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Charitable purposes: Part C 20 Charitable activity can be undertaken under a variety of legal forms; o What is significant is the wording of an entity’s trust deed that describes their charitable purpose Charities Act section 3: Purpose To promote public trust and confidence in the sector Encourage ...

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Charitable purposes: Part C 20 -

Charitable activity can be undertaken under a variety of legal forms; o What is significant is the wording of an entity’s trust deed that describes their charitable purpose

Charities Act section 3: Purpose -

To promote public trust and confidence in the sector Encourage the effective use of charitable resources Provide registration for societies, institution and trusts as charitable entities Require them to comply with obligations

Meaning of a charitable purpose: Section 5 CA: -

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(1)includes every charitable purpose, whether it relates to the relief of poverty, the advancement of education or religion, or any other matter beneficial to the community. (2) Marae has a charitable purpose if it is on land that is Maori reservation (Maori land act). Provided the funds are not used for: o The maintenance of the land or marae (physical structure) o Not a charitable purpose (2A) Promotion of amateur sports is a charitable purpose if it has a charitable intent (1) (3) if the purpose of a trust is non-charitable but is ancillary [secondary] to their charitable purpose then they can still qualify to be a charitable entity.

Charitable trusts Act CTA, incorporation of a board effect: -

Shall have perpetual succession and a common seal; Shall be capable of holding real and personal property; Shall be capable of suing and being sued; Shall be capable of doing and suffering all such acts and things as bodies corporate may lawfully do and suffer.

Section 2 CTA Charitable purposes defined: -

Every purpose which in accordance with the law of New Zealand is charitable includes every purpose that is religious or educational, whether or not it is charitable according to the law of New Zealand

Charitable funds raised by voluntary disclosure (part 4 CTA) -

Section 38 definition of charitable purpose: o Supply of physical wants by the poor o Education of the poor o Reformation of offenders (drug addicts) o Employment and care of offenders o Support of libraries, lecture rooms o Promotion of athletic sports

Incorporated societies Act: -

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Incorporated society defined: section 4 o Any society consisting of not less than 15 persons associated for any lawful purpose but not for pecuniary gain o Must have the consent of the majority of members in the society Section 6 has the rules of the society Incorporated societies may also undertake charitable activities o For example, St George’s Hospital [Anglican-faith based charity hospital]

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Prior Charities Commission, charities were not required to be publicly accountable as they were not being required to file annual financial statements. Whereas Societies do have to file

Key element of charitable trust: Section 27 CTA -

Individuals cannot benefit on the winding up of a trust. o Funds are usually transferred to a trust with similar purposes

Limited liability companies with charitable purpose – Companies Act -

Ngai Tahu with more than 33 limited liability companies

Private act of Parliament: -

Christ College

Examination of charities: -

Section 58 (1) CTA 1957 provides the Attorney-General with the power “to examine and inquire into all or any charities in New Zealand,”

Various legal forms: -

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Charitable trust board: o The Charitable Trusts Act 1957 enables trusts and societies that have charitable purposes to incorporate as charitable trust boards. (Charitable purpose above) o Charitable trust boards often sell goods and services and apply the profits to their charitable purposes. o A charitable trust board may decide to operate its business through a separate trading arm or purchase an existing business. That business then returns its profits to the not-for-profit arm. o They may be “trust-based”, which requires at least two trustees, or “society-based” which requires at least five members. Incorporated Societies: o Under the Incorporated Societies Act 1908, incorporated societies operate for the non-financial benefit of their members and in the pursuit of activities outlined in their constitution o Like charitable trusts, trading activities may be carried out by the incorporated society itself, or a separate trading arm, to return profits to the social mission o They must have a minimum of 15 members  St George’s Hospital Limited Liabilities Companies: o Companies are incorporated under the Companies Act 1993 and must have a minimum of one shareholder and one director o Social enterprises using the company form can adopt a constitution that makes it clear that profit maximisation is to be balanced by “social good” objectives  Ngai Tahu Maori Land Trusts: o Trusts available under Maori/Maori Land Act 1993. These structures are only available to owners of Maori land. o The Act aims to support the efficient administration of multiple-owned Maori land. It seeks to keep lands in the hands of owners, and to occupy, develop and use the land for whanau, hapu and future generations Private act of parliament o Christ college

Taxation Reviews: Part F

Report of the taxation review committee (1967) -

taxation of business profits of other exempt organisations [ie trading charities] that veterinary and other similar clubs and societies or associations should be subject to tax

Report on task force on tax reform (McCaw Report) 1982: -

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Regarding the income tax exemption of commercial activities undertaken by charities within the same sector as income tax liable for-profit entities, o Task Force recommended that while charitable organisations should be permitted to undertake their traditional fundraising activities, at the same time the government should “minimise” the scope for avoidance and reduce the advantages which accrue to income-tax exempt charities which operate in competition with taxable businesses Both the 1967 and 1982 reports suffered from the lack of relevant information o both surprised and frustrated by the lack of reasonably up-to-date statistical information which could be made available

Government economic statement 1987: -

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released his alternative economic statement in which he proposed a raft of controversial measures, including the taxation of charities o measures to eliminate tax avoidance and to broaden the tax base Douglas specifically targeted charities and sporting bodies Douglas intended to withdraw tax exemptions that “were intended to assist the farming sector,” such as “special tax concessions for primary producer co-operatives,” which he considered provided “opportunities for tax avoidance

Report of the committee of Experts on tax compliance 1998: -

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The issue of the exemption from income tax provided to certain organisations was raised Issue noted: o business income derived by charities is exempt from tax under section CB 4(1)(e) ITA. o However, some charities may engage in business activities unrelated to the charitable purpose for which they are provided a tax exemption.  This exemption gives charities a competitive advantage over taxpaying business competitors. Recommendation: o the government should review the tax treatment of charities that engage in commercial activities unrelated to their purposes  No reason exists in principle why business income, unrelated to the core purpose, should not be taxed. o The committee made reference to unrelated business income tax (UBIT) regime applied in the US  NZ government may wish to refer to the relevant US legislation when designing rules for NZ

Tax Review 2001: (McLeod report) -

the pattern of domestic investment is distorted by significant differences in the effective marginal tax rates applying to income from alternative investments Differences arise from: o Different forms of income  assessment and collection of tax on certain types of activities o Different income tax treatment of different entities (Maori authority, charities)  explicit decisions made by past governments to use the tax system as a means of encouraging certain ‘desirable’ activities

Tax and Charities 2001:

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focussed specifically on the non-profit sector, making some interesting comments made concerning the income tax exemption issue of competitive advantage was raised o Final price of products was competitive with other firms so price wasn’t the issue The issue: o

through the ability to accumulate tax-free profits thus enabling “a faster accumulation of funds to expand more rapidly than its competitors d

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to its charitable purposes it remains unclear why a subsidy should be granted through the tax system o Rather than through direct subsidies or government provision of the goods or services in question o Argument:  charities look after areas where the market economy has failed subsidy theory the IRD uses to justify the exemption from income tax

Income measurement theory: -

practical difficulties in defining income and deductible expenses for charities make the measurement of net income problematic Charities receive income from various sources – o donations, bequests, interest on investments, sale of goods (new and second-hand), grants from other charities and community groups, and government. o Which of these is “income”

Capital constraints: -

that the best justification for the exemption is that it helps to compensate [exempt organizations] for the constraints on capital formation that non-profits commonly face charities do not have shareholders, o therefore, when the need for funds for the development of a charity arise, o the retention of funds that would be used to meet income tax liabilities is seen as a substitute for the lack of shareholders.

Donative theory: -

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Built on the income measurement and capital constraints theories maintain that “the primary rationale for the charitable exemption o is to subsidise those organisations capable of attracting a substantial level of donative support from the public The argument here is that if the public consider a charity worthy of their financial support then the government also agrees

Justification for tax credits/rebates: -

Promote redistributive justice. People who can donate should be encouraged to The benefits of a donation are to the society not personal gain all taxpayers must pay. the system is used to make free-rider’s pay a part of cost of providing public goods

Donee Status -

The Land and Income Tax Assessment Act 1962 provided donors with tax relief for their contributions to society, institution, association, organisation, or trust which is not carried on for the private pecuniary profit o to encourage a greater degree of community self-help and initiative

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to encourage taxpayers to provide private support for a wide range of activities and organizations that aid in the accomplishment of social objectives that otherwise would not or could not be sustained by the federal and local governments

Taxation Legislation: Part B Charities not liable to income tax, but this will exist if the charity: -

Has no written rules (trust deed)? Operates under a deed that does not meet the requirements for an exemption Uses business income for charitable purposes outside of NZ Has not registered with the charities commission

CW 41 ITA: Exempt income -

An amount of income derived by a trustee in trust for charitable purposes o Exclusion: if the trust is not registered Defines a tax charity o Trust, society, institution registered as a charitable entity

CW 42: -

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Income derived by businesses carried on for the benefit of a trust, society, institutions are exempt income if: o The business carries out their charitable purposes in NZ o When the income is derived, they were a tax charity o No person with some control over the company can divert to their own benefit If the charitable purpose is not limited to NZ o Only the part of the income appointed to NZ purposes is exempt income Amendment: April 2020 o Business income derived indirectly from business for a tax charity, that business will need to be registered charity itself o The reason for this amendment is because of the number of entities carrying on business for the benefit of a tax charity yet the business itself is not a registered charity o Amendment because:  Risked undermining public trust and confidence in the charity sector  Increased the oversight and regulation of charities

LD 3: Meaning of charitable gift: -

A charitable or other public benefit gift means a gift of $5 or more to organisations described in s. LD 3(2), o society, institution, association, organisation or trust that is not carried on for the private pecuniary profit. Or an organisation listed on schedule 32

Deregistration of charity: -

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Occurs by: o Through omission of material fact o Operating in a manner that is different from originally represented o Engaging in a prohibited transaction Issue to find when the revocation of tax-exempt status began. Once this has been realised the company will have to pay tax on income from that date, potential significance if some point in the past. What tax rates apply, limited liability – company tax, Charitable trust – trustee rate

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Depreciation rates may cause problems Tax rules: April 2014 o Liable for tax unless meet another tax-exempt section.  charity exemption ceases but the charity then qualifies for a tax exemption as an amateur sports body o Tax will be payable on any accumulated income held at date of final deregistration decision and have not been distributed within the next 12 months Grounds for deregistration: o

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Entity is not, or is no longer, qualified for registration as a charitable entity, or has engaged in serious wrongdoing Has being a significant failure by the entity to meet its obligations under the Charities Act 2005

not ancillary to its charitable activity. Not entitled to tax exemption o The ATO lost this case o was wrong, as this will open the way for charities to compete head-to-head with tax paying businesses As a result, AUS moved to introduce a UBIT (US): UCAT o The Government believes that it is important that charities use their tax concessions only to assist disadvantaged people and not for unrelated commercial activities. o Would pay income tax on profits from their unrelated commercial activities that are not directed back to their altruistic purpose o However, they did not adopt these reforms Pemsel case:

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Contained the four divisions of charity o Relief of poverty Requirements: o Advancement of education o Trade or business o Advancement of religion o Regularly carried on o Other purposes beneficial to the community o Not substantially related to furthering the purpose of the charity The UBIT is widely viewed as levelling the playing field between taxable for-profit businesses and tax-exempt non-profits

Unrelated Business Income Tax Regime: UBIT

Sanitarium: -

“Sanitarium” is generally cited as being an example of a commercial activity in support of religious activity undertaken by the Seventh-day Adventist Church. Almost 20 different names used to sell their products: o Naked Locals, Naturals, Organics o Sanitarium Health Food Company, & Nutrition Service o Vitality Works

Ngai Tahu Charitable Group: -

This entity is a registered charity with 40 entities comprising the group Shotover Jet which, until it was acquired by Ngai Tahu, was a for-profit business o How can a for-profit company which has been bought by a charity can morph from being an income tax liable entity to an income tax exempt entity purely because the shareholders, having tax charity status

Hubbards V Sanitarium: -

Hubbard’s is a private company, o Hubbard’s does pay company tax. Sanitarium is generally cited as being an example of a commercial activity in support of religious activity

Sanitarium they are exempt from paying company tax on their earnings because their profits help fund the church's charitable and religious activities. I do not see the “advancement of religion” being achieved by selling breakfast foods. Sanitarium operates in the same breakfast foods market and participates in the same activities as Hubbard’s. o But one organisation is taxed on their income and one is not because of their “Charitable purpose”. o I don’t see any difference in what Sanitarium does compared to what Hubbard’s does, o This is further compounded when you consider that Sanitarium is a market leader in Breakfast foods. The SDA Church is able to use the income generated from Sanitarium and invest into activities outside of NZ, o which it has done investing $13 million into Washington state-based Sweet Green Fields. o You have to ask why the SDA Church invested a large amount outside of NZ that could have gone into “advancement of religion” in NZ. o

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Transfer Pricing: 20 -

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Many Multinational enterprises (MNE) rank transfer pricing as the most important issue they face What it is: o The price at which related parties transact with each other o Cross-border transactions (trade) NZ – AUS  The majority of trade that occurs today is from MNE o Head office in US have a subsidiary in NZ, trade between themselves Prices should be set at arm’s length principle o Based on comparing the conditions of related party transactions with third party transactions Why it’s a problem: o Creates opportunities for mischief o A controlled transaction  Control price, deduction and income.  Can choose where you pay tax o Shift profit from NZ to US vice versa, therefore tax shifting (to country with lower tax rate) Example: o Entity A (tax rate 0%) Entity B (tax rate 28%) are related parties  Differences between jurisdictional tax rules and rates create the opportunity for related entities to shift income from a higher tax jurisdiction to a lower tax jurisdiction  Shift by B charging A and inflated service fee  This creates tension with tax authorities which lose out on tax revenue.

TP rules: o Trying to prevent tax avoidance and evasion of MNE  Ensuring taxable profit are reported in the jurisdictions where the value is derived

Legislation and guidelines: -

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NZ TP rules follow closely with the OECD TP guidelines July 2018 GC 6(1) ITA o substitute an arm’s length consideration in the calculation of a person’s net income if the person’s net income is reduced by the terms of a cross border arrangement. GC 6(2) ITA:

Scope of the transfer pricing rules affect transactions among companies that are considered associated parties GC 13 ITA: o Stipulates 5 methods that can be used to determine arm’s length consideration. o Aim to compare third party transactions with related transactions o

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Cost Plus Method: -

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Applicable: Provision of services, Sales of semi-finished goods Approach: Appropriate mark-up on costs o NZ Sub manufacture product, which sells overseas to related party. What should the TP be? o Try to find some evidence o Similar margin within the industry Works by comparing the companies gross profit to overall costs o o

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Works out the costs incurred by the company in a controlled transaction Then a mark up is added based on the market = Arm’s length TP

Approach: Subtract an arm’s...