WELLINGTON, New Zealand — The New Zealand government is considering significant changes to its charity tax laws, a move that could impact a wide range of organizations, from small community sports clubs to large, commercially active entities operating under charitable status.
Finance Minister Nicola Willis confirmed on Tuesday that the government is consulting on proposed changes with the dual goals of supporting a "really strong charity and not-for-profit sector" while ensuring "value for money" from tax concessions granted to charities.
The impetus for this review is a long-standing debate about whether some charities are exploiting their tax-exempt status by engaging in substantial commercial activities. Currently, about $2 billion is generated annually by the charitable sector, and that money is all untaxed. Many charitable organizations, like private schools, universities and churches, also run commercial businesses that can turn a tidy profit. As charities, they’re entitled to tax breaks and exemptions which are not available to other businesses.
The Inland Revenue Department (IRD), New Zealand’s tax authority, has released a set of proposals for public feedback. These proposals address several key issues, including the taxation of business income earned by charities, the status of "donor-controlled" charities, and a review of older tax exemptions to determine their continued relevance.
"We want to take that advice before we make any changes or before we allow IRD to make any changes," Willis stated, emphasizing that no decisions have been made and all feedback will be considered.
The government’s move comes amid concerns that some charities are accumulating significant wealth without a clear link to their charitable purpose. Dr. Michael Gousmett, a lecturer at the University of Canterbury’s Business School and a long-time advocate for charity tax reform, points out that existing laws may be outdated and overly generous.
"Our laws around charities and tax are, perhaps, outdated… perhaps you might describe them as antiquated compared to other countries," Dr. Gousmett said. He argues that the current framework allows some organizations to operate more like businesses, using their charitable status as a financial instrument.
One specific example frequently cited in this debate is Sanitarium, a major food manufacturer owned by the Seventh-day Adventist Church. Critics argue that Sanitarium’s commercial success shouldn’t be tax-exempt simply because of its religious affiliation.
However, the government is keen to avoid unintended consequences. Minister Willis assured that smaller, community-based organizations, such as local sports clubs, are unlikely to be adversely affected. The focus is primarily on larger entities engaging in significant trading activities.
The current proposals have sparked a national dialogue about the very definition of a "charity." Dr. Gousmett notes that New Zealand’s legal understanding of charitable purposes stems from a 1891 English court case, stemming from definitions by William Pitt in 1799 during the Napoleonic Wars, building on four broad categories: relief of poverty, advancement of education, advancement of religion, and other purposes beneficial to the community. He contends that this broad framework needs clearer guidelines to prevent abuse.
Some charities might argue that accumulating wealth is essential for long-term sustainability and for funding large-scale projects, but critics believe that it should be related to a charitable purpose.
This latest review is part of a long line of reviews that have been conducted over the years. Dr Gousmett said, "For many decades now, there have been numerous tax reviews and those tax reviews have asked the question, if a charity is trading, should it be liable to income tax, and the answer has always come back one way or the other, that yes, those charities should, in fact, be liable to income tax. The question then, is why has parliament never gone to the next step, which I argue forever, that there should be an amendment to the Income Tax Act?"
The government has committed to funding the school lunch program for the next two years, a program previously left unfunded by the last government. This commitment, Willis explained, underscores the importance of supporting vulnerable children who often come to school hungry "through no fault of their own."
Public consultation on the proposed changes is ongoing. The government’s final decision will likely have far-reaching implications for the charitable sector and the broader New Zealand economy.