Mutual understanding restored: Tax Bill provides welcome certainty for not-for-profits

By Phillip Claridge 


In February 2025 the income tax positions of many not-for-profit organisations without specific tax exemptions were thrown into doubt. This followed an interpretive change flagged by Inland Revenue that, if it were correct, would make membership subscriptions for these organisations taxable. This potentially impacted a wide range of entities including unions, professional organisations and residents’ associations.

In a positive development, the Taxation (Annual Rates for 2026–27, FBT Simplification, Foreign Investment Funds, and Remedial Measures) Bill (the Bill) brings us closer to drawing this issue to a close by proposing a sensible legislative solution. If the Bill is enacted as drafted, most affected not-for-profits should be able to continue treating genuine membership subscriptions as non-taxable. The position in relation to income from trading and other activities is unchanged, so these amounts remain subject to the ordinary income tax rules (that is, generally taxable).

The Bill also proposes a significant increase in the statutory deduction available to smaller taxable not-for-profits, from $1,000 to $10,000, together with a corresponding income tax return filing exemption.

How did we get here?

Many not-for-profits that do not qualify for a specific income tax exemption, such as the exemptions for registered charities and qualifying amateur sports bodies, are treated as “mutual associations” for income tax purposes.

The common law principle of mutuality recognises that a person cannot make a taxable profit by trading with themselves. By extension, amounts contributed by members to an association for their collective benefit also should not be income of the association.

New Zealand’s tax legislation overrides much of the mutuality principle. In particular, income from trading activities can be taxable even when the transaction is with a member. However, mutuality continues to apply to genuine membership subscriptions, fees and levies paid as a condition of membership rather than as consideration for particular goods or services. That is, for mutual organisations, these member subscriptions should not be subject to income tax.

In April 2025, Inland Revenue released a draft operational statement proposing a significant change in approach (this draft had been signalled in February that year). Relying on the Australian decision in Coleambally Irrigation Mutual Co-operative Ltd v FCT, Inland Revenue suggested that mutuality could not apply where an organisation was prohibited from distributing funds to its members.

That interpretation was potentially far-reaching. Non-distribution clauses are standard for many New Zealand not-for-profits and are effectively required for societies incorporated under the Incorporated Societies Act 2022. Inland Revenue’s proposed approach could therefore have made subscriptions taxable for a large number of organisations, even though those subscriptions had historically been treated as non-taxable.

We discussed the potential impact in our June 2025 Tax Alert.

What does the Bill propose?

The Bill proposes a new section CW 44B of the Income Tax Act 2007 (ITA 07). Broadly, under this section an amount derived by a qualifying not-for-profit organisation will be exempt income if it would not have been income but for the organisation being prohibited from making distributions to its members.

The accompanying commentary confirms that the amendment is intended to override the effect of Coleambally in New Zealand. It applies to organisations meeting a new definition of “not-for-profit organisation”, including incorporated societies registered under the Incorporated Societies Act 2022.

Importantly, the Bill does not make not-for-profits generally exempt from income tax. Rather, it preserves the expected treatment of amounts that would have been non-taxable under mutuality if the organisation had not been subject to a non-distribution requirement.

If enacted as it stands, this means that:

• Genuine membership subscriptions, fees and levies that would otherwise fall within the mutuality principle (but for a prohibition on distributions) should be exempt income, that is, non-taxable
• The associated expenditure will generally be non-deductible
• The mutuality rules do not apply to income from other sources (including member trading activities) and these amounts will generally be taxable under the ITA 07.

The change would apply from the 2027–28 income year. 

The $10,000 statutory deduction

The Bill also proposes to increase the statutory deduction available to eligible taxable not-for-profits under section DV 8 from a maximum of $1,000 to a maximum of $10,000.

The new deduction will be more tightly targeted:

• An eligible not-for-profit with net income of $10,000 or less, calculated before the deduction, will generally be able to deduct an amount equal to that net income
• An organisation with net income exceeding $10,000 will receive no statutory deduction
• Associated not-for-profit bodies, such as regional or district branches of a national organisation, will not each qualify separately for the deduction.

Eligible organisations with net income of $10,000 or less before the deduction will also generally not be required to file an annual income tax return unless Inland Revenue specifically requests one. We expect this should simplify compliance obligations for small not-for-profit organisations that don’t already benefit from a tax exemption.

Next steps and further guidance?

Overall, the Bill lands in a sensible place. It preserves the established treatment of genuine membership subscriptions, removes an unnecessary threat to organisations with standard non-distribution clauses, and provides meaningful compliance relief for smaller not-for-profits.

The proposals do provide a timely reminder that the longstanding position in New Zealand is that most income derived by not-for-profits is taxable, unless the organisation benefits from a specific tax exemption. This means, for example, that charges to members for goods, events or services all generally fall within the income tax net. It is important that all not-for-profits turn their minds to their income tax obligations, and do not simply assume that they benefit from an exemption.

While the proposed change draws a line under the treatment of member subscriptions, the rules in this area can still be challenging to apply. In our view it is important that Inland Revenue provides updated practical guidance alongside the legislation, covering both the treatment of income and also how expenses should be treated (including expenses in the nature of ‘overheads’ that are connected to both taxable and exempt income). Immediately prior to the publication of this Tax Alert, Inland Revenue issued a draft operational statement (ED 0265 – available here) which, in its current form goes some way to doing this. If you would like to comment on the draft statement consultation closes on 11 December 2026. 

If you would like to discuss how the proposals may affect your organisation, please contact your usual Deloitte adviser.