We often get asked about what income (including business income) is exempt from taxation by our many charity clients.
In New Zealand, registered charities benefit from various tax exemptions. Inland Revenue released an interpretation statement (IS24/08) clarifying the rules around tax exemptions under section CW 42 of the Income Tax Act 2007. This exemption allows certain income that a charity derives from business activities to be non-taxable, provided specific requirements are met. Here’s what charities need to know about this important exemption:
What is Business Income for Charities?
A charity’s income is categorised as either business or non-business income. Business income includes any income a charity earns through commercial activities, such as running a store or providing services for a fee. For example, if a charity operates an op shop or a café to fund its charitable purposes, the income generated from these activities can qualify as business income. This income may be exempt if certain conditions are met under section CW 42. On the other hand, non-business income, such as donations and gifts, are generally tax exempt under a different provision (section CW 41).
The Business Income Exemption
Under section CW 42, a charity’s business income can be exempt from tax if all of the following conditions are met:
- The entity carrying on the business is a registered charity – The exemption applies only if the business is conducted by a charity that is registered under the Charities Act 2005.
- Charitable purposes must be carried out in New Zealand – To qualify for the exemption, the charity must apply its income towards charitable purposes within New Zealand. If any of the charity’s purposes are outside New Zealand, the income must be apportioned, and only the part used for New Zealand charitable purposes is exempt.
- The entity is a “tax charity” – This includes registered charities.
- Control restrictions – There must be no individuals or entities with control over the charity’s business who could divert the charity’s income for private benefit. Any breach of this control restriction would make the charity’s business income fully taxable.
Territorial and Control Restrictions
An important aspect of the exemption is the territorial restriction. If a charity’s purposes are not limited to New Zealand, the charity must apportion its income between New Zealand-based activities and those outside the country. Only the portion supporting New Zealand activities will be tax-exempt.
Additionally, the control restriction ensures that the charity’s business income is used solely for charitable purposes. If any person or entity can direct or divert income for personal gain, the entire business income will become taxable.
Key Takeaway for Charities
Charities involved in business activities should carefully assess their operations to ensure they meet the conditions for the business income tax exemption. This includes maintaining registration as a charity, focusing charitable efforts within New Zealand, and ensuring compliance with the control restriction. Failure to meet these conditions could result in the loss of the tax-exempt status for business income.
We can help charities that operate both in and outside New Zealand to document and implement business income-splitting practices to ensure compliance with the IRD’s guidance.
—
This article is intended for general informational purposes only and does not constitute legal advice. For advice specific to your situation, please contact a qualified legal professional. Reproduction is permitted with prior approval and credit to the source.
