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:

  1. The relief of poverty.
  2. The advancement of education.
  3. The advancement of religion.
  4. 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 50% 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 120 (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 several 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 50% 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 the Charities Commission 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 50%. 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 the Charities Commission 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 51% or more. So, provided a charity applies 51% 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.

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.  One of our partners, Ken Lord, has also contributed chapters to several of the leading texts on charities law in New Zealand. 

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.

This is a book about social enterprise which is a really interesting and challenging read.  I think it will be relevant to a lot of people involved in charities and not for profits as well as those looking to start one.  There are a lot of concepts and thoughts in this book which align well with many of our social enterprise clients (even if many of our clients may not realise that is what they are).  The traditional words for them have been “not for profit” or “charity” and they probably have never called themselves “social enterprises” but that is really what they are!  

So turning to the book it is “different” in a few distinctive ways.  For one, when I bought it the person at the store said, “How much do you want to pay?”  It seems that you can choose the price.  The money then goes towards funding “Thankyou” which is the organisation the author co-founded.  On a communication from them when I joined their newsletter it says about this price: “It’s sold at a pay what you want price to fund the future of Thankyou and so far, has crowd-funded the launch of Thankyou New Zealand! WIN!”

The other distinctive is when you open the book all the text is opposite to the usual format for a book.  It runs from left to right across the page so you have to turn it 90 degrees onto its side and read it almost like a flip chart.  So from the outset you can tell that the author is trying to do something different.  Trying to challenge the status quo.  He acknowledges this a little later when talking about this format:

“Once you get out of your comfort zone, you begin to actually ask questions – and you start thinking and challenging what you’ve always accepted as the norm.  The reality is that stepping out is uncomfortable.  Even as you read this book ‘the wrong way around’ in airport lounges, on public transport, on you way to school or work or around friends, there’s a chance you’ll feel uncomfortable.  Why?  Because there is the possibility that people will notice your re doing something differently.  We live in a world where we can blend in fairly easily, that is until the moment you take a risk and attempt something that perhaps no one has done before.”

The story itself centres on three young people who had an idea in Australia that has resulted in “Thankyou”.  They started it when they were just 19 years old.  The back cover describes what they did as beginning with the world water crisis and how to end it but that “has developed into award-winning consumer goods brand that empowers millions of people to fight poverty with every munch of muesli, sip of water or pump of hand wash”.  

Essentially they brand around 35 products and then the funds raised from the sale of those products goes to support, for example, water projects in Africa (from sale of water), health projects (from sale of body care products) and food programs (from sale of food products).  You can read more about them online at https://thankyou.co/. As noted above it looks like they will be launching in NZ soon.

The book is called Chapter One because the author acknowledges up front that their story is just beginning.  He uses that as an encouragement to try and say that we can try things as well because they are just at the start of their journey.  He plans to write a “Chapter 2” in a few years time when they are further down the road.  The opening page makes this a call to be included on their journey as he writes, “Our world doesn’t need another book; it needs an idea that could change the course of history.  Write with us.”  He writes later:

“This book is written as we go, to show you that any one individual, any group of people, can make their ideas and dreams a reality.  You may not have ‘made it’ yet (and neither have we), but everything we have learned along the way we want to share with you, In the hope that it will encourage you, inspire you and empower you.”

The 13 chapters have catchy headings like “Turning stumbling blocks into stepping stones”, and “Build a great team to achieve a great dream”.  In each chapter anecdotes and stories are told about the experiences of the author.  What I found helpful was the honesty about their journey – not trying to pretend that they have “made it” but instead writing in a way to try and encourage others to try something new.  The book is full of challenges to the status quo and trying to do things differently.  An example of this is the following quote:

“Some people don’t think the game will ever change.  But it always does.  And if you aren’t convinced the game will change, it’s probably best to keep those thoughts to yourself, otherwise years later you might find yourself mentioned in a quote like this: “the iPhone is nothing but a niche product” – then CEO of Nokia in 2008.”

There are many quotes like this and there are several direct reference to New Zealand as well.  For example, when describing why they want to launch Thankyou in New Zealand he writes:

“We want to empower New Zealanders, the way we’ve empowered Australians, to show the world that consumers have the power to change stuff.  Many of the biggest brands in the world trial ideas in New Zealand because it’s widely known that if a concept works in New Zealand, it will work globally.  So we’ve invited New Zealand to help take this movement to the next level.  The thing is, we’re not just launching Thankyou Australia into New Zealand.  Instead, we’re launching Thankyou New Zealand from scratch.  We’ll be setting up a local team, local suppliers and local impact partners.  Coinciding with this book arriving on shelves, we launched our boldest and most ambitious campaign yet, inviting both Australians and New Zealanders to make a choice – to either help launch Thankyou New Zealand or not to.  Will it work?  We can’t guarantee that it will.  But I love this thought: if it does, then together two of the smallest countries in the world (at times underestimated), who both bat above their weight globally in sport, entertainment and music, could go not to do something the likes of which the world has never seen before.”

Is this book a world changer?  No.  But that would be too much to ask of anything.  What it does provide is a call to move in the right direction.  What is needed is for many people to start questioning the way things have always been done and this book is good because it does that.  It also is empowering because it shares a journey that the author is just starting which makes it seem more possible to join in some way.  Perhaps the sentiment was best summed up in one of my favourite books as a child, “The Lorax”, where Dr Seuss ends with the following lines:

 “Unless someone like you cares a whole awful lot,
Nothing is going to get better. It’s not.”

And that is really the theme of this book too.  We need to care.  We need to demand change.  We need to be the change.  I would recommend this book to people who are looking for an inspiring and ultimately challenging read.  It will definitely be interesting to see how Thankyou goes in New Zealand since we will have a front row seat on their launch here.  

Review by Steven Moe, Parry Field Lawyers

 

One of the key questions for any start up – whether in the charitable or social enterprise arena or not – is what the best structure is to reduce the potential liability for directors/trustees.

We would recommend using the structure of a Charitable Trust. It is created by execution of a Deed of Trust, but can then be incorporated as an incorporated Charitable Trust under the Charitable Trusts Act 1957.

While there are other options such as an Incorporated Society, the charitable trust route is the process we usually follow.

Once the trust is incorporated, it is a legal person separate from the Trustees, and can enter into contracts and other obligations as its own legal person (under the Common Seal of the incorporated Trust). This means that the trustees do not personally need to be parties to the contracts it enters.

Under this structure, the liability of the Trustees personally would be somewhat analogous to the liability of directors of a Company (who do owe some duties to the Company and its creditors but not direct personal liability for Company actions), but is not clearly stated in the Charitable Trusts Act 1957. It should also be possible to obtain professional indemnity insurance for the Trustees as officers of the trust.

Every situation is unique and we would be happy to discuss your particular situation with you because what is right for one organisation may not work so well in another context.

 

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.

One theme often comes up again and again for charities, not-for-profits and social enterprises relates to how the organisation will be governed. This same issue applies whether the particular involvement is in education, relief of poverty, youth work, the arts or some other worthy cause. Governance structures are of critical importance.

Different organisations have different approaches to governance and the appointment of those in charge. Below we have described some of the options which are open when considering how to structure a board or governance body.

 

These represent what we consider to be the most commonly used methods for governance as well as the pros and cons of each for you to consider. Obviously this is an overview document so there are many factors to think through but we hope this will provide a good sense of the options.


Governance Structures Option 1: Trustees appoint Trustees

Overview: When a vacancy or specific need becomes apparent, the Trust identifies a possible trustee and a working relationship is begun. The Board appoints trustees to fill vacancies or as additional trustees. This is then approved at next AGM by those attending / members. Often there are provisions that at each AGM one fifth of Trustees are to retire (longest serving first).

It is fairly common for Charitable Trusts to have an appointment process like this that gives the power of appointment to the current trustees but gives a veto right to another defined group.

Positive:

  • Trustees retain control over who is approached.
  • Board can appoint trustees directly.
  • AGM involved in process so two levels of approval are required.

Negative:

  • Process not always followed well creating possible irregularity in the appointment of trustees.
  • Less involvement of wider community.

Potential for incoming trustees to shift the focus of the Trust over time without any control mechanism to preserve original vision.

Governance Structures Option 2: Trustee Elections

Overview: Election of Trustees at each AGM so public call for nominations before that.

Positive:

  • Wider community involvement in process.
  • Greater potential pool of trustees with diverse experience.

Negative:

  • Uncertainty as to background of potential candidates and understanding of special character.
  • External engagement required eg advertising vacancies.

Governance Structures Option 3: Hybrid Model

Overview: Provide for election of some Trustees from certain backgrounds eg one Trustee appointed by employees. Others to be appointed by combination of above eg election / Trustees choose who to appoint.

Positive:

  • Incorporates elements that are positive in above examples eg diversity, involvement in process, ability to choose some trustees.
  • Has more checks and balances.

Negative:

  • More complex appointment process may be harder to administer.
  • Some voters may not have a strong connection with any special character.

Reflections on these options

In our experience the most common structure is for the existing trustees to have the power to appoint replacement trustees. The simplicity of this approach is one of the key reasons for its popularity.

In some cases, the trustees’ power of appointment is subject to a right of veto granted in favour of the group or entity that originally established the Charitable Trust. This is a viable approach and reduces the risk that the incoming trustees may over time shift the focus of the Trust.

Having elected trustees is more akin to an Incorporated Society model where members of the society elect Board members from time to time. The main negative of this approach is the complexity it adds to the appointment process. If notice deadlines are missed by the trustees, irregularities will arise in the appointment of trustees.

In considering which approach to adopt, the trustees should also take into account the different roles a Trust performs – governance vs administration/upkeep of properties etc.

Every situation is unique.  We hope this short summary of some common options is helpful and would be happy to discuss any of them with you in more detail than can be contained in this overview.

 

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.

Introduction

So you have a great idea that just might make a difference in the world, but are wondering about how to formalise a legal structure that would help you do that?  A charitable trust is one of the most commonly used options in New Zealand.  This article describes the steps to set up a charitable trust and key points to consider.

Advantages of a charitable trust

A charitable trust can provide a number of advantages.  For example:

  • Reputation: Funders and donors tend to gain comfort if the entity is a charitable trust (rather than a private business or individual). Where a company sets up a charitable trust and invites staff to participate, they will be motivated by the charitable purposes.
  • Tax status: There can be tax advantages in registering as a charitable trust with Charities Services (see below).
  • Longevity: A trust is not dependent on one individual and can go on long after the founder ceases to be involved, in “perpetuity” in fact.

Great examples of charitable trusts in New Zealand include World Vision, The New Zealand Breast Cancer Foundation, and Ronald McDonald House.

Key points before setting up

To set up a charitable trust you will need a founding document for the Trust – called a Trust Deed.  This is the legal document which sets out the key elements of the Trust.  The questions you should answer before you see your lawyer are as follows:

  • What are your purposes?  A charitable trust must be charitable.  That may sound basic but it isn’t necessarily as easy as having a good idea – for example if you want to develop a new type of transport that is safer than a car then it sounds great but by itself that purpose won’t be “charitable”.  You need to fall within one of the following categories to count as a charity:
  • Alleviate poverty: This does not just apply to the destitute but could be for those that fall below the ordinary standard of living. It could be achieved through financial means but also through practical means such as providing food and shelter;
  • Promote education: Whether something is deemed to be charitable under this category will depend on its usefulness and its educational value;
  • Promote religion: This is about the promotion of a wide range of spiritual teachings. Charitable purposes under this heading could range from the provision and maintenance of ministers/religious leaders to the provision of buildings for worship. However, it does not include just the promotion of certain ethics.
  • Other charitable purposes beneficial to the community: This in a way is a “catch-all” provision. It can include such purposes as the promotion of health and recreational facilities. However, a trust will not be deemed charitable under this category if it is not for some public benefit.

Whether your purposes will fit the definitions is something that we can discuss with you.

Other questions to answer

Are political purposes okay? One of the historical fundamental aspects of charitable trusts is that they are not underpinned by some political purpose. However, as of 2014, the New Zealand Courts have found that if a charitable trust has an ancillary (secondary) purpose that is political in nature, then that does not automatically exclude the trust from being charitable if there is still some public benefit. What is important to remember is that this political purpose must be secondary to the main charitiable purpose and whether or not the trust is deemed charitable will be decided on a case by case basis.

What will be your activities?  Once you have purposes it is important to think about the practical side of how you will implement those purposes.  Will that involve running seminars and workshops?  Providing scholarships?  Promoting participation by volunteers?  Jot down all your ideas so they can be incorporated in the Trust Deed

What will your name be? Usually charitable trusts will have a name that reflects their charitable purposes or what they aim to achieve. However, before finalising a name you have to be certain that your trust will be able to use that name. The name cannot be the same or similar to the name of another charitable trust or any other corporate body. If you do decide to use a name similar to that of another trust or corporate then you may need to have the written consent of that trust or corporate to use it.

Who will the trustees be?  The trustees are those who meet and guide the Trust in the future.  They can also be great ambassadors for the cause.  Choose them wisely and consider having a variety of people involved who bring different skills.  For example a charity focussed on education of young people should try to have teachers involved but also those with other skills.

Incorporation. Trustees can apply to the Registrar at the Companies Office for incorporation as a board. The benefits of doing this include:

  • The Trust becomes a separate legal entity with separate legal liability. This generally means that the trustees are not personally liable for the legal commitments of the Trust.
  • If the Trust owns real estate or other registered assets, it does not need to update the title or ownership register every time the trustees change.

Tax status and whether you want to apply for tax exemption.  If you want to have the benefit of a tax exemption and the ability to issue charitable receipts for donations, you will need to register your charitable trust with Charities Services.

Practical considerations, cost and timing involved

Before you take the next steps it is worth knowing a few practical points, which include:

  • Writing the Trust Deed – particularly the charitable purposes can take a few weeks to get all trustees on board and an agreement. Important issues such as the statement of purposes, who hold the power to appoint and remove trustees, are best decided before the trust deed is signed.
  • Time frames involved to get decision – a few days for Companies Office, a few weeks/months for Charities Services.
  • Registering with Companies Office – this is a free application which must be signed by all trustees. In addition one trustee must sign a statutory declaration in support of the application and attach a certified copy of the trust deed.
  • Time frames for incorporation – 1-2 days once application documentation signed.
  • Cost for application – this is a free online application on the Charities Services website.
  • Application requirements – the application form is reasonably detailed. It must be accompanied by a statutory declaration from one of the trustee applicants. Charities Services, when considering your application, will want to see good evidence of the Trust’s existing or intended charitable activities so that it can satisfy itself the actual activities are genuinely charitable.
  • Time frames for registration – this can take up to three months from the time Charities Services receive application.
  • Time frame for tax exempt status – Charities Services should notify IRD directly once your charitable registration is approved, but it can take a few weeks for your trust to show up on the IRD’s list of donee organisations.
  • The availability of trustees to sign documents – this can depend on where your trustees are.

Summary

Although setting up a charitable trust can take time, it is often a most worthwhile structure to have in place. We have helped many charities over the years and would be happy to discuss your situation with you.

 

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. For more information, please feel free to contact Steven Moe at stevenmoe@parryfield.com or 021 761 292. We have free resources for start-ups, boards and companies including “Start-ups Legal Toolkit” which covers the key issues we see people face when starting out (it’s a free PDF guide in the resources section of this site).