I’m Just About Over It!

I’m just about over it!

Personally I generally like tax – it’s the price we pay for civilisation. But these unrelenting attacks on charities and non-profits through the tax system are really starting to annoy me.

You’ll remember back in February when the IRD released an Issues Paper ( HERE) proposing to tax charities in various ways. Many of us put in a lot of time and effort (and 900 submissions) into explaining how bad most the Issues Paper proposals were. So we were relieved (if not a little annoyed) when the Government announced that proposals to tax the so-called “unrelated business income” of charities would not proceed in the 2025-26 Budget, though further work was not ruled out at the time.

Then, at the end of October, the Minister of Revenue announced work on taxing the business income of charities will not proceed. We understand from our friend, Susan Barker at Charities Law, that Ministers were concerned “the complexities, compliance costs and distortions associated with a change would impose significant costs on charitable organisations and distract them from their core purposes”.

Instead, and as we suggested, the Ministers indicated they expect IRD to “increase its enforcement efforts to make sure charity businesses are complying with the existing rules.”

Its almost as if they read our submissions! But how out of touch do you need to be not to appreciate that the costs of attempting to tax the (so-called) unrelated business income of charities would far outweigh any benefits before putting us through all that stress and cost. Thank goodness IRD did consult, and listen to the feedback.

But wait, there’s more! On 14 November, IRD released effectively a “secret” next version of the Issues Paper: Taxation and the not-for-profit sector: Targeted consultation on detailed design. It seems like they were a little taken back and over-whelmed by the sector’s response to their first effort and don’t want to have to deal with that again. And just to clamp down further on this pesky “targeted” consultation, the paper was provided to only 50 “stakeholders”, with a deadline of Christmas Eve for responses!

The latest 15 or so proposals affect both charities and other non-profits (such as incorporated societies), and represent a stunning series of ‘complicifations’ (the opposite of simplification), almost all adding compliance and admin costs and workloads, including on already stretched volunteers.

There are some positive proposals (such as increasing the tax- free threshold of non-profits to $10,000 to catch up for not maintaining its real value since 1979) but even these are linked with additional filing requirements, or proposals to improve administrative incentives for Donation Tax Credits, which will not be available to donors who file paper-based tax returns. There are some also down-right counter-productive proposals, such as the removal of modest income tax exemption from the 1,000-odd local and regional promotion bodies. And some proposals which superficially seem justified (like requiring minimum distribution rules for donor-controlled charities), are entangled with excessively complex rules that will be very expensive to comply with, and will ironically, according to Barker, encourage into the charitable sector, the very things the Charities Act was introduced to counteract, such as fraud, money laundering, and tax avoidance.

Once again the IRD Paper is remarkedly ‘evidence free’ and very thin. There is no support for what the problems are supposed to be that the proposals are expected to address. As Barker rhetorically asks, “Why would New Zealand go down a rabbit hole of complex tax rules that other jurisdictions are trying to climb out of, particularly when there is an infinitely better solution readily available?” Her principle-based alternative (which is also supported by submissions of the NZ Law Society and a host of law firms and others) is better enforcing fiduciary duties through a simple amendment to the Charities Act.

Our greatest problems stems from a fundamental misundertsanding of our sector. Non-profits are seen as a cost (with a pre-occupation of reducing “tax expenditure”), rather than as a social benefit, crucial to community well-being, and worth investing in and supporting. Its that failure to understand us, being so out of touch with what’s really happening, that annoys me most.

If you’d like a copy of the “secret” IRD paper (don’t worry its not illegal - IRD have made it clear its not confidential, just not publicly distributed) and LEAD’s submission on their proposals, just email garth@lead.org.nz

Garth Nowland-Foreman

Director, LEAD Centre for Not for Profit Governance & Leadership