Taxation and the not-for-profit sector: have your say

On 24 February 2025, the Inland Revenue released an officials’ issues paper (the paper) seeking thoughts on the taxation of charities and not-for-profits. The charitable sector is unlikely to be surprised by this move as this review has been clearly signalled by the Government, with an expectation of announcements being included in the 2025 Budget (being delivered on 22 May). However, the breadth of the proposals may take other not-for-profit organisations by surprise, with questions raised about the continuation of tax exemptions for many other organisations.

The paper seeks feedback on a number of questions related to three main areas, with submissions due by 31 March 2025.

1. Charity business income tax exemption

The ability for charities to run businesses which compete with the private sector has long been a point of contention, with the issue getting a head of steam since the 2023 Election.

The paper does not put forward any concrete proposals but is more interested in soliciting views on the topic. Paraphrased questions for submitters include:

• What are the most compelling reasons to tax, or not to tax, charity business income?
• If the tax exemption is removed for business income, what are the most significant practical implications?
• How can you define what business income is unrelated to charitable purposes?
• If business income is taxed, what is an appropriate threshold to carve out small-scale business activities?

The paper is focused on businesses which are “unrelated” to the charitable purpose of the organisation, with diary farms and beverage manufacturers cited as examples. The concern is also focused on charities which accumulate income for many years before applying it to a charitable purpose.

Many charities are in the position of needing to have some form of “business” to supplement variable or declining donations. The paper doesn’t elaborate on when a business is unrelated, or whether managing passive assets / investments in a professional manner amounts to a business. The paper indicates there could be relief for charities which apply business income for charitable purposes, but could require charities to maintain a special memorandum account to track how business profits have been applied.

Given charities are required to supply extensive information to maintain charitable status, charities may want to consider reviewing financial statements to identify areas of uncertainty, examples of why surpluses are accumulated for the future, current costs to comply with charities law and potential compliance costs of additional tax rules. If business and charitable activities are contained within a single entity, consideration should be given to how easily, or not, expenditure can be allocated between activities.

2. Donor-controlled charities

This chapter highlights that there are no special tax rules which relate to donor-controlled charities and this presents an opportunity for tax avoidance and other mischief (such as circular arrangements, inflated prices, significant lags in charitable activities vis-à-vis receipt of donation tax credits, etc).

The paper summarises some approaches taken in other jurisdictions to require a minimum amount of charitable actions on an annual basis (such as distributing 5% of the market value of assets each year).

Again, there is no specific proposal put forward, with the Issues Paper asking for feedback on a number of areas (paraphrased below):

• Should there be different tax rules for donor-controlled charities, and how would you define these?
• Should there be any investment restrictions, and if so, what?
• Should there be a requirement for a minimum distribution each year?

While it is understood why there could be concerns in this area, the paper doesn’t provide details of existing (non-tax) rules which already prohibit inappropriate non-arm’s length transactions.

3. Integrity and simplification

The final chapter contains proposals on some issues which may take some by surprise, with these being less well signalled in advance and having potential impacts on many organisations with no profit-making motive who are currently spared tax compliance costs.

The paper covers not-for-profit member transactions, a variety of tax exemptions for different bodies, the FBT exemption for charities, and possible simplifications for volunteers and donors.

Proposals put forward include:

• Taxing mutual associations on transactions with members and member subscriptions (this may impact 9,000 organisations);
• Removing tax concessions for friendly societies and credit unions;
• Removing specific tax concessions, mainly introduced in the 1950s. These cover local and regional promotional bodies, herd improvement bodies, bodies promoting scientific and industrial research, veterinary service bodies;
• Removing the Fringe Benefit Tax (FBT) exemption for charities;
• Treating payments of honoraria to volunteers as salary or wages rather than as schedular payments.

Many people may not be overtly familiar with the term “mutual association”, but this is a body or an association of people acting together to further an objective, which might be to share costs and to provide services to each other. Common examples of mutual associations include clubs, societies, trade associations, professional and regulatory bodies, unions and industry councils. Inland Revenue have issued a statement clarifying that the changes are not intended to apply to the over 20,000 amateur sports clubs and societies.

In relation to FBT, while there is a proposal to remove the current exemption for charities, it is also noted that there is a policy review of FBT in progress. Therefore it is difficult to assess the potential impact of this change. We recommend charities keep an eye out for, and participate in, the separate consultation on this regime when it occurs.

The paper also cross references to a recent review of Donations Tax Credits. This review showed there were problems with taxpayers being aware of the regime and a potential lack of evidence that the credit is effective at stimulating donations.

How to make a submission

This paper presents an opportunity for charities and not-for-profits to have a say on these important issues, albeit in a fairly compressed timeframe. Given the existence of an income tax exemption, many impacted parties may be unfamiliar with the process of making a submission on a paper like this. For a good submission we recommend you consider:

• Summarising the reason for your interest in the topic.
• Provide a summary of what your not-for-profit does (if relevant).
• Provide your overall views on each major topic you are interested in.
• Provide answers to some, or all, of the specific questions for submitters, to the extent you have views. Clearly showing the question and answers to these specific questions will help officials with preparing feedback summaries.
• Feedback on expected practical consequences of changes (such as expected compliance costs) or thoughts on potential unintended consequences will likely be valued by Officials more than general statements about whether the proposed are supported or opposed.
• Provide a clear executive summary or conclusion with your overall views.
• Feedback on expected practical consequences of changes (such as expected compliance costs) or thoughts on potential unintended consequences will likely be valued by officials more than general statements about whether the proposed are supported or opposed. 

It’s important to note that submissions may be made public, or can be requested under the Official Information Act 1982.

Submissions must be made by 31 March. They can be emailed to policy.webmaster@ird.govt.nz or posted to:

Taxation and the not-for-profit sector

C/- Deputy Commissioner, Policy

Inland Revenue Department

PO Box 2198

Wellington 6140

For more information please contact your usual Deloitte advisor.