Are you an entity that carries on business for the benefit of a registered charity? Then it is essential that you are aware of the incoming changes to business income tax exemptions. This article explains what the current law is and how the incoming changes will impact both registered and unregistered entities.
A key benefit of being a registered charity is enjoying the tax exemptions on business and non-business income set out in the Income Tax Act 2007. Under section CW 42, registered charities do not need to pay tax on their business income provided that they carry out their charitable purposes in New Zealand. However, the section goes further and extends the exemption to entities that carry on business for the benefit of a registered charity. This means that businesses can benefit from this exemption without registering with Charities Services. Therefore these businesses are not obliged to comply with the charity reporting requirements.
The Government has been concerned that some businesses may be taking unfair advantage of the provision, undermining the transparency and accountability mechanisms in the Charities Act 2005. As a result, the Taxation (Annual Rates for 2018-2019 Modernising Tax Administration, and Remedial Matters) Act 2019 narrows the eligibility for this exemption. Taking effect from the 2020-2021 income year, an entity must be registered as charitable to be eligible for a business income tax exemption. This means that an unregistered entity carrying on business for the benefit of a registered charity is no longer eligible.
This will have an impact on companies that are owned by a charitable trust. From 2020, the charity’s registration will no longer shield that company from income tax obligations. Entities that are currently relying on another’s registration need to consider whether they are eligible for charitable registration in order to retain this benefit. This could involve revising the constitution of the business and making clear it is sending profits to the charity.
This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. Our team is experienced with charities, social enterprises and trusts that are common in this area of law. We would be happy to assist you in your journey. Please feel free to contact Steven Moe at firstname.lastname@example.org or 021 761 292 should you require assistance.