Critics line up against the government’s plan to tax charities

Diana Clement

LawNews

April 23, 2025

A sweeping review of the taxation of New Zealand’s 29,000 registered charities has sparked widespread concern.

Proposals to tax not-for-profits’ business income if it’s unrelated to their charitable purpose – whatever that might mean as this term has not been defined – and tighten donor-controlled charity rules have left many questioning whether this is genuine tax reform or simply a government revenue-grab.

The IRD published its 24-page consultation document Taxation and the not-for-profit sector on February 24, with a tight deadline of March 31 for submissions.

The move has appealed to those who disapprove of the behaviour of charities such as Sanitarium, the Gloriavale Christian Community and Destiny Church, but critics say it’s not the job of the IRD and tax legislation to rein in these organisations and the proposals risk punishing legitimate charities with increased taxes and compliance costs.

Both the proposals and the short time frame for consultation have been criticised by the charity, legal and accounting sectors. Some see it as a tax grab by a government that needs to balance its books before next month’s Budget.

Tax reform of the charitable sector wasn’t part of National’s 100-day plan, but a paper prepared by the IRD for the previous government caught the attention of the coalition, says tax expert Stephen Tomlinson, a partner at Tomlinson Law and member of The Law Association’s Trust Law Committee. The consultation document was pulled together in weeks, he says, and the window to respond was short.

“One could be a little bit cynical about this in that it seems to be driven not so much by the Minister of Revenue but, rather, by the Minister of Finance, Tomlinson says. “It has been quite a condensed process and that concerns us.”

The proposals themselves are also a concern, particularly the plan to tax charities’ unrelated business activities. Even if the profit from unrelated businesses is used for charitable purposes, it will be taxed, along with returns from a charity’s investments.

“There used to be a presumption in charities law and tax law that a charity existed to further its charitable purposes and not to make money,” Tomlinson says.

The proposal to tax investment income is also fraught.

“More recent case law suggests that [the] Inland Revenue’s view is that the same principles that apply for determining whether a taxpaying citizen is carrying on a business [of investing] also apply to a charity. Presumably that will lead to a situation where some investment income is taxed and some still isn’t,” he said. The Catch-22 for charities is that there is an obligation for the trustees to invest prudently.

Tomlinson says unless there is a carve-out for investment income, the proposals will result in larger charities being taxed. “It’s got nothing to do with the perceived competitive advantage that charities enjoy over other businesses.”

If the proposals become law, there will likely be boundary issues for both charities and the IRD. These could be costly for both charities and the IRD as the legislation is tested in court.

Concerns about the behaviour of a small number of charities shouldn’t fall to the IRD to resolve, Tomlinson says. Unlike some overseas jurisdictions, New Zealand has a regulator – Charity Services – which monitors the sector.

The government is looking in the wrong place to balance its books, he adds, and there is a concern that New Zealand might end up “with a knee-jerk reaction …. reform driven by fiscal needs.

“If I were to draw a rather dangerous analogy, it’s a little bit like the Trump administration imposing tariffs without actually thinking through the fiscal effects of those and just thinking that it’s a good idea, based on inadequate research and understanding of these reforms.”

The other area of particular concern for Tomlinson is the taxation of not-for-profit organisations such as credit unions, friendly societies and clubs.

Not-for-profits should have been filing returns since 2004, but many smaller organisations are oblivious to this, Tomlinson says. He questions whether it is worth the time and effort to audit not-for-profits and collect this tax.

If not-for-profits are to be taxed, he recommends the $1,000 exemption, which was introduced in the late 1970s, be increased.

Limited consultation, significant change

Charities lawyer Sue Barker has written a 143-page submission repudiating much of the IRD’s consultation document. But she appeared stumped when asked why the IRD and/or government had come up with these proposals.

“It seems to be driven more by ideology,” Barker says. “The analysis is, ‘I run a business, and I pay tax. This business over here doesn’t pay tax. How can that possibly be fair?’”

The IRD has been trying to tax charities since1967, she said.  “And maybe [the IRD] thought with a right-wing government that perhaps this was its opportunity.”

At the same time, she says, officials have created a belief in the public’s mind that there’s something dodgy going on. “The underlying question as to whether there really is a problem that needs to be fixed, I don’t think it’s actually [been] asked.”

Barker said she couldn’t speak for the IRD or the government but thought the problem was that officials were working from underlying assumptions that hadn’t been properly examined.

Lawyers from all fields should also be concerned about the short timeframe of this consultation, Barker said. It could be repeated in other areas.

“They do this very limited consultation for the most significant change to the tax settings for charities in almost a century. They give charities just over four weeks that coincides with the end of the financial year for most charities. Why the rush?”

The international experience

Barker and others spoken to by LawNews point out that the consultation document assumes New Zealand is an outlier when it came to taxing charities, a subject Barker covers in her submission.

It was other countries that needed to look at this issue because their approaches had been shown not to work, she said. “Canada is looking to move to the way Australia and New Zealand treat their business income.”

She concluded, after an extensive review of overseas jurisdictions, that they serve as a cautionary tale rather than a precedent to be followed.

The concept of an unrelated business income tax had failed all over the world, Barker said. For charities, there is no bright line between a related and an unrelated business and attempts to draw such a distinction are fraught with difficulty that cannot be resolved.

“Outlier” charities that are breaching their fiduciary duties can be dealt with by using rules that are already in place, she said.

“My real concern is that the proposals will not address the perceived areas of concern but what they will do is impose blanket restrictions on the charitable sector as a whole which will stifle a lot of really important charitable work. It will also demoralise voluntary effort without addressing the perceived issues. Even if we had a problem, these measures wouldn’t fix it.”

Her submission outline reasons why the government should not remove the FBT (fringe benefit tax) exemption for charities. Barker said the policy rationale was that it enabled governments to further social objectives such as supporting disadvantaged communities. Removing this concession could negatively impact charities, especially those operating with limited resources. “[It] is an important support for charities that should remain in place for as long as the FBT regime itself remains.”

Charities already struggle to recruit labour and removing FBT exemptions would make it harder, Barker said.

Her submission also highlights imputation credits, which were not analysed in the consultation document. Charities cannot claim imputation credits, as other businesses can, and this affects the “competitive advantage” argument, Barker said.

This non-refundability distorts charity investment decisions, pushing them away from New Zealand companies (where dividends are taxed) and towards investments where their tax exemption is effective, such as interest-bearing debt or foreign companies offering unimputed dividends.

Costs, complications and unintended consequences

Chartered accountant Craig Fisher, an independent director and governance consultant and a former member of the ADLS (now The Law Association) council, acknowledges that objectives such as simplifying tax rules and addressing integrity risks are well-intended but warns the devil is in the detail.

He says the public does not understand the proposals outlined in the consultation document and believes them to be a fix for questionable behaviour by a small number of charities such as Destiny Church and the Gloriavale Christiab Community.

“Charity law is the most appropriate approach to maintain the social licence and public confidence of the charitable sector,” Fisher says. “If abuse of tax concessions is the primary issue, then resource the [Charity Services] regulator sufficiently to investigate and ensure it can take appropriate action.”

He adds that charities already face significant transparency requirements, including financial reporting and service performance reporting. These compliance costs are significantly greater than those for most for-profit entities, which often have no legislated obligations.

“The biggest issue with [the proposals] is the conceptual one in that it’s looking at the support of charities as a cost to the government, as lost revenue. Most studies would show that actually, charities are more effective deliverers of charitable services to society than the government is directly.”

Fisher says as it stands, the principles behind the consultation move New Zealand further away from its simple tax system. “As a rule, exceptions often create complications costs, and unintended consequences.”

He questions the financial analysis behind the IRD’s paper and says from an accounting perspective, it doesn’t add up.

“Late last year, Minister Willis [was quoted in] the press about the charity sector making $2 billion worth of profit that needs to be taxed. That’s a very simplistic statement. If the IRD starts taxing, then in order to be fair I would want, as an operator of a charitable business, to be claiming absolutely every expense that I could to reduce my tax liability. That’s what for-profit businesses do. That would dramatically change the potential level of taxation revenue to the government.

“Is my time worth $500 an hour? Or is it worth the minimum hourly rate?” says Fisher, who is on several charitable boards. “The cost of compliance for both the charities and the IRD would be huge if the proposals go ahead.

“I then have a major conceptual problem with the fact that the government, and not just this current government but repeated governments of all colours over the past 20 years, have made various statements about wanting the charitable sector to be sustainable and self-sustaining. Yet all the funding that charities get generally relies on the charity of others, apart from a charity actually running a business. It’s the only one where the charity has complete control over its own destiny.”

Fisher says he has not seen evidence of predatory pricing by charities or independent studies proving that this is a problem. Charities on the other hand face competitive disadvantages, such as restrictions on raising finance, the inability to claim imputation credits on tax-paid dividends and the inability to offset losses against future profits.

Read the consultation paper here https://www.taxpolicy.ird.govt.nz/-/media/project/ir/tp/consultation/2025/taxation-and-the-not-for-profit-sector.pdf

 https://lawnews.nz/tax/critics-line-up-against-the-governments-plan-to-tax-charities/