Charities' $2b untaxed profits

There is about $2 billion of "profit" in the charitable sector that is not subject to tax, data suggests.

Finance Minister Nicola Willis is promising tax changes ahead for charities and closing of loopholes, to be announced in next year's Budget.

"We've set that out in the tax policy work programme - what essentially we're doing is looking to see if there are any loopholes that are being exploited that would allow entities that are structured as charities to avoid tax they should otherwise pay," Willis told reporters on Tuesday, following her appearance at the Finance and Expenditure Select Committee.

The latest Charities Services annual report shows charities had total expenditure of $25.28 billion in the 2023/4 year, and total income of $27.34b - leaving a difference of about $2b.

In New Zealand, charities that are registered with Charities Services providing fully charitable activities, with none of the income available to the benefit of members, trustees or associates, can access a tax exemption.

Whether that is fair has been discussed a number of times - partly because of high-profile charities, such as Sanitarium and Best Start childcare, which compete with non-charitable businesses that do not have tax exemptions.

A paper prepared for the Tax Working Group said that estimates from Charities Services and IR indicated about 30 percent of registered charities were likely to have some sort of trading activities.

In the group's final report it said it recommended the Government periodically review the charitable sector's use of what would otherwise be tax revenue to verify the social outcomes were being achieved.

Michael Gousmett, adjunct fellow in the department of accounting and information systems at the University of Canterbury, said there were questions of fairness.

He has raised concerns about iwi organizations, such as Ngai Tahu's seafood businesses, having tax exemptions for non-primary purpose trading. "Seafood production is not the same thing as advancing the purposes of iwi therefore that's a non-related trade, a non-primary trade so it should be subject to tax."

Ngai Tahu has been approached for comment.

He said another case was Christ's College in Canterbury, which he said had been a shareholder of a forestry company.

"I said why don't they send young men up to the North Island to teach them how to grow straight pine trees, how to mill timber, market it and so on. That would be advancing education under charity law but the fact is they didn't, it was a purely commercial operation same as the chap down the road growing straight pine trees. But the difference is one pays tax and one doesn't. Where's the fairness in that? I think we need to tighten this up.

"It's not so much a loophole as what I'd describe as a failure of fiscal policy. The fact is there's provision in the income tax act for exemption for charities but I argue it's too broad."

Christ's College has been approached for comment.

Gousmett said charitable businesses could be required to decide how much they wanted to donate to their parent charity and do that each year. That would reduce their overall profit and tax bill.

"To me that would be a fair way to do it."

Deloitte tax partner Robyn Walker said the issue the government seemed concerned about was whether charities were "potentially not doing the charitable stuff on a timely basis".

"It's hard when looking at the aggregated data - it could be that 90 percent of charities spend every cent they make and it's only a small subset of charities which are actually contributing to hat $2b difference between income and expenses."

She said charities were required to apply all their income and assets to charitable purposes.

"If you apply it to the private benefit of an individual, you lose your charitable status. But what happens is that sometimes the charitable purpose might arise some time into the future. There are definitely periods where they're not spending everything they are making because there is a longer-term purpose… there's a bunch of different obligations they have to meet to keep their charitable status."

She said concerns seemed to centre on those charities that were in competition with private sector entities.

Walker said it had been suggested that charities could have a sort of memorandum account where they were able to claw back the tax they paid as they spent their money on charitable purposes.

"That leads to a lot more compliance cost."

The government would have a fine line to tread trying to target what it was concerned about without causing a lot of collateral damage to good charities, she said.

Sanitarium said it would not be appropriate to comment.