration of the company as a charity with Charities Services because they will look at the purposes which are set out there to decide if your entity meets the criteria to be registered as a charity. For more on these issues see this article here.

Why set up as a Trust?

Setting up a trust is probably the most common form that is used in New Zealand. It is a structure which is easily explained and because there are no “shareholders” as such it provides a clean story to explain to people. There is something of an inbuilt assumption that if you are a trust then it is automatically assumed that this is a “for good” type of entity. This is in contrast to the company structure where there can be an assumption that there is a “for profit” element as a main objective.

A trust does not have shareholders and is instead guided by trustees who form a Board. In some ways this might be seen as providing less control to the original founders. However, in practise the founders will choose trustees who share the vision for the trust so that they can ensure it follows in the direction intended. One of the key decisions at an early stage is how to make decisions about replacement trustees – will they be shoulder tapped by current trustees, elected or some combination of both those options? Governance issues will sooner or later become a key point for the trust so it is best to get this sorted early. This aspect and the issues involved is explored further in this article about governance here.

The purpose is also safeguarded by the founding document for a trust, the Trust Deed, which will have a “purposes” section that sets those out clearly. It is really important to make sure that the purposes decided on accurately reflect what the trust is intended for. As with a company structure if you go to Charities Services this will be really important when they decide to register you as a charity (or not). One of the weaknesses we see is that people do not define the purpose using terminology and ways of describing what they will do so that they fit within one of the four recognised charitable purposes. For more on this, see the article here.

What about two for one?

As can be seen each of the most commonly used structures has both pluses and minuses. One option we have seen people do is to set up using both structures in order to try and get the unique advantages that each provide. In that scenario there is usually a trust which has been registered as a charity and has donee tax status. When telling the story to funders and donors that is a structure that can be easily explained and they can get on board with.

At the same time the trust may have a trading arm which is set up as a company. Usually the shareholder will be the charitable trust. The income that is generated by the business of that company then usually will go back to the trust for it to continue carrying on its charitable purposes. But having the company may provide more flexibility such as a vehicle to enter into joint ventures with other entities or seek other investors into the company. Like most structuring it is important to get good accounting advice on some of the tax and accounting implications of setting up in this way as well.

Conclusion

We hope that this overview of the two main options for social enterprises in New Zealand has provided some clarity over why each structure might be used. Ultimately it would be great if there could be a new form of entity which took the best aspects of both the company and trust structures and that could be used going forward. For now though we need to make do with what is available and adapt the structures that we can use in order to further advance social enterprises in New Zealand.

The definition of charitable purposes in New Zealand charity law derives from English common law.

The foundations for the legal definition of charitable purposes and charity law owe their inception to the Preamble of the Statute of Charitable Uses Act 1601, commonly known as the Statute of Elizabeth. It is remarkable to think that a document written more than 400 years ago would have had such influence on the development of this area of law.

After various legal changes and evolutions charitable purposes in New Zealand are now included in section 5(1) of the Charities Act 2005. They still retain the four ‘heads’ of charity from the case of Pemsel which was an English case decided in 1891. These four heads of charity are as follows:

The relief of poverty.
The advancement of education.
The advancement of religion.
Any other purposes beneficial to the community, not falling under the preceding heads.

Of importance is the fact that the Charities Act 2005 and case law require that a charitable purpose must have a public benefit to qualify as being charitable.

The New Zealand courts have exercised a presumption when they look at the first three heads of charity that a public benefit exists (unless a contrary intention is shown). The presumption is not a conclusive determination and the question for the court as to whether a purpose operates for the public benefit will depend very much on the full range of evidence presented to the court.

By way of contrast, a presumption of public benefit does not exist in relation to the fourth head of charity ie “any other purposes beneficial to the community”. For a purpose to be deemed charitable under this arm, a public benefit must be specifically shown. To be deemed charitable under this arm, showing a particular need to be alleviated can qualify.

In New Zealand, charitable purposes are assessed by Charities Services as to whether or not an organisation’s purposes are indeed charitable and therefore worthy of being tax exempt. One of the key criteria will be to examine the statement of purposes of the charity. For example a Trust would include those in its founding document, the Trust Deed. A company might include the purposes in its constitution. To aid practitioners and those seeking to set up a charitable trust, Charities Services include on their website examples of how these charitable purposes clauses can be worded in a founding document.

The reason this is important is that you may have a “good idea” which you think will help others but it actually needs to qualify as a charitable purpose as defined in law. So it needs to fit within one of the four categories set out above. Sometimes people get confused about this and try to describe the good that they are going to do but don’t relate it to the strict legal categories of charitable purpose. They are therefore unlikely to get across the line and qualify as a charity.

We thought it would be helpful to simply link to the Charities Services website descriptions of some of the wording that they recommend. Please see the links below for guidance.

The relief of poverty

The advancement of education

The advancement of religion

Any other purposes beneficial to the community

If you are seeking to set up a charitable trust and have questions about charitable purposes then we would be happy to have a discussion with you stevenmoe@parryfield.com.

Introduction

New Zealanders are a generous people. Charities and social enterprises which are based overseas and doing good work in other parts of the world are increasingly looking to grow their support bases here. This article looks at how you can do that and what the options are for an overseas charity which is looking to either set up in New Zealand or establish a fundraising presence here. In particular it will focus on Schedule 32 status and when that special means can be used to become tax exempt in New Zealand.

What is the usual approach to setting up a charity in New Zealand?

There are a few options when it comes to setting up a legal entity in New Zealand ranging from a charitable trust to an incorporated society or a company. The most common would be a charitable trust which will then usually apply for tax exempt status where it can prove to Charities Services that it has charitable purposes as defined under New Zealand law. We have already covered this process in more detail in the article here.

Since most charities in New Zealand are focused within this country this is a relatively straightforward process. However, if a charity is aimed at purposes which are more than 25% outside of New Zealand then it will be much more difficult to achieve tax exempt status here. That brings us to the second option.

What other option is there for an overseas focused charity?

Applying to be added to Schedule 32 of the Income Tax Act 2007 can give qualifying charities a unique status in the New Zealand tax regime. Schedule 32 status is only granted to a select few international charities which as at the date of this article is around 140 (you can see them here). It provides the ability for the organisation to issue receipts to their donees for donations made to the charity. Those donees can then use those receipts to claim a credit or deduction against their income tax. If they are an individual they can get a third of the donation as a credit, just as long as the donation was not more than their taxable income. If a company, they can claim a deduction, as long as the donation was not more than their taxable income in the absence of that deduction. When it was first introduced the Government had a flood of requests and it even published special guidelines to charities on how to make the application. For those charities that do not have their charitable purposes principally (more than 50%) in New Zealand, then the charity cannot qualify as a donee organization (unless it is listed on Schedule 32).

What are the key points to consider?

We have done more than a dozen Schedule 32 applications which have been successful. In our experience, international charities, or their advisors, can easily get tripped up when it comes to their tax status in New Zealand. As mentioned above, the law provides that donee organizations are those organizations with their charitable purposes principally in New Zealand. There is no case law on this, but it is accepted that if your purposes are more than 75% in New Zealand then you will qualify. Note that it is where your purposes are which is most critical. That may be different to where you spend money (eg buying toys in New Zealand to send to children in third world countries would mean that the purposes are overseas, not in New Zealand).

When charities are applying with Charities Services for registration, Form 1 question 22 asks: “What percentage of New Zealand sourced funds did you spend overseas in the last financial year? If the entity has not been operating for a year, what percentage of New Zealand sourced funds does it intend to spend overseas in the next financial year?” The explanation of this questions attempts to clarify the point regarding where charitable purposes are, but our experience is that this question still confuses some charities.

Our understanding is that IRD practice is to send out a “donee letter” if the charity puts down a percentage less than 25% (that is, more than 75% of funds are used in New Zealand). If you are a charity that spends your money in New Zealand, but your purposes are restricted to purely overseas purposes, you may think that this letter allows you to give tax-deductible receipts but it does not. You need to apply to be listed on Schedule 32 before you can get donee status.

What other hurdles should an overseas charity be aware of in seeking Schedule 32 status?

The IRD will put forward a special request to Cabinet for approval if it agrees with the application by the charity. That is only done once or sometimes twice in a year and may coincide with the tax year (start of April).
In our experience it can take a year or more to go through the process of applying for Schedule 32 status. The later stages are likely to benefit from approaching the IRD early on to discuss the proposal to see if they raise any “red flags” with the idea.
We have seen some overseas charities set up a local charity to begin operations in New Zealand while they apply for Schedule 32 tax status. While tax deductible receipts cannot be issued if the NZ sourced finds are primarily spent overseas, it can start to raise awareness of the cause.
Some local “champion” to promote the cause in New Zealand is far more likely to result in fundraising being successful in the New Zealand context – simply having a website and seeking support online is unlikely to be so effective.
Many overseas charities may have purposes which will cause problems (for example, political advocacy may be an aim of a group). Where a charity is applying for Schedule 32 status, Cabinet will want to see that the purposes of charity fall within the following categories:
- The relief of poverty, hunger, sickness or the ravages of war or natural disaster, or
- The economy of developing countries; or
- Raising the educational standards of a developing country.
“Developing countries” are those recognised as such by the United Nations.
It will be important to “tell the story” and that includes not only the purposes of the charity but also who the trustees are, what they are involved in and explaining how the charitable purposes are checked to ensure that they are being followed in practice. In addition information on how long the organization has been operating, its source of funding, business plan etc will all help to paint the picture.
There will need to be evidence that the NZ trustees of the charity regular visit the overseas offices and/or third party charities that the charity works with and self-audit to insure that the money raised is being properly used for the intended purposes.

Questions that the IRD are likely to ask include:

- Do the trustees of the Charity have relevant knowledge and experience of the relevant field, and other project and financial management systems? For example, is there a process for assessing, and monitoring projects and selecting beneficiaries
- Does the charity give funds to non-resident organisation(s)? If so, are the activities of the non-resident recipients consistent with the Cabinet criteria
- If the charity works with non-resident organisations, does it have access to regular and accurate information from these organisations
- Does the charity have a set of financial accounts that clearly identify receipts of donations and transfers of funds, on a regular basis, to its designated charitable purpose
- Can the charity demonstrate that its activities are likely to be effective in the long term
- Does the charity have procedures to prevent funds going directly, or indirectly, to individuals or organisations associated with terrorism?

What about the status of donations made to NZ charities for overseas purposes?

A charity that is registered with Charities Services can issue receipts for donations made to it where its funds are applied wholly or mainly to charitable purposes within New Zealand. The IRD usually recommend that charities maintain separate accounts which clearly identify funds applied or spent outside New Zealand. This has led to some charities believing that these overseas bound funds are ineligible for tax credits. “Wholly or mainly” has been interpreted as meaning 75% or more. So, provided a charity applies 75% or more of its funds to its New Zealand based charitable purposes, it can issue receipts to all of its donors, even those whose giving has been earmarked for the support of persons serving overseas. Our view is that the IRD advice to keep separate accounts is merely reiterating that this is a good idea to help the charity measure what percentage of funds are being applied toward NZ purposes vs overseas purposes. This is so that, when the charity’s annual return is completed, it can accurately state the proportions as required. We have found that shedding some clarity on this issue has enabled charities to increase the support base for persons they wish to support overseas, as potential donors are more likely to give to the charity if they can claim a tax credit/deduction.

Another option to consider is setting up a New Zealand based “fund”- it is another option to consider if you are overseas focussed but with NZ aspects of what you do, and we have written about that here.

Conclusion

As you can see, when it comes to seeking Schedule 32 status there are a number of issues to be thinking through. We have successfully applied for this status on multiple occasions so can confirm it is possible to achieve, depending on the purposes and nature of the charity involved. We have prepared a series of questions that refers to the Cabinet criteria which help to clarify with an organization whether they may qualify under Schedule 32 and can then be used to prepare the application.

Parry Field Lawyers provide legal advice on a range of charitable matters and are able to assist you with any questions in this area that you might have. We provide free resources and host a monthly “impact call” as well, contact stevenmoe@parryfield.com if you are interested to join the email list.

Please note that this article is not intended to be legal or investment advice, and is only intended as a general guide. Reliance should not be placed on this article where any specific issues are concerned.

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