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.
We write regarding the Government discussion document entitled “Streaming and refundability of imputation credits”.
We are a 6-partner law firm, and we have a significant amount of charitable institutions that we act for. As such, we consider that we are well placed to comment on the tax policy issues that arise from the discussion document, especially regarding how they relate to charities.
We would like to make the following submissions in relation to the discussion document:
Chapter 4, Question 1 – Does the absence of a rule allowing a refund for imputation credits affect the type of investments a tax-exempt organisation makes?
In the context of charities, the answer to this question is undoubtedly yes. Although the answer to the question is yes, even if imputation credits were refundable to charities, there would be limited circumstances where charities would actually avail themselves of the privilege. Most charities are set up for the purpose of carrying out their charitable purposes. As such, they will typically not invest their money in New Zealand companies, but rather use every dollar at their disposal to further their charitable aims.
Notwithstanding the above point, some charities do invest significant amounts of money, and do attempt to make a reasonable return on this investment. The return on the investment may then fund the charitable purposes of the entity involved. Although these situations, from our experience, are not representative of the charitable sector, we do consider that the inequities inherent in the non-refundability of imputation credits should be removed. We understand that the current government policy is not to tax charities, and we consider that the non-refundability of imputation credits flies in the face of that policy.
Chapter 4, Question 2 – If rules were introduced to allow imputation credits to be refunded, it would be necessary to ensure they did not undermine the objectives of the imputation system. What checks and balances would a responsible refund mechanism have?
As stated above the situations where charities would invest in companies is fairly limited in number, although the amounts that may be invested may be significant. We would therefore agree that proper safeguards are put in place to ensure that there is no abuse of the refundability of imputation credits, as this would bring a bad name to the good work charities do.
The types of safeguards we envisage could include the following:
- Ensure that the refund mechanism is closely linked with Charities Commission registration. This will ensure that only deserving charities are able to claim the refund.
- Develop a separate form whereby Charities can claim the refund of the imputation credit. Specific audit levels can then be placed on refunds to ensure that they are properly administrated. This will also prevent Charities from having to file a full return to claim the refund, when they would otherwise not have filed a return.
- In all cases where a refund is claimed dividend statements should be provided evidencing the imputation credits received.
- A sample of refund applications could be subjected to audit activities to ensure that no spurious refunds have been claimed.
- The penalties regime should apply to spuriously claimed refunds in the same way that it applies to underpayment of tax.
- Reference should be had to the safeguards implemented in Australia with reference to spuriously claimed refunds.
For further assistance with tax matters please contact Ken Lord at Parry Field (348 8480).