Charities/NFP - Parry Field Lawyers

Introduction

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

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

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

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

What other option is there for an overseas focused charity?

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

What are the key points to consider?

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

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

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

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

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

Questions that the IRD are likely to ask include:

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

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

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

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

Conclusion

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

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

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

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.

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.

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).

Parry Field Lawyers provide legal advice on a range of trust matters including formation and operation of both family trusts and charitable trusts.

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Parry Field Lawyers provide legal advice on a range of trust matters including formation and operation of both family trusts and charitable trusts.

International Charities and New Zealand Tax Law

Are you an international charity that has recently applied for listing on Schedule 32 of the Income Tax Act 2007? Or do you have a client in this position? If so, we would like to hear from you.

Read more

In mid-2008, the New Zealand government gave charities an opportunity to give their view on receiving a tax break. Currently charities are indirectly taxed when they invest in New Zealand companies. The government has been investigating ways to prevent this from happening. Parry Field lodged the following submission with comments on the government discussion document.

Claiming Tax Credits on Donations to Charities supporting Overseas Causes

Many New Zealand based charities also support overseas causes – this is often a result of donations being “ear-marked” by donors as being for support of a particular overseas-based person or purpose. Although these amounts usually make up a small percentage of the charity’s total spending, there appears to be some confusion as to the status of these donations. Shedding light on this issue may help charities to increase the support base for persons they wish to support overseas.

International Charities and New Zealand Tax Law

Claiming Tax Credits on Donations to Charities supporting Overseas Causes

Christchurch CBD

Christchurch – Riccarton

Rolleston

Hokitika

Auckland

Advantages of a charitable trust

Key points before setting up

Other questions to answer

Practical considerations, cost and timing involved

Summary

International Charities and New Zealand Tax Law

Claiming Tax Credits on Donations to Charities supporting Overseas Causes

Christchurch CBD

Christchurch – Riccarton

Rolleston

Hokitika

Auckland