We often get asked by charitable trusts to help vary their trusts and we are always happy to assist.  In fact in the past year we have helped dozens through the process and assisted in preparing the documents needed.

A question often comes up though – whether the changes could unwittingly lead to what is known as a ‘resettlement’ of the Trust.  We are going to answer what that is and why this may be relevant to your charitable trust in this article.

Why might a Trust vary its Trust Deed?

The desire to vary the Trust Deed itself could be for a variety of reasons.  Some reasons we often hear from a group are:

• the document itself is very out of date – perhaps even written on a typewriter;
• the actual processes described in the Trust Deed are not even followed;
• the way Trustees are appointed or removed could use a refresh;
• the situation itself has changed – something fundamental is no longer the same; or
• other reasons, such as having a rotation of Trustees with term limits would be beneficial.

These are all very good and common reasons to update a Trust Deed. Perhaps some may even apply to your charitable trust.

A requirement to consider if rules are “fit for purpose”?

In fact, due to the recent changes to the Charities Act 2005, Trustees need to confirm that the rules they have are “fit for purpose” every three years (see section 42G which is at the end of this article).  This includes not just a review of the Trust Deed but policies and procedures as well.

While we recommend a review of your charitable trust’s Trust Deed, it is also worth noting that if you decide to amend the purposes – which might seem like a good idea, then it could affect the Trust so much that it amounts to a ‘resettlement’, which might have consequences that are not intended.

The reason is that the Trust was set up for one purpose, or purposes, and if those purposes change enough, then it might result in the new purpose(s) being so different that the Trust itself has been resettled – in other words, a new Trust takes over from the original one.

Let’s consider how this might play out with a practical example.

Penguins or Children? Jane has always loved penguins and wanted to help preserve them since she was a little girl.  She sold her tech company and decided to set up a charitable Trust by endowing it with $25 million dollars.  While she was the donor and set up the Trust itself, she asks 4 trustees to provide the governance of the new trust. The Trust starts a rescue centre and works for 10 years for this purpose seeing thousands of people visit and get educated as well as saving many penguins every year.  The Trust purchases a large property to run a recovery centre for the Penguins. However on the 10th anniversary the Trustees consider their Trust Deed as a result of attending some training by Parry Field Lawyers on how they need to make sure it is “fit for purpose”. They have a strategy day away and among many parts of the Trust Deed they consider the purposes as well.  The Penguins are important but they realise that actually they are about education of the public about the environment – the Penguins are just one way that happens. The Trustees decide to vary the purposes to emphasise the education of young children about the natural environment, and change the name of the recovery centre for Penguins to the “Environmental Education Centre for Children”. The renewed focus is received well by everyone – except they forgot to include Jane, the donor.  Jane disagrees with the new focus and sends a strongly worded message to the Trustees, as well as filing a Court application challenging the decision and describing it as a resettlement.  The Attorney General takes an interest in this as well and the accountant – who they had not involved – mentions that there may be some major tax consequences as well…

Hopefully the point of this is clear.  Resettlement happens if the property of a trust is put into a different trust – this can happen if the purposes themselves change.

There could be two major consequences:

• a donor or former trustee or someone else interested might bring a claim that the variation was not valid, and challenge it in Court; or
• there could be tax consequences because if there has been a resettlement then that might trigger a transfer of the property the Trust holds (with tax resulting, potentially).

(Note that we are not tax specialists so you need to talk to an accountant – there are even more implications that they can outline for you but we just want to alert you to the issue.)

So what should you do?

For Trustees considering modifying their purpose they need to check that the purposes are essentially the same as they were before.

This will be a question of degree – but going too far introduces dangers.  It is worth spending time thinking about this issue though rather than changing the purposes without being aware.

But what about practical risk?

In our experience there is a “who cares” question – in other words, if you did vary the Trust Deed then is anyone going to actually object?  Is there an equivalent of the Jane in the story – or have they long since gone?

Our job is to point out the risks but it may be that the Trustees take on board the issue, consider it and then decide that they want to proceed anyway.

Either way, we hope this information has provided more clarity on why this can be an issue and how to consider it.

If you’d like to talk about your situation then feel free to get in touch with us.

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The new section which introduces a requirement to consider if your rules are fit for purpose:

42G      Duty to review governance procedures

(1)       A charitable entity must review its governance procedures (whether those are set out in its rules or elsewhere) at least every 3 years.

(2)       When conducting a review under subsection (1), the charitable entity must consider whether its governance procedures:

• (a)        are fit for purpose; and
• (b)        assist the charitable entity to achieve its charitable purpose; and
• (c)        assist the charitable entity to comply with the requirements of this Act.

 

We often get asked about what income (including business income) is exempt from taxation by our many charity clients.

In New Zealand, registered charities benefit from various tax exemptions. Inland Revenue released an interpretation statement (IS24/08) clarifying the rules around tax exemptions under section CW 42 of the  Income Tax Act 2007. This exemption allows certain income that a charity derives from business activities to be non-taxable, provided specific requirements are met. Here’s what charities need to know about this important exemption:

What is Business Income for Charities?

A charity’s income is categorised as either business or non-business income. Business income includes any income a charity earns through commercial activities, such as running a store or providing services for a fee. For example, if a charity operates an op shop or a café to fund its charitable purposes, the income generated from these activities can qualify as business income. This income may be exempt if certain conditions are met under section CW 42. On the other hand, non-business income, such as donations and gifts, are generally tax exempt under a different provision (section CW 41).

The Business Income Exemption

Under section CW 42, a charity’s business income can be exempt from tax if all of the following conditions are met:

1. The entity carrying on the business is a registered charity – The exemption applies only if the business is conducted by a charity that is registered under the Charities Act 2005.
2. Charitable purposes must be carried out in New Zealand – To qualify for the exemption, the charity must apply its income towards charitable purposes within New Zealand. If any of the charity’s purposes are outside New Zealand, the income must be apportioned, and only the part used for New Zealand charitable purposes is exempt.
3. The entity is a “tax charity” – This includes registered charities.
4. Control restrictions – There must be no individuals or entities with control over the charity’s business who could divert the charity’s income for private benefit. Any breach of this control restriction would make the charity’s business income fully taxable.

Territorial and Control Restrictions

An important aspect of the exemption is the territorial restriction. If a charity’s purposes are not limited to New Zealand, the charity must apportion its income between New Zealand-based activities and those outside the country. Only the portion supporting New Zealand activities will be tax-exempt.

Additionally, the control restriction ensures that the charity’s business income is used solely for charitable purposes. If any person or entity can direct or divert income for personal gain, the entire business income will become taxable.

Key Takeaway for Charities

Charities involved in business activities should carefully assess their operations to ensure they meet the conditions for the business income tax exemption. This includes maintaining registration as a charity, focusing charitable efforts within New Zealand, and ensuring compliance with the control restriction. Failure to meet these conditions could result in the loss of the tax-exempt status for business income.

We can help charities that operate both in and outside New Zealand to document and implement business income-splitting practices to ensure compliance with the IRD’s guidance.

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This article is intended for general informational purposes only and does not constitute legal advice. For advice specific to your situation, please contact a qualified legal professional. Reproduction is permitted with prior approval and credit to the source.

We have helped many incorporated societies transition into charitable trusts and an issue that always arises is what happens to bequests to the incorporated society? The answer, in short, is “it depends”. This article will look at two situations; what happens to bequests when the incorporated society is wound up and what happens when the incorporated society is left as a shell entity.

Wound up incorporated society

Firstly, if a gift is left to an incorporated society that has been wound up, the executer would look to supporting documents that show a relationship with the trust and whether it is essentially the same entity. This would include, for example, the background section of the trust deed and the resolution to wind up and transfer assets from the society to the charitable trust.

The court may need to get involved if the executer is not satisfied the charitable trust is essentially the same as the incorporated society or where the wording of the Will is clear that the funds are only to go to the society. In this unlikely case, the court will seek to carry out the wishes of the Will-Maker when deciding which charitable entity to gift the funds to.

This means that even where there is a background section in the trust deed, there is no absolute certainty that the charitable trust will receive a bequest meant for the society. It is likely they will, due to the clear documentation that the charitable trust is essentially the same as the society, but there still remains a risk. Unfortunately, we have talked to MBIE about this and they cannot make any regulations for the new Act to remove this risk.

It is therefore advisable that if your incorporated society has transferred to a charitable trust, that you get in touch with your supporters and let them know they should amend their Wills. If you need help with this wording please do not hesitate to contact one of our experts here at Parry Field Lawyers.

Shell incorporated society entity

Secondly, whether bequests are paid to the charitable trust when the Will states it is to an incorporated society and/or quotes the charitable trust depends on what the Will says, how the executor feels about the bequests and if the residuary or other beneficiaries will raise issues.

Where a Will is clear that the bequest is for the incorporated society and it contains the Companies Office number or Charities Service number, the executor will generally be able to find the contact details for the society. It could then be explained to the executor that the charitable trust is undertaking the same work as the incorporated society. It will be at the executor’s discretion as to whether they transfer the funds to the charitable trust directly or require the funds to be transferred to the incorporated society. It would be prudent for the incorporated society to keep a bank account and to be active for this very reason, so it can transfer any bequests made to it.

The executor may be a close relative (e.g. child) of the Will-Maker who is aware of the Will-Maker’s wishes and can interpret the gift left in the Will to the society as being meant for the charitable trust. By contrast, the executor might be distanced from the Will-Maker or unaware of their involvement in the charitable trust and therefore unwilling to make the gift to the society.

A situation may arise where a beneficiary of the Will is challenging the gift made to the society, in which case it could be helpful to avoid any challenges to the validity of the gift itself.

These may be a reason to keep the society as a shell entity, to avoid a lot of these situations. It is prudent to consider how long you should leave the incorporated society as a shell for, as there may be some people who have drafted their Wills recently but won’t pass for a long time.

Some Wills contain a clause which discusses the “successor” entity which that would work in the charitable trust’s favour.  Alternatively, some Wills say that if a gift fails then it gets added to the residue, or if the provision falls short, then it automatically gets added to the residue, this would not be in the charitable trust’s favour.

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We have helped many incorporated societies transition to a charitable trust and have an incorporated society information hub here and a charitable trust information hub here. This article is not a substitute for legal advice and our experts here at Parry Field Lawyers would be happy to answer any of your questions.

If you would like to discuss further, please contact one of our team on stevenmoe@parryfield.com sophietremewan@parryfield.com  or annemariemora@parryfield.com .