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Charities, Income Tax Act 2007

The incredible lightness of tax of being a charity

Blind Foundation bulldozes $8m Parnell house, creates carpark is an emotive headline from the New Zealand Herald published on 27 July 2019  that highlights the disconnect between registration as a charity and the tax benefits that flow from this, and highlights the reality that registration as a charity does not obligate a charity to distribute its tax-free income in accordance with its charitable purposes.

The financial accounts for the Blind Foundation shed some light on the bigger picture.  Charities can own and operate businesses and invest donated funds as the charity deems appropriate.

The tax benefits accorded to charities can be contentious when a non-charitable business is competing in the same market against a charity.  underpinning this is that the profits of a non-charitable business are for the ultimate benefit of the business’ shareholders; but with a charity the ultimate profits are to benefit the purposes of the charity.  The difficulty, as mentioned above, is that there is no time-frame within which this is required, which can give a charity a distinct advantage over a non-charity.  Importantly, the tax advantages accorded to a charity require that there is no personal benefit to the charity’s founder and trustees and associated parties.  This does not prevent payment to employees and does not require that employed staff are remunerated at the parsimonious level that might be deemed appropriate given the “good works” to be carried out.

So what does this really mean?  Charities fulfill and incredibly important social role.  The register of charities enables donors and the public to examine a charity’s accounts and assess whether donated funds and charitable income are put to good use.  So what do the accounts for the Blind Foundation actually tell us?

Should we be appalled at the $8m purchase of a property that was demolished to  provide car parks (perhaps more appalling as legally blind  people cannot drive)? Or is the Blind Foundation a business that balances investment considerations against the need to support its purposes?

Observations from the Blind Foundation accounts for the year ending 30 June 2018:

  • donations exceed business revenue by over $14m (donations and legacies total $27.8m, compared with $13.2m from business activities).
  • cost of fund raising $6m, which means that donations and bequests should more properly be valued at a net of $21.8m
  • amount paid for the benefit of the purposes appears to be approximately $24.1m (this figure excludes $5.4m on account of Foundation costs, that cannot be directly related to purposes

The conclusion – more money is paid to the purposes than net non-investment funds raised, suggesting a charity that is meeting its purposes in a sustainable manner.  This analysis will not be true for all charities.  The Blind Foundation is an asset rich charity.  The purpose of this blog is to highlight the need to look behind an emotive headline to publicly available information to inform decisions with fact.

References:

  • V. Ammundsen, Taxation of Trusts (ed 3)  CCH (NZ) Limited, chapter 30
  • Income Tax Act 2007, sub-part CW

 

 

 

 

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