Schedule 32 Entity - Parry Field Lawyers

If your organisation is listed on Schedule 32 of the Income Tax Act 2007 and you are thinking about a name change, the good news is that the process is more straightforward than many people assume. Here is a practical overview of what is involved.

What is a Schedule 32 entity?

Schedule 32 status gives qualifying charities, whose purposes are mainly overseas, the ability to issue receipts to their donees for donations made to the charity. The donees can use those receipts to claim a credit or deduction against their income tax.

Can a Schedule 32 entity change its name?

Yes. There are generally no restrictions from Inland Revenue’s perspective on a Schedule 32 entity changing its name. However, there are a couple of practical considerations to keep in mind. The proposed name also should not create confusion for the public by being too similar to another existing organisation.

Does the legislation need to change first?

Ultimately, yes, to formally update Schedule 32 to reflect the new name, an amendment to the legislation is required. That means the change needs to be included in a Parliamentary Bill, which then goes through the full legislative process. This can take time.

However, the legislative update does not need to happen before your organisation starts using the new name. In practice, once the name has been changed on the relevant registers (the MBIE register and the Charities Service register), your organisation can start operating under the new name right away.

What about IRD?

Once the register updates are done, you or your adviser should notify IRD’s operational team. You can do this through myIR or by emailing charities.queries@ird.govt.nz. IRD will then update their systems to reflect the new name for tax purposes and will also update the Approved Donee Organisations list on their website.

The legislative amendment to Schedule 32 can then be progressed in due course. IRD’s policy team can initiate that process, but it is important to let them know the new name as soon as possible. IRD has noted that they sometimes do not hear about name changes until years after the fact, which can cause complications.

Summary

In summary, the process would roughly follow the these steps. Firstly, consider your new name and receive advice on whether it is likely to be approved. If the new name will likely be approved, then proceed with updating your name on the MBIE and Charities Service registers. Once that has been done, then you can notify IRD’s operational team via myIR or the charities queries email. Also make sure IRD’s policy team are informed, so the Schedule 32 legislative amendment can be initiated. From this point the legislative change can follow in due course and does not hold up the name change itself.

We can help

If your organisation is considering a name change and you would like advice on the process or any related legal matters, we would be happy to assist. This article is a general guide only and is not intended as legal advice. Please get in touch with our team if you would like to discuss your specific situation.

We have helped many overseas charities set up in New Zealand. Why is it an attractive place to set up? This is a very generous country with a population that is open to supporting others. Also, the regulatory environment makes it easy to start a charity. In this article we want to outline some of the key things to know from an overseas perspective if you are looking to set up here.

Before we dive in please note that with this focus we have not gone into the detail of the process to set up a charity itself which we already covered in detail in this article so read that one in combination with this one. Instead we are thinking about the key things to know if you are an overseas charity which is looking to set up in New Zealand.

What we find is that the following are the crucial points to consider:

Purpose – focus on New Zealand? Is the new charity being set up to do the work you do in another country on the ground here? Or are you looking to fundraise in New Zealand to send the funds back offshore? The answer to this is really important because a New Zealand charity can be set up easily BUT will only qualify for tax donee status (favourable tax position and ability to issue receipts to donors so they can claim back 1/3 of what they give) if 75% of the funds are used in New Zealand.
Purpose – focus offshore? If you plan to send the funds back offshore this is important to be clear about at the start. If the funds raised here are to go offshore then you may still qualify if you can come under Schedule 32 status (funds are to be used offshore for humanitarian purposes) – we go into detail about this here as we have helped close to 20 obtain this status.
Trustees: It will help with the application to show a connection to New Zealand so rather than having all offshore trustees it is best to have a majority who are here in New Zealand. It is possible to have only offshore trustees but if you do then this is likely to convert the trust into a foreign trust with some accounting implications (speak to your accountant about this).
Accounting and tax: picking up on that last point it is important to structure things well so that you are in the best position from a tax and accounting position so as well as talking to your lawyer make sure you get input from an accounting professional.
Connection to overseas entity: It will be important to think through how closely aligned the new entity will be. For example, should all new trustees be approved in writing by the overseas charity? Will there be an MOU in place about how things will run? Will there be a license agreement about the use of trademarks? All these things need to be thought through. It may be that instead of a close connection that it is intended that the new entity is to be independent – that’s fine too.
Understand the local context: Find out more about how things operate here for charities – you can do that by downloading our free book for Charities in New Zealand here. We also host a call every two months for the impact sector where many people share about what they are seeing – examples of these are here. It may help to get a better understanding of the society here too – for example the relations with Māori and the unique value that brings to the way we operate here. Many charities choose to include a clause about honouring the principles of the Treaty of Waitangi or translating headings in their Trust Deed. The point is it helps to get to know the local landscape and we can help with that process. One of our Partners hosts a podcast called seeds theseeds.nz which has hundreds of interviews with local people doing good so there are many stories to learn from.Our team is experienced with overseas entities coming here and setting up charities and social enterprises. We would be happy to assist you in your journey. For more information, please feel free to contact Steven Moe stevenmoe@parryfield.com. We also have free resources for start-ups, boards and companies including a “Start-ups Legal Toolkit” which covers the key issues we see people face when starting out.

Some charities provide benefit partly for New Zealand purposes and partly for overseas purposes. It is also possible for funds to be applied in New Zealand for overseas purposes or applied overseas for New Zealand purposes. If a charity applies too high a percentage of its funds for overseas purposes, then it may not qualify for tax donee status. The percentage permitted by IRD to be applied for overseas purposes is therefore very important.

In relation to this, on 20 September 2018, the IRD issued Interpretation Statement 18/05 regarding the meaning of the phrase ‘wholly or mainly’. The interpretation statement is accessible here at and a shorter fact sheet is here.

This Interpretation Statement is important because an organisation may qualify for tax donee status if it applies its funds ‘wholly or mainly’ within New Zealand. A charity focused primarily overseas will not qualify for tax donee status. In the past, the view accepted by IRD has been that if more than 50% of funds were applied in New Zealand for New Zealand purposes then the organisation would qualify as operating ‘wholly or mainly’ in New Zealand. That percentage has now been changed to 75%. Earlier discussion papers had suggested the figure might rise to as high as 90% but it was later moderated to the lower figure of 75% wholly or mainly within New Zealand for New Zealand purposes.

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 “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.

What if a New Zealand donee charity donates to a Schedule 32 organisation?

A New Zealand registered charity with donee status should not assume that donating to a Schedule 32 organisation counts as applying funds “within New Zealand”. Inland Revenue looks at the ultimate purpose of the funds, not just the recipient’s donee status.

IRD’s guidance in IS 18/05 notes, unless there is evidence to the contrary, donations to a Schedule 32 overseas donee organisation are presumed to be applied to the donor charity’s overseas purposes. The donor charity should therefore include the payment in its own ‘wholly or mainly’ calculation and check whether it remains within Inland Revenue’s 75% safe harbour, including on a rolling three-year basis.

In short, Schedule 32 status supports the recipient donee’s ability to receive tax-deductible donations, but it does not automatically protect the donor charity’s own donee status if the funds are used offshore.

Why is this an important change

If someone makes a donation above $5 to a donee organisation 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.

The information contained in this outline is of a general nature, should only be used as a guide and does not amount to legal advice. It should not be used or relied upon as a substitute for detailed advice or as a basis for formulating decisions. Special considerations apply to individual fact situations. Before acting, clients should consult their Parry Field Lawyer.

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 160 (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 70%) 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 many 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 limited 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 (e.g. 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, one of the questions 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. There is often a 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;
- 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.

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.

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