LEAD's Submission to the Review of the Charities Act 2005

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LEAD Centre for Not for Profit Governance & Leadership propose that the Charities Act Review should be referred to the Law Commission for a more considered, wide-ranging and independent review, based on first-principles. Failing this we make further specific recommendations in six areas for immediate remedy of the current legislation, regarding: 

  • Clearly limiting legislative purpose; 

  • Inappropriate investigation of activities; 

  • Access to natural justice (‘trier of facts’ & appeal) and development of charity law; 

  • The obligation of advocacy; 

  • Transparency, not government control, of charity finances; and 

  • Accountability of the regulator. 

We have drawn heavily on the excellent legal and policy analysis by Sue Barker and Dave Henderson, to which we are indebted, especially for their “Review of the Charities Act 2005: Issues Paper“ (February 2019). However, we bear final responsibility for how any material is presented in this submission.

The principal author of this submission is LEAD Director, Garth Nowland-Foreman, and, in the first instance, enquiries concerning the submission or issues it raises should be directed to him at garth@lead.org.nz or 021 395532. We love to hear feedback, comments and questions.

Recommendations:

REC 1: The Charities Act should be referred to the Law Commission for a more considered, comprehensive and independent review. This will allow a proper ‘first principles’ review, including consideration of actually modernising the current archaic definition and language.

Failing the above, we make six further recommendations for immediate remedy of the existing legislation.

REC 2. (i) To avoid regulatory over-reach, the purpose of the Charities Act needs to be clearly articulated and limited. It should be specifically limited to an information and disclosure regime - facilitating the transparency of registered charities to their donors, volunteers, beneficiaries and the general public. 

(ii) Two additional purposes for the Act, which respect rather than undermine the independence and creativity of the sector, could be appropriately added to the legislation:

  • To support and sustain a robust, vibrant, independent and innovative charitable sector, and

  • To respect and protect the autonomy of charities and charities’ rights to freedom of expression, in particular their right and duty to advocate in furtherance of their charitable objectives.

REC 3. The reason Charities Services are required to ‘have regard to’ a charity’s activities is to ascertain whether the charity is continuing to act in furtherance of its stated charitable purposes over time, not to exercise a subjective vetting process in an attempt to ration the privileges of charity, nor decree how best a charity should achieve its charitable purposes. This limitation should be clearly expressed in the legislation.

REC 4. (i) Charities must be able to access a ‘trier of fact’, that is, an oral hearing of evidence, in determining important questions of fact, such as what their purposes are and whether they operate for the public benefit. 

(ii) Charities must also be able to appeal all decisions of the agency administering the Charities Act, not just those relating to registration and deregistration. 

(iii) To assist the development of the law of charities in New Zealand, the case for ‘test case litigation funding (as provided by the Australian Tax Office), as well as judicial specialisation (preferably through a specialist Charity Tribunal), should be examined. 

(v) The Attorney-General should also be involved in Charities Act litigation in a capacity of parens patria (the ‘protector of charities’, as is the case in England and Wales).

REC 5: Charities’ independence, and their right and duty to advocate in furtherance of their charitable purposes, without fear of loss of registration must be protected and promoted. 

REC 6: (i) Charities should not be required to either distribute a minimum percentage of their assets, nor provide additional reporting on their strategy, plans or actions in accumulating funds or holding reserves.

(ii) Charities’ ability to raise funds for their charitable purposes, including by way of running businesses, must also be protected and supported. Arbitrary tests or requirements should not be applied in considering the registration of Charities if they have no basis in New Zealand law.

(iii) Compliance costs should be reduced and reporting requirements, especially for the smallest charities should be simplified. Consideration should be given to raising the threshold of tier 2 entities to $5 million, raising the threshold of tier 3 entities to $500,000 and reducing the reporting for tier 4 entities (under $500,000) to an annual online fill-in-the-box financial form and simplified performance report.

REC 7: (i) An independent Charities Commission should be reinstated at least as an autonomous Crown Entity, and preferably as an independent Crown Entity. 

(ii) Whatever agency administers the Charities Act must be accountable to the charitable sector in a meaningful way, and an advisory board should be established to advise Government on policy, and advance the interests of the charitable sector. 

LEAD Centre for Not for Profit
Governance & Leadership

This submission to the Review of the Charities Act 2005 is from LEAD Centre for Not for Profit Governance & Leadership (LEAD). We are a social enterprise consisting of a consortium of professional trainers , coaches, consultants and evaluators, which works exclusively with not for profit organisations and those who fund them. Our team is led by three Directors and draws on the expertise of a growing team of approaching a dozen part- and full-time Associates. 

Over the years our team has earned a strong reputation in Aotearoa New Zealand and internationally for dedication and effectiveness in working alongside small and large organisations. We are committed to bringing out the best in individual community leaders and their organisations. Our work is funded by the non-profits we serve, local government, and family and community philanthropies in Aotearoa New Zealand and internationally, from the US-based David and Lucile Packard Foundation, to Foundation North, Rātā Foundation, Vodafone Foundation, and to McLaren Park and Henderson South Community Trust.

Our genesis is as a group of trainers who developed and implemented the ‘real world’ curriculum for graduate programmes in not for profit management for Unitec, throughout New Zealand and the Pacific for over 20 years. Since 2017, we have continued and widened our engagement in high quality and relevant leadership development for not for profit leaders. This has given us, among the three directors alone, approaching a century of experience in working with well in excess of a thousand charities and other community-benefit organisations, and their leaders. We are grateful for the privilege of doing so, and this has afforded us strategic sector-wide insight into how charities and other community-benefit organisations actually operate, the challenges they face and the impact of regulatory systems and government policies on them.

We bring a high regard for an evidence-based approach, and our team are widely published on not for profit issues (including in peer-reviewed publications), and we are involved in senior leadership positions across\ the sector. For example, amongst the three directors alone, in recent years we have been engaged in leadership roles with:

  • National Association for OSCAR, as founding leader

  • New Zealand Coaching & Mentoring Centre

  • Developing an Aotearoa New Zealand Peer Mentoring Model 

  • Board of Hui E!

  • Pacific representative on ECPAT International

  • NZ Lottery Grants Board

  • NZ Council of Christian Social Services

  • Australia and New Zealand Third Sector Research

  • Tangata Whenua, Community & Voluntary Sector Research Centre

  • Study of the Non-Profit Sector in New Zealand (as the NZ component of the Johns Hopkins International Comparative Study of the Nonprofit Sector)

  • Statistics NZ on Satellite Accounts on Nonprofit Institutions

  • Social Investment Agency on NGO Data Use & Protection

The Review We Need

The current Review of the Charities Act is actually the best part of a decade over-due, and is already at least 6 months behind its original timeline. When looking at what is now needed, it is important to remind us of some history. Rushed changes were put through to the original Charities Bill in 2004, following the select committee’s (and ultimately the sector’s) dissatisfaction with the draft bill they were given. To assuage widespread concerns that ‘fast law does not make good law’, at the lack of opportunity for full consultation on last-minute legislative changes, and to meet outstanding concerns of the sector, a ‘first principles’ review was promised within 5 years. This has not yet eventuated, and the Department of Internal Affairs (DIA) now claims the legislation is essentially ‘fit for purpose’. At least it appears that DIA has recently removed from the Review website the provocative claim that a ‘first principles’ review is thus not needed.

The final amendments to the Charities Bill (including further minor, but extensive, changes made by Supplementary Order Paper) were passed through under urgency, with all final stages occurring on one day. The comment was made in Parliament that “we do not really know what we are passing tonight, or what the implications are” (Charities Bill 3rd Reading (12 April 2005) 625 New Zealand Parliamentary Debates 19981). The Bill was also criticised for containing no regulatory impact statement, nor compliance costs statement, in breach of the Cabinet guidelines.

To make matters worse, in the 13 years since the Charities Act has been passed, without the promised review, the Act has been subject to a series of amendments which have generally been put forward by Statutes Amendment Bill, and/or rushed through under urgency without proper consultation, often against the strong opposition of the charitable sector. Many of these amendments are also replete with unintended consequences, such as section 5(2A), the disestablishment of the Charities Commission in 2012, section 18(3A), and officials’ attempt to remove charities’ rights of appeal by Statute Amendment Bill in 2015/2016.

It was soon apparent immediately after the original Act was passed that there were several unintended consequences and poor pieces of drafting-on-the-run – some of which have since been corrected. There have also been a series of knee-jerk and ad hoc changes along the way, for example how ‘the promotion of amateur sport’ was crudely added in Sec 5(2A), the surprise disestablishment of an independent Charities Commission in 2012, and ‘clarification’ that took away what had been seen as rights to review decisions, etc etc.

The current Review is not a ‘first principles’ review, as promised to assuage the rushed nature and lack of wide consultation when the Act was first pushed through. Specifically ruled out of the current Review’s terms of reference is: the definition of ‘charitable purpose’; the tax exemptions that result from registration under the Act: as well as the relationship to ‘regulation of the broader not-for-profit sector’ - all key ‘first principle’ issues. 

We share the concerns of a number of members of the Review’s own Sector User Group, who asked the Minister for the Community and Voluntary Sector, Peeni Henare, on Friday 22 February if the review of the Charities Act could please be carried out instead by the Law Commission, as was the case with incorporated societies and trusts legislation. They pointed out, and we agree, that (1) the terms of reference for this current Review are too narrow, and thus will not allow all key concerns to be properly addressed, (2) the proposed timeframe, of having all policy work completed by August this year (so that legislation can be passed before the 2020 election), is now far too tight, and (3) it is essentially an ‘internal’ review only, with limited independence, as it is being carried out by a different section of the same government department responsible for the administration of Charity Services (now that the quasi-independent Charities Commission has been abolished and many of its responsibilities transferred to a unit within the Department of Internal Affairs). 

The big risk in this current Review is not seizing the opportunity to modernise the Act, and, in the rush and narrow focus, actually making things worse for charities and the communities they serve. The issues in this area of law are complex, and their impact far-reaching. It is likely to be more cost-effective (and prudent) in the long run to take the time needed to complete this review properly. This is an important sector – crucial to this country’s economy and society. It deserves proper attention – not a once-over-lightly cursory review, failing to address ‘first principles’ a decade late after a ‘first principles’ review was promised. The Law Commission did a good job in its review of incorporated societies, and a genuinely independent and thorough review under the auspices of a body like the Law Commission would also help with rebuilding trust in the regulatory environment.

This will enable a more comprehensive review to consider the current archaic , deficit-focussed language in the definition of charitable purpose, based on the 500 year old Elizabethan four Heads of Charity. Much of this language as well as the scope of the definition is outdated, and no longer is consistent with recognised ‘good practice’ of a strengths-based, well-being approach (which the current Coalition Government is also currently working to implement throughout all policy areas). The traditional definition:

  • Is expressed in archaic and inappropriate language;

  • Does not represent modern good (strengths-based) practice in community benefit, and risks undermining these approaches;

  • Often cuts across traditional ‘community benefit’ practices for Te Ao Māori and Pasifika and other non-Anglo-Saxon cultures;

  • Fails to recognise social enterprise, or aspects of it that may be primarily of community benefit; and

  • Confuses objects (ends) - such as alleviation of poverty - with methods (means) - favouring, in practice, ‘band-aid’ ameliorative approaches over preventative or public policy-oriented approaches, even if they are more effective in achieving the charitable purposes.

REC 1: The Charities Act should be referred to the Law Commission for a more considered, comprehensive and independent review. This will allow a proper ‘first principles’ review, including consideration of modernising the current archaic definition.

Clearly Limiting Legislative Purpose

When the Bill was first going before Parliament, it was argued by some of us at the time that this was ‘a solution in search of a problem'. As noted above, in response to hundreds of submissions, the original proposed Bill was almost completely rewritten at Select Committee stage – almost unheard of these days, and generally a recipe for poor drafting, all the more so when rushed through under Urgency, without proper consultation on the major revisions, as it was in this case.

The key problems with the previous arrangements as administered by Inland Revenue (prior to the Charities Act), were the lack of a comprehensive register, the lack of reporting obligations, and the lack of certain and simple processes for dealing with an organisation established for charitable purposes that may no longer be pursuing charitable purposes. Most in the sector were willing to accept an information and disclosure regime to address these specific limitations. Instead, since the Act was passed, we have had ‘purpose creep’, with new more far-reaching objectives added to the Act’s purposes. For example, when the Charities Commission was summarily abolished, and effectively replaced by a unit in DIA, two objectives of the now defunct Commission were just elevated and tacked on as additional purposes of the overall legislation. These included potentially interfering and controlling functions of the more subjective ‘promoting public trust and confidence in the charitable sector’ and especially the most insidious ‘promoting the effective use of charitable resources’. These new objectives appear to have been taken by Charities Services as a driver to impose greater controls on the sector. This represents regulatory over-reach, and a purpose that has either been rejected in most comparable jurisdictions (see, for example, the recent review of the Australian Charities legislation, Strengthening the Purpose: Australian Charities and Not for profits Commission Legislation Review 2018, pages 25-26) or assessed as a dangerous failure (for example, the same review concluded that an equivalent object in England and Wales was also found not to have had any positive impact on the charities sector in the UK.) It is a basic principle of good governance that an organisation’s own board should be responsible for determining effectiveness, not an outside body - whether an independent regulator, let alone a government agency. 

The sector supported the Charities Commission having a function of promoting public trust and confidence, envisaging that the Commission would be able to draw on data about the sector using the register, so as to respond in a balanced way to negative media focus on a particular charity or group of charities. This would enable a more balanced public perception of the sector. However, this has essentially not happened. Lifting these objectives to the overall purposes of the legislation has been used to effectively change their meaning and ‘control and colonise’ the sector.

The original intention was that the purpose of an oversight regime was to ‘weed out’ ‘bad’ charities (those that engage in fraud, tax avoidance, money laundering etc.) in order to maintain confidence in the vast majority of legitimate charities, who should be allowed to go about fulfilling their charitable duties as they set think fit. Beyond ‘serious wrong doing’ (as defined in Section 4 of the Act), we should be relying on the disinfectant power of ‘sunshine’ - an ‘accountability of a thousand eyes’ that comes with the disclosure of information by the registered charities and its exposure to public scrutiny. In this way all stakeholders may determine which charities they wish to support, and which they do not. We do not need more top-down, centralised control by a government agency determining which charities are and are not worthy of public support. 

In considering additional possible objectives, it is quite legitimate for a regulatory body to have a function of supporting and sustaining a robust, vibrant, independent and innovative sector - as provided for in the second objective of the Australian Charities and Not-for-profits Commission Act 2012. 

Without this wider purpose behind the information and disclosure regime there is a risk that the sector is essentially regulated and controlled, as a ‘loophole’ that needs to be contained and constrained, rather than a positive part of the social fabric in its own right that should be respected and supported to flourish.

For avoidance of doubt, as discussed in more detail below, and especially given the practical difficulties the way the current regulatory regime is being implemented, the government parties’ avowed intention of protecting the independent advocacy role of the sector should also be explicitly enshrined as an additional objective in the legislation.

REC 2. (i) To avoid regulatory over-reach, the purpose of the Charities Act needs to be clearly articulated and limited. It should be specifically limited to an information and disclosure regime - facilitating the transparency of registered charities to their donors, volunteers, beneficiaries and the general public. 

(ii) Two additional purposes for the Act, which respect rather than undermine the independence and creativity of the sector, could be appropriately added to the legislation:

  • To support and sustain a robust, vibrant, independent and innovative charitable sector, and

  • To respect and protect the autonomy of charities and charities’ rights to freedom of expression, in particular their right and duty to advocate in furtherance of their charitable objectives.

Inappropriate Investigation of Activities

Section 18(3)(a) of the Charities Act is a specific example of how poorly drafted legislation-on-the-run is giving rise to unintended consequences. The legitimate reason for a regulator to ‘have regard’ to registered charities’ activities under this section should be limited to determining whether the charity is continuing to act in furtherance of its stated charitable purposes over time. This was the rationale discussed at the time. It was not intended to be a means for a government agency to vet what are legitimate activities for a charity, nor to ration the privileges of charity based on changes in government policy

Charities are independent community entitles, usually intended to exist into perpetuity. It for charities to determine how to best further their stated charitable purposes from time to time, and they should be protected from undue government interference when doing so.

This view was strongly supported by the 662 respondents to the Independent Community Consultation to Inform the Review of the Charities Act (Survey Report, May 2019), where 37.27% agreed and a further 34.38% strong agreed:’In principle, it is for charities to determine how best to further their charitable purposes, not DIA Charity Services.’

REC 3. The reason Charities Services are required to ‘have regard to’ a charity’s activities is to ascertain whether the charity is continuing to act in furtherance of its stated charitable purposes over time, not to exercise a subjective vetting process in an attempt to ration the privileges of charity, nor decree how best a charity should achieve its charitable purposes. This limitation should be clearly expressed in the legislation.

Access to Natural Justice (a ‘Trier of Fact’ & Appeal Rights) and Development of Charity Law

Most charities that are deregistered or declined registration or otherwise adversely affected by decisions of Charities Services are unable to access justice under the current framework; this is causing New Zealand charities law to become distorted.

The current decision-making framework, since the abolition of the Charities Commission and its role being split across the Charities Registration Board and Charities Services, was cobbled together and rushed through under Urgency, based on an original framework that was designed for a different structure. The current framework is replete with unintended consequences, including the denial of natural justice to charities.

As the Law Commission noted in the context of disputes procedures for incorporated societies, the principles of natural justice can require an oral hearing. This is problematic, as neither the Board nor Charities Services has ever held an oral hearing. Charities, like everybody else, need to be able to access an oral hearing of evidence (a “trier of fact”).

Under the regime that applied before the Charities Commission, cases would arise primarily under the income tax legislation (and as a result disputes would fall under the well-developed, statutory tax disputes process. Part 4A of the Tax Administration Act 1994 provides an elaborate process for determination of such disputes. For example, Part 4A requires issues, facts, evidence and propositions of law to be thoroughly canvassed, through notices of proposed adjustment, notices of response and statements of position, before a matter even proceeds to litigation. Even then, only an outline of the facts and evidence are required, and if the matter does proceed to Court, evidence is not prevented from being adduced simply because it was not provided earlier: even after a full disputes process, taxpayers are not restricted in the evidence they can produce in challenge proceedings to evidence that had been previously provided. Taxpayers are also able to avail themselves of the processes of discovery and inspection in any such challenge. They are also able to cross-examine the decision-maker.

The Court of Appeal has confirmed that, if the original Charities Bill had proceeded in the form in which it was introduced, the District Court Rules at the time would have permitted the District Court to rehear the whole or any part of the evidence, and the Court would have had “full discretionary power to hear and receive further evidence on questions of fact, either by oral evidence or by affidavit”.

By contrast, appeals to the High Court are usually conducted as a rehearing. The absence of any wording in section 59 regarding the nature of the appeal means that appeals under the Charities Act are interpreted as general appeals subject to Part 20 of the High Court Rules. Part 20 of the High Court Rules precludes appellants from having any automatic right to present any evidence to the Court that was not before the decision-maker (in this case, Charities Services and the Charities Registration Board) when it made its decision. Part 20 also requires evidence to be presented by affidavit, rather than by witnesses giving oral evidence and being available for cross-examination. These requirements are strict, but they are based on an assumption that a full oral hearing of evidence has already been undertaken at first instance in the Court or Tribunal appealed from. These requirements are also based on an assumption that the Court or Tribunal appealed from was adjudicating a dispute between two parties. However, neither is the case under the Charities Act. The Charities Registration Board does not adjudicate a dispute between two parties, and neither the Department of Internal Affairs nor the Charities Registration Board conducts an oral hearing.

The nature of the hearing to be conducted on an appeal under the Charities Act is of particular significance because the question of whether an entity qualifies for registration often turns on questions of fact. For example, in order to determine whether an organisation’s purposes are charitable, it is first necessary to determine what those purposes are. This is a question of fact. Whether any particular purpose operates for the public benefit (a key factor in determining whether that purpose is charitable) is also a question of fact, to be determined, on a case by case basis, by forming an opinion on the evidence. Facts are established by evidence, including by calling witnesses, including expert witnesses, and making them available for cross-examination where appropriate. The process of testing evidence and establishing facts materially assists the Court in its decision-making by providing a sound evidential platform from which to make decisions.  

Applying the High Court rules to appeals under the Charities Act effectively means that charities’ ability to access a trier of fact, in undertaking the often difficult task of proving that their purposes are charitable, appears to have been inadvertently removed altogether. 

There is no indication in any of the material surrounding the Charities Bill (2004) that, in changing the words ‘District Court' to ‘High Court’, Parliament intended to remove charities’ right to access an oral hearing of evidence. The removal appears instead to have been an unintended consequence of the Select Committee’s attempt to strengthen charities’ rights of appeal by providing a right of appeal to the High Court rather than the District Court. As discussed above, the Charities Bill was almost completely rewritten at Select Committee stage, and then rushed through under Urgency without proper consultation.

The current position also has other downstream consequences. The High Court only considers the evidence that was submitted as part of the original application to the Board. Special reasons are required before new evidence may be brought before the Court. This means that charities need to present material before Charities Services and/or the Board as if they are preparing for a High Court trial

It also means that charities have no means of adequately testing the material Charities Services finds from internet searches, whether that material, and the conclusions drawn from it, are correct, and what weight should be placed on it. This places charities at a significant disadvantage that is arguably causing New Zealand charities law to become distorted. 

It also means that the Board is not supposed to appear adversarially in support of its decision, and may not appeal a decision of the High Court. These issues are potentially problematic: as noted by the High Court, the absence of the usual tension between appellant and respondent “can sometimes lead to poor decision-making and that should be avoided”. However, these are symptoms of the current framework. To address these symptoms without addressing the underlying cause (the current absence of a trier of fact) has the potential to make a fundamentally flawed framework even worse. 

The absence of access to a ‘trier of fact’ is particularly problematic because the question of whether a purpose is charitable often turns on questions of fact, as discussed above. The inability to call and test evidence at the hearing of the appeal in Charities Act cases means that Courts often simply do not have the evidence they need to make a decision as to whether a charity is eligible for registration. This has led to an unhelpful development whereby Courts are referring cases back to the Charities Registration Board for reconsideration in light of their judgment. 

This causes further cost, uncertainty and delay for the affected charities (see for example Re Greenpeace of New Zealand Inc [2013] 1 NZLR 339 (CA), Re Greenpeace of New Zealand Inc [2015] 1 NZLR 169 (SC) and Re Family First New Zealand [2015] NZHC 1493 (30 June 2015)). In both the Greenpeace and Family First cases, the result of the Board’s reconsideration was to reach the same conclusion as previously. Family First appealed its second deregistration decision, but was unsuccessful in the High Court. However, that decision is now under appeal to the Court of Appeal. The net result is that 6 years and two Court cases after originally receiving a notice of intention to deregister, Family First still does not have a final decision as to whether it is entitled to remain on the charities register. Concern about the Family First decision has also reached Australia, and has led the Australian government to announce in December 2018 that it would amend section 11 of the (Australian Commonwealth) Charities Act 2013 to clarity that advocacy of a ‘traditional’ view of marriage would not, of itself, amount to a ‘disqualifying purpose'. The intention is to remove uncertainty in Australia following the New Zealand High Court decision. 

It would both encourage the more effective use of charitable resources, and the development of the common law on the definition of charitable purpose, for charities to be able to have a full oral hearing of evidence in appeals before the High Court. This would also bring the legislation in line with Parliament’s original intent.

In summary, Charities need to be able to appeal all decisions made under the Charities Act (as is the case with the Incorporated Societies Act exposure draft and all other comparable legislation), not just those relating to registration and deregistration. 

The burden of developing the law of charities in New Zealand currently falls on individual charities challenging decisions under the Charities Act. There is a case for test case litigation funding (as provided by the Australian Tax Office), as well as judicial specialisation, preferably through a specialist Charity Tribunal. Eighty-three (83) per cent of respondents to the Independent Community Consultation to Inform the Review of the Charities Act (Survey Report, May 2019) believe it would be helpful for charities to be able to access an independent, specialist Charity Tribunal, along the lines of the Taxation Review Authority.

The Attorney-General also needs to be involved in Charities Act litigation in a capacity of parens patriae, the “protector of charities”, as is the case in England and Wales. It is important to “look after” the definition of charitable purpose and ensure it is developing correctly. This is particularly important because Charities Services appears to be focused on reducing the number of charities on the basis of ‘fiscal cost’ (even though it could equally be argued that if the empirical analysis were done, charities would probably be found to provide net fiscal benefits when all factors are taken into account). 

REC 4. (i) Charities must be able to access a ‘trier of fact’, that is, an oral hearing of evidence, in determining important questions of fact, such as what their purposes are and whether they operate for the public benefit. 

(ii) Charities must also be able to appeal all decisions of the agency administering the Charities Act, not just those relating to registration and deregistration. 

(iii) To assist the development of the law of charities in New Zealand, the case for ‘test case litigation funding (as provided by the Australian Tax Office), as well as judicial specialisation (preferably through a specialist Charity Tribunal), should be examined. 

(iv) The Attorney-General should also be involved in Charities Act litigation in a capacity of parens patria (the ‘protector of charities’, as is the case in England and Wales).

The Obligation of Advocacy

Charities Services approach to advocacy by charities has become a leash around the neck of the sector, retaining its effective implementation of individual organisation’s charitable purposes, and having a chilling effect way beyond the individual cases it has pursued. 

For example, many in the community consultations (Survey Report, May 2019) (wrongly) believed that registered charities are not able to advocate in support of their charitable purposes, despite firm views that they should and need to be able to as a necessary activity. Many felt the way that Charity Services currently define advocacy in relation to registration requirements negatively impacts the core work of charitable organisations in New Zealand.

The terms of reference for the current Review specifically include “the extent to which registered charities can advocate for their causes or points of view”. The terms of reference are asking the wrong question: the question should be, “how can the legal framework best support charities to advocate in furtherance of their charitable purposes”.

Kevin Kearns, one of the world’s leading experts on nonprofit and public sector accountability, identifies, in Preserving the Public Trust in Public and Nonprofit Organisations (San Francisco: Jossey-Bass. 1996) four dimensions of accountability. The first two are well known and widely appreciated - regulatory & contractual compliance, and stakeholder responsiveness. The third dimension refers to calculated risks and entrepreneurial activities to make the most of available resources (financial,  human, physical, and intangible), and has some implications for the discussion about ‘businesses’ operated by charities. It is the fourth dimension, however, which is of most interest to the current discussion. Kearns argues that advocacy is not just an optional extra (let alone something to be limited or constrained) but actually an obligation of all public benefit organisations, including charities. This is in part as a reciprocal responsibility for the privilege such organisations often have in being part of people’s and communities’ lives when they may be at their most vulnerable. The obligation is whenever these organisations come across laws, policies, or activities that are not working for the beneficiaries they serve, they cannot ignore such systemic failures but need to advocate on them, as forcefully as they are able, to who-ever has the power and/or resources to address the concern. They cannot be held responsible for achieving the change that is in the hands of others, but Kearns argues they should be held accountable for taking the issue to whoever has the power and resources to address the concern. This may be at an implementation level, at a policy level, at a budget level, or at a legislative level.

From Kearns’ point of view such advocacy in pursuit of charitable purposes should not be just a ‘permitted’ activity of charities - but a required one in terms of fulfilling their accountability obligations. If we follow this argument to its logical conclusion, the failure of a charity to take active steps to raise a systemic issue would be more properly a ground for reregistration, than doing so! Neither Kearns nor we would suggest that failure to advocate should be regulated, but certainly part of ensuring the accountability of charities is expecting and supporting them to advocate in furtherance of their charitable purposes. 

Advocacy is a key aspect of a vibrant civil society and plays an important role in the development of social policy. Especially with the involvement of community benefit organisations, it allows a wider range of New Zealanders to voice their concerns and influence public policy and legislative development. The role of advocacy by charities is widely acknowledged as integral to community wellbeing (for example, by the 2018 Australian Charities Review). Or as the UK House of Lords Select Committee on Charities observed: “Charities are the eyes, ears and conscience of any society; advocacy is a central part of their work and a sign of a healthy democracy… advocacy is an important and legitimate part of their role”

Unfortunately the current regulatory regime not only fails to encourage accountability to advocate for change when system failure is identified, it is not even neutral. Charities Services’ interpretation of the Supreme Court decision in Greenpeace is complex, highly subjective and unworkable in practice. It would be disastrous for charities’ ability to advocate for their charitable purposes and our democracy if there was any move to codify Charities Services’ wrong-headed interpretation of the Supreme Court decision. It would also be inconsistent with both Labour and Green Party policy, which is to support the independence of community sector advocacy, and to ensure that charities can engage in advocacy without fear of losing their registered charitable status. It would be inconsistent with Parliament’s expressed intent when introducing the original legislation.

It is accepted around the common law world that charities cannot engage in partisan political activity (that is supporting political parties or candidates for public office). Beyond that, advocacy is an important and legitimate part of charities’ role and a sign of a healthy democracy: seeking peaceful orderly change is itself in the public interest in a participative democracy like New Zealand. 

Advocacy is an activity, not a purpose. The question with respect to advocacy is whether it is carried out in furtherance of the charity’s stated charitable purposes. If it is, then there should be no difficulty. That is the law of New Zealand, and it should be applied by Charities Services. (Note that the terms of reference are framed incorrectly, representing a fundamental misunderstanding from the officers responsible for its drafting: charities advocate in furtherance of their charitable purposes, not their “causes or points of view”.) 

REC 5: Charities’ independence, and their right and duty to advocate in furtherance of their charitable purposes, without fear of loss of registration must be protected and promoted. 

Transparency, Not Government Control, of Charity Finances

Ability to accumulate assets

In some other jurisdictions, notably the United States, ‘private foundations’ (usually certain grant-making bodies) are required, under complex rules and with a complicated formula (necessitated by the wide variety of circumstances that need to be taken into account) to ‘distribute’ a minimum 5% of the value of their net investment assets annually - either by grants or eligible administrative expenses.

First, it should be noted that these, the most intrusive of rules in the US, only apply to ‘private foundations’. If an organisations receives significant public donations or government funding they are exempt. Further, several commentators have noted that it inadvertently has led to the minimum becoming the norm or even the maximum - effectively reducing funds distributed - the direct opposite of the regulation’s intent. Finally, although with little benefit (especially when distribution levels are set low enough to not cause hardship for a wide variety of circumstances), these requirements can add significantly to the reporting and regulatory burden.

Given the costs and relative ineffectiveness of minimum distribution rules, it is sometimes suggested that charities should publicly justify any reserves that they hold. This does little to reduce (and may even increase over minimum distribution requirements) the reporting burden, without necessarily increasing transparency. If a charity wishes to explain why they are accumulating funds or why reserves may be important, they can currently do so. At the same time transparency is already achieved by current reporting and disclosure requirements. This leaves charities, and their donors to independently make their own decisions about what is needed, who they wish to support, and on what criteria - rather promoting de facto criteria that may or may not be helpful in particular circumstances.

Treatment of charity businesses

Another issue of ‘regulatory over-reach’ arises in the context of charities running businesses. Under New Zealand law, charities are able to run businesses to raise funds for their charitable purposes: the question is not how the funds are raised, but rather that all funds raised must always be destined for charitable purposes. 

Despite this, Charities Services applies the following rule: Charities that seek to raise funds through business activities need to clearly distinguish their business activities from their charitable purposes. They must also: (a) Show that the business is capable of making a profit to go to charitable purposes; and (b) Show that the charity does not provide any resources to the trading body at less than market rates.

Despite Charities Services imposition of this test, there is no legal authority for this rule. It is simply a rule that Charities Services has unilaterally decided to apply. As a result, Charities Services’ approach could see many good charities deregistered or declined registration, even though they meet all the legal criteria for registration. This in turn can severely hamper charities in their efforts to raise funds for their charitable purposes, and ultimately to become self-sustaining. It represents a particular stumbling block for new emerging forms of community benefit organisations, such as the development of charitable social enterprises.

In an environment of increasing costs, increasing demand for services, and diminishing revenue streams, Charities Services’ approach is unhelpful, and counterproductive for New Zealand society as a whole. 

Charities Services’ approach is also not lawful. New Zealand is governed by the rule of law. Laws are promulgated by Parliament following a democratic process. They are not made by Charities Services. Charities that meet the legal requirements for registration should be able to register. 

Regulatory Burden

Under External Reporting Board standards enforced by Charity Services, there are four levels of financial reporting requirements of increasing complexity, primarily dependent on the financial size of the entity. Charity Services (2018) note that only 58% of tier 4 charities (the lowest standards for the smallest entities) successfully meet their minimum financial reporting standards (compared to 81% for tier 3, 91% for tier 2, and 100% for tier 1 entities). 

Community consultations for this Review (Survey Report, May 2019) also found that reporting and administrative requirements are seen as problematic, especially for tier 3 and tier 4 charities.

This failure is occurring despite training, information and other extensive efforts by both Charity Services and the External Reporting Board. Rather than push for even more training, information and other efforts, it is time to examine the appropriateness of the standards and the sizes of entities to which they apply. 

While it is true that tier 4 entities are only required to comply with a simple, cash-based standard. This (the simplest) Standard is over 30 pages long, with another 46 pages of guidance. 

There are good reasons for requiring some level of compliance with minimum standards to assist in transparency and accountability. However, this needs to be balanced against other factors including the compliance time, cost, capability and risks to charities - especially the smallest of them. On balance, we consider that there is merit in increasing the levels at which different tiers apply and creating a new reporting tier with simpler reporting requirements for the smallest charities. 

Some accountants and others with limited experience of actually running small charities have argued that it is crucial to keep the current standards as a principle, despite the evidence that they are not working. For example it is argued that the smallest charities should not have reduced requirements as they represent 71.1% of registered charities, and as a result this could significantly undermine the accountability of the whole charitable sector. However, this ignores the important principle of proportionality. As research presented to the 2019 Charities Law Association of Australia and New Zealand Conference, Wellington, by Smith (2019), an audit partner at Grant Thornton, demonstrates, while there are many small and very small charities, they control only 3.95% of total  charitable assets and 3.57% of charitable annual income. 

In other words, even if tier 4 charities were completely exempted from any requirements, it would not effect more than 96% of charitable income or assets. And of course a simplification in reporting requirements will not put all the assets or income of the smallest charities at risk. In fact, if simpler reporting requirements mean that more, or preferably most, of the smallest charities can actually meet the reporting requirements, then transparency and accountability should, in fact, be improved. This is no trivial matter, as the vast majority of charities that have lost their registration, have done so as a result of not meeting reporting requirements. 

Temptation to add even further compliance requirements - for example, imposition of  governance or other new standards, minimum distribution of funds requirements, etc   - no matter how well intentioned, should be resisted. If the imposition of increased compliance burden leads to less charities being able to fully comply with all reporting requirements, it actually can end up reducing transparency and accountability, and to the extent that it squeezes out charitable effort, it could easily also end up reducing the social good and community benefit that charities can offer.

REC 6: (i) Charities should not be required to either distribute a minimum percentage of their assets, nor provide additional reporting on their strategy, plans or actions in accumulating funds or holding reserves.

(ii) Charities’ ability to raise funds for their charitable purposes, including by way of running businesses, must also be protected and supported. Arbitrary tests or requirements should not be applied in considering the registration of Charities if they have no basis in New Zealand law.

(iii) Compliance costs should be reduced and reporting requirements, especially for the smallest charities should be simplified. Consideration should be given to raising the threshold of tier 2 entities to $5 million, raising the threshold of tier 3 entities to $500,000 and reducing the reporting for tier 4 entities (under $500,000) to an annual online fill-in-the-box financial form and simplified performance report.

Accountability of the Regulator

In the original Charities Bill, the Charities Commission was structured as a Crown agent. Of the three types of statutory entity created by section 7(1)(a) of the Crown Entities Act 2004 (Crown agents, autonomous Crown entities, and independent Crown entities), Crown agents have the closest connection with the Government. Crown agents are subject to a high degree of Ministerial control: members of Crown agents are appointed by the responsible Minister, and may be removed at the responsible Minister’s discretion; although Ministers are not authorised to give directions to any Crown entity in respect of a particular person, Crown agents must give effect to Government policy when properly directed to do so by their responsible Minister. Crown agents are established in situations when Government wishes to retain close control over an entity (akin to a Department), but does not want to play a role, for example, in making specific funding decisions. 

A large number of submitters on the original Charities Bill expressed concern with the proposal for the Charities Commission to be a Crown agent, that this might allow the Government to interfere with, direct, or control the Commission, and would not reflect the independence of the charitable sector from the Government. Particular concern was expressed at the prospect that the Government might be able to directly or indirectly influence the registration or deregistration of particular charities to reflect government policy.

In light of these concerns, the classification of the Charities Commission was changed at select committee stage to that of an autonomous Crown entity. Although not as independent as an independent Crown entity, the autonomous Crown entity classification meant that Ministers would only be able to direct the Charities Commission to have regard to government policy, following which the Commission and its Board would decide how best to exercise their powers to perform their statutory functions. 

The controversial and surprise proposal in 2011 to disestablish the Charities Commission and transfer its functions to Charity Services (a business unit of the DIA) was not wanted by the charitable sector and ultimately passed by only one vote. Submissions from the sector expressed strong objection to the proposal, and the lack of proper consultation regarding the disestablishment of the Charities Commission remains a source of grievance

Ironically, the result of this amendment was that the agency administering the Charities Act is now housed in an entity even closer to government than the original Crown agency classification that was so comprehensively rejected in the select committee stage for the original Bill. 

The independence of the Charities Commission was fundamental to the agreement between the sector and the Government when it was established in 2005. Its unilateral disestablishment by the previous government and tighter control within a government department just six years later represented an arrogant slap in the face for the sector, has fertilised mistrust and destroyed any fig leaf of pretence about working collaboratively with the sector.

One of the arguments at the time of disestablishing the Charities Commission was to reduce costs. Even if this were true, it does not justify a inferior structural arrangement with so many down-sides. However, the information available suggests that no savings have indeed been made to overall costs, even at a time of reduced applications for registration (now that the establishment phase ‘rush’ is over).

This change in entity has also resulted in a convoluted decision-making process between the Chief Executive of the Department and a 3-person Registration Board. 

The relationship, in practice, between the Registration Board and DIA staff is too close. Instead of the Board acting as an independent decision-maker and reaching its own view on the recommendation of the Chief Executive, as required by the Act, the Board appears to treat the DIA analysts as its own employees/advisers, and takes a (so called) ’governance’ role of merely approving the decision-making process already undertaken by the Department’s staff. This results in an unfair process and a process that does not achieve the “two-tiered” consideration of the applications required by the Act.

Another issue that arises in this context is whether the Board is sufficiently resourced to provide the independent check on Charities Services’ decision-making as was originally intended.

In particular, there appears to be a practice developing of DIA staff commonly encouraging some applicants (whom they, the DIA staff, believe might not be successful in applying for registration) to withdraw their application (or voluntarily deregister) - thereby removing decision-making from the Board, and also as a result removing from public and media scrutiny (ironically undermining the very transparency that the legislation was designed  to promote).

For example, since February 2007, approximately 9,315 charities have been de-registered (more than a third of those currently registered - so this represents quite a major ‘purging’ of the register). About half (4,774 charities) were deregistered for failure to file annual returns. While the paper work is an important part of an information and disclosure regime, only six charities (0.0006%) have actually been deregistered for ‘serious wrongdoing’ - the main rationale for having such a regulatory regime in the first place. Most of the remaining 4,535 charities have deregistered ‘voluntarily’ so it is unclear how many of these deregistrations are the result of the narrow jurisprudence of concern to many observers. Similarly with registrations being informally dissuaded from being pursued this effectively hides potential areas of conflict, individualises failure to comply, and throws a cloak of invisibility over potential  systemic biases or jurisdictional peculiarities.

Despite only six cases of ‘serious wrongdoing’ there is the wrong-headed call for ‘governance standards’ and further rules and regulations to be imposed to ‘command and control’ registered charities. This will only lead to more work for lawyers. It would be preferable instead - if indeed it is needed - that the definition of ‘serious wrongdoing’ be amended to clarify it includes “an act, omission, or course of conduct that is in breach of the charitable entity’s constituting document or not in the best interests of the charitable entity’s charitable purposes.” 

The Courts have confirmed that the Charities Act was not intended to change the definition of charitable purpose. However, Charities Services’ interpretation of the definition is much narrower than was considered to be the case prior to the passing of the Charities Act. Of course, charities law must develop, but normally it develops by evolution, not by revolution. Somehow, charities appear to have become conceptualised as a ‘loop hole’ or ‘fiscal cost’ that needs to be reduced. 

Charities Services genuinely appears to consider that New Zealand has ‘too many charities’, and that interpreting the definition of charitable purpose in accordance with the law as it existed prior to the Charities Act would ‘open the floodgates' and allow thousands of not-for-profit entities to gain access to the register. 

Such an argument is specious: no one argues that all not-for-profit entities should be able to register as charities. However, all charities that wish to, should be able to access the regime, otherwise the purpose of the regime would be undermined. The Charities Act regime is an information and disclosure regime. Conceptually, Charities Services (and the public) should want charities to be on the register, so that they are subject to the transparency and accountability requirements of the Charities Act. An increasingly narrow interpretation of ‘charity’ serves no-one, and undermines the avowed purpose of the Act.

In addition, as predicted, the disestablishment of the Charities Commission has resulted in charities-related functions that are less accessible to the public, and charities sector work is being carried out less transparently.

An exacerbating factor in this context is the question of whether charities have an effective means of appealing decisions of Charities Services and the Board, and therefore of holding them to account for their decisions, which is discussed in more detail above.

The Department of Internal Affairs should not have a monopoly on providing advice to the Minister about issues affecting the charitable sector. An Advisory Board should be established, to advise Government on policy and advance the interests of the charitable sector. Australia has an advisory board (in addition to, and as advisors to the Commissioners), and their most recent review recommended that the role of the Advisory Board be extended to interface with both the Minister and the sector: this will enable the Advisory Board to engage directly with the sector and provide the Minister with an independent perspective on issues.

Canada has also recently announced the appointment of a Permanent Advisory Committee on the Charitable Sector, which will provide advice to Government on an ongoing basis relating to important challenges and issues faced by the sector. The Advisory Committee is also intended to assist with improving communication and relations with the charitable sector. 

It does seem unfair for the Board to be tasked with decision-making under the current framework: the Board is held responsible for controversial decisions that are largely formed by Charities Services; it is not resourced to provide the independent check that was originally intended, especially against a government department that appears to have very entrenched views as to how the Act should be interpreted

Overall, there is no meaningful accountability of Charities Services to the charitable sector or the public. Lack of adequate checks and balances can and does lead to poor decision-making. Charities should certainly not be asked to fund this regime, which has turned out to be much more costly than the Commission it replaced.

REC 7: (i) An independent Charities Commission should be reinstated at least as an autonomous Crown Entity, and preferably as an independent Crown Entity. 

(ii) Whatever agency administers the Charities Act must be accountable to the charitable sector in a meaningful way, and an advisory board should be established to advise Government on policy, and advance the interests of the charitable sector. 

 31 May 2019