Charitable Trusts 09 Dec 2011
Parry Field Lawyers provide legal advice on a range of trust matters including formation and operation of both family trusts and charitable trusts.
Setting Up a Charitable Trust
Briefly, the procedure is as follows:
- An original name for the Trust must be decided on.
- The proposed trustees agree on the form of the Trust Deed.
- The trustees may then choose to apply to register the Trust under the Charitable Trusts Act 1957.
- The trustees may also apply to register as a charity with the Charities Commission, particularly if they want the trust to obtain tax exemption status.
The Trust Deed
The trust deed is the central document for a charitable trust. It defines the purposes for the trust and the powers given to the trustees. It should also specify the process of changing trustees, amending the trust deed, winding up the trust, and provide a process for setting rules for trustee decision making.
In order for the trust to be eligible for charitable registration, the trust purposes must come within specified charitable purposes which include:
- The advancement of education.
- The advancement of religion.
- The relief of poverty.
- Any other matter beneficial to the community.
The trust will create the boundaries for the future actions of the trust. If poorly drafted, it can restrict the expansion of the trust activities as the trust grows over time. For this reason, it is very important that you obtain legal advice at the time of preparing the trust deed.
Incorporation under the Charitable Trusts Act 1957
Once the trust deed has been signed by the trustees, you may choose to apply to register the trust as an incorporated charitable trust under the Charitable Trusts Act 1957.
The advantages of registration include providing some protection to the trustees of the trust because the incorporated trust can sign contracts as a separate legal person rather than through the trustees personally. We can help clarify the process for execution of contracts by your trust to ensure contracts are executed by the trust rather than the trustees personally.
When applying for incorporation you need to submit :
- An application on the prescribed form signed by the majority of trustees (there must be more than one trustee). Each applicant must provide his or her full name, physical address and signature.
- A copy of the trust deed.
- A statutory declaration made by one of the trustee applicants, either describing any additional trusts on which applicants hold property or stating that there are no other trusts.
Once incorporated, the trust is given a unique registration number and becomes able (as a separate legal person) to enter into contracts and carry out all the activities that a natural person is entitled to carry out (subject to the purposes and powers set out in the trust deed).
Registration under the Charities Act 2005
The Charities Act 2005 set up a Charities Commission to administer formal registration of charities. Registration with the Charities Commission is voluntary, but from 1 July 2008 you must be registered to obtain tax exemption from income tax and to avoid the imposition of gift duty on donations you receive.
If you wish to register with the Charities Commission, we can assist you by:
- Checking that your founding documents are in order, and advising on any necessary changes that may now be required.
- Advising whether your stated purposes accurately describe what you are doing now, and whether the law regards them as charitable.
- Advising whether your trustees or officers are legally eligible to serve and apply for exemptions if they are disqualified under the new Act.
- Advising whether your decision making and record keeping practices need to change and if so in what ways.
- Identifying risk areas and advise on how to address them. For example, if your trust also engages in non-charitable activities such as overseas mission work or political lobbying this may have an impact on your charitable status and on the tax treatment of the trust's income.
- Completing the registration forms for you.
Once your trust has registered with the Commission it will be issued with a unique registration number which must be displayed on all fundraising materials used (eg, collection tins) when money is collected from the public. You will need to file a detailed annual return within six months of your next balance date. The annual return must include:
- Financial Accounts, audited or otherwise.
- A Statement of Financial Performance including a break down of the sources of your income by type i.e. donations, government contracts, bequests, etc.
- Details of grants paid overseas.
- The cost of service provision (excluding salaries and wages).
- The cost of trading operations (excluding salaries and wages).
- A balance sheet.
- Details of paid employee time, broken down by fulltime and part time, and volunteer time employed.
If a charity changes any or part of its core practices during the year (such as the organisation's charitable purpose) it must notify the Commission. Penalties will be imposed on organisations that fail to notify the Commission of these changes within a specified time. The Commission has monitoring and enforcement roles, and a statutory power to compel you to answer questions about your operations. Refusal to answer could lead to a criminal conviction and a $10,000 fine. Based on the UK experience with similar legislation, the New Zealand Commission is likely to stretch its wings and require more detailed operational information, and monitor compliance with other legal requirements. We think it likely that over time charities that wish to obtain funding directly from the public or government agencies will need to be able to demonstrate the cost and value of what they contribute to remain credible.
Tax Exempt Status
Although registration is necessary to obtain a tax exemption it does not guarantee that you will in fact be exempt from income tax and gift duty. That determination is still made separately by IRD. Previously, charitable trusts were able to send their trust deed to IRD for non-binding advice as to whether the trust was eligible for tax exempt status. With the commencement of the Charities Act 2005, IRD no longer gives individual advice as to a particular organisation's eligibility for tax exempt status.
IRD have issued a general tax advice statement advising that:
- Entities with non-business income that are registered with the Charities Commission will prima facie qualify for the income tax exemption in respect of that income.
- For entities that derive business income, registration alone will not be sufficient for the business income tax exemption and they must self assess the extent to which their charitable purposes are carried out in New Zealand. It is also required that no person with some control over the business be able to divert an amount derived from the business to their own benefit. Neither may the trust be carried on for the private pecuniary profit of any individual.
In relation to business income, financial records are needed. Where business income is divided between use within New Zealand and overseas, the tax exemption will only apply to the share of the income that can be said to relate to charitable operations within New Zealand.
Approved Donee Status
Separate to registration underthe Charitable Trusts Act 1957 and the Charities Act 2005, if your trust's purposes are charitable you should be entitled to obtain "approved donee status". Individuals who give donations to charities with approved donee status can claim a rebate from IRD on their tax.
Donee status is not affected by the Charities Act. Inland Revenue will continue to administer donee status as it has done previously.
If you apply for charitable registration under the Charities Act 2005, you do not need to make a separate application to obtain donee status. Instead, the IRD will use the information you give when you apply for registration under the Charities Act 2005 to work out your donee status. They will send you a letter about this shortly after you register with the Charities Commission.
If you don’t want to register under the Charities Act you will need to apply for donee status directly to IRD.
it is worth bearing in mind that charitable status is not limited to trusts. For example, it is possible to incorporate a company as a charity to trade with the benefit of limited liability and a board of directors structured on a commercial basis. If you are uncertain what structure best suits your organisation, we recommend you contact us to discuss the possibilities further.
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.