Charities/NFP - Parry Field Lawyers

What the key change actually entails

If an organisation applies more than 25% of its funds for the benefit of overseas purposes, then it may no longer be considered to be operating ‘wholly or mainly’ in New Zealand and could lose its tax donee organisation status. The reason this may impact on charities you advise is that some charities have traditionally sent significant amounts overseas to support works there (disaster relief, orphanages, aid workers etc). It is possible that religious organisations in particular who support people overseas may already be at, or close to, the new threshold, and be unaware of the changes. It could cause them problems in the future if they continue to operate in the same way.

If you’re a lawyer advising a client who does send funds overseas, it would be important to advise them about the new approach.

The key provision itself

The section relevant in the Interpretation Statement 18/05 and related fact sheet is the Income Tax Act 2017 section LD 3(2)(a) which sets out the meaning of a charitable or other public benefit gift. The type of entity that qualifies is:

“a society, institution, association, organisation, or trust that is not carried on for the private pecuniary profit of an individual, and whose funds are applied wholly or mainly to charitable, benevolent, philanthropic, or cultural purposes within New Zealand.”

In clarifying what these definitions mean – “within New Zealand,” means the purposes are what is looked at, rather than the location where funds are spent. “Wholly or mainly” – will mean “75% or more” of funds being applied in New Zealand. Lastly, “funds are applied,” means action of sorts needs to be taken by the organisation to either spend or accumulate the funds.

The Interpretation Statement has been issued to clarify what entities qualify as a donee organisation under that section. The new interpretation will be implemented from the 1^st of April 2019. For those entities that do not have a 1 April balance date the new interpretation percentage will apply from the first day of their income year for 2019/20.

The “safe harbour exception”

There will be some flexibility in how the percentages will work. An organisation can choose a method to calculate a “safe harbour percentage.” The key steps involved in doing this is to calculate the total funds and then divide that by the amount spent for specified purposes within New Zealand to get the percentage.

If in any year the safe harbour of 75% is not met then IRD can also look at the two preceding years. The purpose of this is to allow for some one off exceptions. It does this by looking at the cumulative figures over the three years. This means that the current year might be at say 70% but the previous two years were respectively at 80% and 90%. By looking at the cumulative total the percentage over the last three years might average 80%. IRD provides some key examples on the guidance of this, see here.

Another option for those sending funds overseas

Schedule 32 of the Income Tax Act 2007 could provide another exception to this new interpretation. If you are a lawyer with a client who will no longer meet the threshold proposed due to the significant funds applied overseas, this provides another option to them.

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 (full list here). It provides the ability for those organisation to issue receipts to their donees for donations made to the charity even if applied wholly for overseas purposes.

At times the Government had a flood of requests and 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 75%) in New Zealand, then the charity cannot qualify as a donee organisation unless it is listed in Schedule 32.

When applying to be listed under Schedule 32, it is the purposes for which funds are applied which is the most critical point. This may be different to where you spend the money. For example, buying toys in New Zealand to send to children in third world countries would mean that the purposes are overseas, not in New Zealand.

Furthermore, there are other hurdles to be aware of if applying for Schedule 32 status.

The process for applying is long and arduous and IRD has to put a special request to Cabinet for final approval and these happen only once or twice a year.
The purpose of the overseas charity is also important. When applying, Cabinet will want to see that the charity’s purpose falls within these three humanitarian 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.” Advancement of religion and political advocacy is thus not noted in this list.
You must “tell the story” of your charity, specifically focusing on who the trustees are, what they are involved in and how the charity purposes are being practically carried out. Furthermore, there must be evidence that the New Zealand trustees regularly visit any overseas offices and an audit of the money raised.

Why is this an important change

If someone makes a donation above $5 to a donee organsiation they receive a refundable tax credit/income tax deduction. This encourages people to give to organisations that qualify. If an organisation does not have tax donee status then it will be more difficult to solicit donations.

If you would like to know more information, please contact one of our Partners Steven Moe.

Steven can be contacted on:

E: stevenmoe@parryfield.com

M: +64 021 761 292

Section 5(2A) of the Charities Act 2005 states that “the promotion of amateur sport may be a charitable purpose if it is the means by which a charitable purpose referred to in subsection (1) is pursued”. So, what sports actually meet these criteria for a charitable purpose?

The purpose of section 5(2A) is to ensure that the promotion of a sport can be a charitable purpose. While promoting a sport is not in itself a charitable purpose, the purpose of a charity could include the promotion of a particular sport for the purposes of promoting health or for the advancement of education, as is established in the section.

Recently, after six years of Swimming NZ being a registered charity, the Charities Registration Board decided to de-register it. The reasoning behind this was that it no longer had charitable purposes due to the competitive and elite nature of the high performance programme. This in itself does not promote a sport but instead promotes sporting success which does not benefit the public. They decided that while there was some promotion to health, the focus on promoting success in the sport outweighed this.

The impact of this decision by the Charities Registration Board is that sporting organisations set up as charities will need to prove that they are existing to promote health as opposed to promoting success in the sport, and ultimately be benefiting the public.

An article which discusses this in more detail was posted by the New Zealand Law Society and can be found here.

So, to answer the question above, any sport can meet the criteria for a charitable purpose as long as it relates to the promotion of health, the advancement of education or anything else that proves to be beneficial to the community, and it will need to be able to prove that it does continue to promote these.

The Charities Services website provides a helpful overview on this topic which can be found and here.

We offer legal advice on all aspects of charitable trusts and are happy to answer any questions that you might have. Contact Steven Moe at stevenmoe@parryfield.com or 03-348-8480 for more information.

Trustee Duties

The Trustees have certain duties and liabilities placed on them under the relevant Trust Deed, New Zealand Legislation and Common Law (decisions of the Courts in New Zealand and Overseas). These duties include:

– to know the trust deed, the trust assets and liabilities;
– to advance charitable purposes;
– fiduciary duties of honesty and loyalty and acting in the best interests of the trust;
– exercise care, skill and prudent diligence;
– act impartially amongst beneficiaries;
– to sell wasting property;
– to exercise reasonable care;
– to insure assets and keep property safe;
– to keep inventories;
– to invest within a reasonable time;
– to repair trust property;
– to invest prudently;
– to not delegate;
– to act jointly where there is more than one trustee;
– to not profit from trust property;
– to be accountable; and
– to be honest, loyal, diligent and prudent in carrying out the terms of the trust.

If you would like further explanation of any of these duties, please get in touch with us.

Generally a charitable trust will have between 3 to 7 trustees. Usually trustees are a mix of professional executives and non-executives. They will be held to the same standard of care in their actions as applies to directors of a business (there is not a lower standard due to it being a charitable trust).

Trustee Liability

Trustees are representatives of the Trust. As noted above when discussing duties, they act as fiduciaries who hold the trust property for the benefit of the charitable purpose set out in the deed. It is important that trustees clearly understand what those purposes are and do not overreach and act in a way that is further than what was set out in the deed. If trustees fail to perform their duties then they may be subject to proceedings taken out by interested persons. Ultimately the New Zealand Attorney General has certain rights as the ultimate power ensuring accountability. It is common for trust deeds to include some limits on trustee liability. However, as mentioned before it is possible that trustees will be jointly and severally liable where a trust fails to account for GST, ACC levies or PAYE payments.

Every situation is unique so please discuss your situation with a professional advisor who can provide tailored solutions to you. We offer advice on all aspects of charitable trusts and are happy to answer any questions that you might have. Contact Steven Moe at stevenmoe@parryfield.com or 03-348-8480 for more information.

This article is the second in a series on charitable trusts. To have a look at our first article which sets out the advantages and disadvantages of charitable trusts, click here.

Requirements for a Charitable Trust

At the very least, a charitable trust must:

– have a charitable purpose;
– have trustees to administer the trust;
– have a registered address in New Zealand;
– be internally managed by a trust deed;
– keep a record of trustee meetings through minutes and resolutions; and
– keep proper financial records.

Annual returns and Auditing

A charitable trust will be required to submit annual returns that vary in requirements depending on the tier of charity. This varies as follows:

– Tier 1: Over $30 million expenditure;
– Tier 2: Under $30 million expenditure;
– Tier 3: Under $2 million annual expenses; or
– Tier 4: Under $125,000 annual operating expenses.

Regarding the auditing of accounts, if the total operating expenditure for the last two accounting periods was:

– over $500,000 – financial statements must be either audited or reviewed by a qualified auditor; or
– over $1 million – financial statements must be audited by a qualified auditor.

Charities Services

After your trust board is incorporated, you may apply to Charities Services to register as a charity. Once you are registered with Charities Services you will engage with them in relation to ongoing compliance requirements such as annual reports and notifying changes. The following areas need to be updated if there are changes:

– the name of the charity;
– a change in the officers;
– the rules;
– the address for service;
– the purposes of the charity; and
– the balance date.

These changes can be made online rather than by filing paper forms.

Every situation is unique so please discuss your situation with a professional advisor who can provide tailored solutions to you. We offer advice on all aspects of charitable trusts and are happy to answer any questions that you might have. Contact Steven Moe at stevenmoe@parryfield.com or 03-348-8480 for more information.

What is a Charitable Trust?

In New Zealand a common form that a charity will take is a charitable trust. These are used where there is not a “profit” motive for private gain for an individual from the activities of the trust. The regulator is both Charities Services (which registers charities if they meet legal criteria under the Charities Act 2005) and the Registrar of Incorporated Societies (which approves the incorporation of the trust boards under the Charitable Trusts Act 1957).

A registered charitable trust has the following key features:

– it is a separate legal entity;
– the liability of trustees is limited if the trust board has been incorporated;
– there is some cost involved in establishing the trust as certain documents are required but there is no cost to registering it; and
– there are ongoing reporting and administrative requirements.

Some Advantages

1. Separate Legal Entity

A charitable trust board which has been incorporated is a separate legal entity which can contract with others. A settlor (sometimes called donor) is needed to provide the initial amount which is how the trust is created (this is often a nominal figure such as $10).

2. Limited Liability

The liability of trustees is limited if the trust board has been incorporated. It is also common for a trust to provide indemnities for its trustees and officers and to take out insurance. Note, however, that trustees will be personally jointly and severably liable for certain taxes (GST, ACC levies, PAYE).

3. National Registration

New Zealand does not have a state-based system like Australia, so when a charitable trust has been registered by Charities Services that is a national registration.

4. Purposes are Restrictive

A charity in New Zealand must act to further its purposes which are set out in a trust deed. To be accepted as a registered charity those purposes must be charitable as defined in New Zealand law (which includes advancing religion). The charity cannot distribute funds or assets for the private gain of any individuals.

5. Powers of Trustees

Trustees can have a wide range of powers depending on how they are written in the Trust Deed. They can include matters such as use of funds, purchasing property, accepting money and carrying on a business.

Some Disadvantages

1. Establishment Costs

A charitable trust has some costs involved to set it up (usually more than $2,000.00 NZD). A lawyer will likely be involved to make sure that the purposes are charitable according to New Zealand law. They can also provide ongoing advice on the trust’s ongoing regulatory and filing requirements.

2. Disclosure and Reporting Requirements

A registered charity will have reporting requirements which can vary depending on their size (there are four tiers). There are financial reporting and auditing obligations on registered charities.

Every situation is unique so please discuss your situation with a professional advisor who can provide tailored solutions to you. We offer advice on all aspects of charitable trusts and are happy to answer any questions that you might have. Contact Steven Moe at stevenmoe@parryfield.com or 03-348-8480 for more information.

1. Govern don’t manage: Avoid getting into too much of the detail of how the trust operates. You shouldn’t be talking about minor issues at the Board level.
Yes! What is our strategic plan for the next 5 years?
No! Can we save $7 per month by purchasing paper in bulk?

Your rating out of 10?______

2. Have clear agendas: Don’t let meetings turn into a conversation that starts “what are we talking about again”? Have a clear defined standing agenda that then has key points added.
Yes! Circulate agenda in advance along with relevant pre-reading. Read it.
No! Show up late and try to remember what was discussed last time, with no agenda to guide the meeting (and ensure it finishes on time).

Your rating out of 10?______

3. Board Charters: This is a document that can provide overall guidance – set out role, relationships, how decisions made, procedures, inductions, committees.
Yes! Consider having a Board Charter and clearly set guidance out.
No! Continue without clear thinking and strategy behind what you are doing.

Your rating out of 10?______

4. Know your Trust purpose: It is surprising how many Trustees are unclear on the actual purpose and maybe have never even read the Trust Deed to see the original purposes.
Yes! Be clear on what the purpose is and let it guide decisions.
No! Put the Trust Deed in a drawer and not look at it for 10 years.

Your rating out of 10?______

5. Know the purpose behind the purpose: Think about and understand how the day to day and month to month work is of value – know your “why”. In many cases there are deep needs which are being met by each trust
Yes! Know your why (if you have not seen the Simon Sinek video, google it)
No! Don’t forget the real reason behind the activity and work being done.

Your rating out of 10?______

6. Plan ahead: Think long term not short term – discuss finances, properties, succession for your board, strategy, growth, is this Trust relevant …
Yes! In 5 years I think our landscape will have changed so here is what we need to do to prepare…
No! Where shall we hold our next meeting?

Your rating out of 10?______

7. Trust board size: I think optimum size is 4 to 6 Trustees. Many Trust Boards are more, but once you get above 8 the opportunity for participation drops. This results in a drop of enjoyment (less sense of contribution) and also reduces the quality of decision making because discussion is more limited.
Yes! Keep boards efficient by not growing them too large.
No! Don’t get too big – boards that have crept up above 10 are like a parliament and are also far more difficult to chair.

Your rating out of 10?______

8. Increasing need for professionalism as a Trustee: There is a growing need to create a culture of continuous improvement or learning within the Trusteeship itself. Have a view that you can never stop learning. Governance is a high calling.
Yes! Trustees ought to be encouraged to read material that takes them a bit further in their journey of understanding what it is to a Trustee and how to contribute.
No! Just wing it.

Your rating out of 10?______

9. Who should be on a Trust Board? In a small charity this may be a luxury but the ideal answer is someone who has both a strong belief in the vision and purpose of the Trust as well as a particular skill set that the Trust most needs.
Yes! Consider skill sets around tangible matters e.g. finances, property matters, operational issues but also the soft issues – the ability to think strategically, a high EQ and focus on building a great team.
No! Don’t focus on one set of skills instead aim for a diversity of thought.

Your rating out of 10?______

10. The right Chair? Good outcomes are largely the result of effective meetings and effective meetings are not possible if the Chair is not suited to the task. A good Chair creates an environment of respect, fair opportunity to speak, but without restricting candor and ensuring discussions do not go on any longer than necessary and a clear conclusion is reached. Also, if the organisation is large enough to have employed staff then the relationship between the Chair and the Chief Executive is a critical one.
Yes! Have those awkward conversations to ensure that the person most suitable to facilitate good meetings is the Chair.
No! Like all of these points, don’t continue on if change is needed.

Your rating out of 10?______

Some resources:

Simon Sinek, “The Power of Why” – YouTube Video

“Joan Garry’s Guide to Non-profit Leadership (because non-profits are messy)”.

“Good to Great and the Social Sectors” – Jim Collins (speaker on commercial/corporate leadership, but has good things to say for charity leadership as well).

“Boards that Lead” – Charan, Carey and Useem.

In terms of podcasts there a number of great leaders who speak to the leadership area including Andy Stanley and Carey Nieuwhof.

Seeds is a podcast I have been doing each Tuesday interviewing people for an hour on what they do and why – often this includes people who have started or run charities www.seeds.libsyn.com

Should you need any assistance with these, or with any other Trust and Asset matters, please contact Steven Moe at stevenmoe@parryfield.com (+64 3 348 8480).

Social enterprises have become a trending term in the business world over the last year, as proven by the more than 1,600 delegates attending the Social Enterprise World Forum in Christchurch last year. But what are some of the concerns with the legalities of social enterprises? And what actually is a social enterprise, anyway?

What is a social enterprise?

To start with, we need to get the definition right. In New Zealand the Ākina Foundation works in the social enterprise sector and its definition is a good one: Social enterprises are purpose-driven organisations that trade to deliver social and environmental impact.

The key word there is purpose. Traditional business has had more of a focus on profit than purpose. In fact, that focus on profit is baked into our business model. For example, how important the shareholders of a company are and the focus on the directors returning profit to them.

Social enterprise flips that around and places the primary importance on purpose over profit. While these are businesses which are trading and they need a profit to continue, there is often some other reason for their existence beyond the money factor. In the past we might have relegated this ‘do-good’ approach to the realm of charities and not-for-profits. Social enterprises bring purpose front and centre and, perhaps most critically, provide a self-sustaining model for achieving good in society. Think about it – how are charities and not-for-profits operated? Often they are dependent on grants or funding streams, which may dry up over time and as the political climate or giving habits of donors shift. Social enterprises are longer-term solutions that often address real needs in a practical way. They seek to combine the heart of charity with the profit-making mindset of business.

Other factors making social enterprises different

This all may be intriguing, but what are some of the additional elements that set social enterprises apart?

1. Purpose: This should be clearly defined and set out

2. Profit distribution: A percentage should be reinvested into the purpose (how much is a point of debate)

3. Asset lock: May provide for the distribution of assets on wind-up to another similar entity acting for a comparable purpose, and

4. Reporting: Transparency and clear communication of how the purpose is being fulfilled and its tangible impact.

In New Zealand, there is no bespoke form of legal entity for social enterprises. If an entity has most of the elements above then it may start calling itself a social enterprise. In other words, there is no box to be ticked on a form or a particular legal structure that signals to the world that intention. This is in contrast to countries such as the United Kingdom, Canada and the United States that have adopted legal structures better suited to social enterprises.

Legal forms of social enterprises

Often a social enterprise will end up being a limited liability company. Some may choose to become charitable entities, either as charitable trusts or companies. There is a tension here, of course, because a charitable entity cannot return profits to investors. That means they are not the best option to raise money (investors seek a market rate return). In contrast, while a company may attract investors, it can be difficult explaining that the business has more than just profit in mind.

A good argument can be made that we need some new legal form that sits in the middle between a charity and a profit-making entity and embraces the best of both those structures. Such a ‘social enterprise company’ would certainly raise the profile of the sector and provide a means to empower those individuals who want to combine purpose and profit.

How might all this affect traditional business?

By now, you will recognise that the intention behind social enterprises is not new – people have acted in ways that go beyond profit for years. Often the outlet has been through charities (think op shops) so, in some ways, ‘social enterprise’ is just a fresh term and new way of expressing older concepts. What is clear is that it aligns with the next generation seeking purpose in their work. Often job interviews are not ending with questions such as, “Will I get a company car”, but instead, “How will my role contribute to society?”

Traditional business can learn from the approach of social enterprises and even be involved in supporting them in different ways, such as:

Social procurement: Consider how goods and services are secured. For example, at the next board retreat have lunches from a social enterprise catering company?
Purpose and vision: Whatever your business, it can be helpful to write down your purpose and vision. Get your ‘why do we do this?’ right as that can also help motivate staff, and
Impact: What is the footprint of your business? Who are your suppliers? Who do you employ? Is your corporate social responsibility policy gathering dust in a drawer?

Social enterprises are a growing force, but they will only have true impact if they can scale. To do that, they need traditional companies to better understand what they are and support them too.

Challenges ahead for social enterprises

Some of the challenges have been hinted at already such as gaining access to funding and finding buyers for the products made, or the services offered.

At the upcoming conference at Te Papa in April, Perspectives on Charity Law, Accounting and Regulation in New Zealand, there will be a session about social enterprises and where they fit in the not-for-profit world. Many charities are actively exploring what it might look like for them to start a social enterprise to diversify their income streams. Increasing education and awareness about the role social enterprises can play remains a challenge for the sector.

Another more subtle challenge is when businesses adopt the term ‘social enterprise’ as a way to entice consumers to buy what they are offering. This could result in the entire sector being discredited and dilute the true value of what the term stands for.

Looking ahead

This is more than a passing trend. The social enterprise sector is growing and it provides an alternative way of thinking about doing business. Whether or not you choose to be involved in starting a social enterprise or working for one, the principles that sit behind them have broader application to all businesses that are looking to have a positive impact on the world.

This article originally appeared on Idealog.

What are your options when a charity “runs out of steam” but you don’t want to give up on it altogether? What if you want some time to have a break from the charity and its compliance obligations, but intend to come back to it in a few years? We were recently asked the question of whether it is possible for a charity to “pause” for a period of time, and here is what we said:

Can you “pause” a charity?

Generally, a charity is deregistered (removed from the Charities Register) where it ceases all activity. This means that in order for a trust to remain “alive”, it must continue to be active. Pausing a charity essentially means that all activity for the charity will cease for a period of time and it is therefore no longer active. If a charity has been de-registered and wishes to get back on the Charities Register, it will need to go through the application process again.

There is, however, an exception to this – it is possible for a charity to continue to file annual returns for the years that it is “paused” which essentially holds the charity accountable to the fact that it has paused. So long as the charity is not making any returns, it would not need to pay anything on filing those annual returns.

Conclusion

In conclusion, it is possible that you could pause a charity and come back to it in a couple of years, provided that you continue to file an annual return each year for the years where the charity is paused. This option could be advisable where you do not want your charity to be deregistered and to have to go through the application process again at a later date.

Every situation is unique so please discuss your situation with a professional advisor who can provide tailored solutions to you. We offer advice on all aspects of charitable trusts and are happy to answer any questions that you might have. Contact Steven Moe at stevenmoe@parryfield.com or 03-348-8480 for more information.

What the key change actually entails

The key provision itself

The “safe harbour exception”

Another option for those sending funds overseas

Why is this an important change

Trustee Duties

Trustee Liability

What is a Charitable Trust?

Some Advantages

Some Disadvantages

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