A charity must usually be registered with the Charities Services in order to qualify for the income tax exemption for charities (Income Tax Act 2007, s CW 41 and CW 42) of the Income Tax Act 2007. Registered charities are also treated as “donee organisations”, which means that donors can be entitled to tax relief on donations made to these entities.

Charities that are de-registered as charitable trusts, whether or not the de-registration is voluntary, are not entitled to the tax exemptions that apply to registered charities. However, questions have arisen regarding the timing of the loss of charitable status and when this has effect for tax purposes.

New rules

New rules have been enacted to clarify the tax law that applies to charities so that deregistered charities and their donors have a greater level of certainty as to their tax obligations. These rules also protect the integrity of the tax base by ensuring the tax concessions that apply to charities that are intended to benefit.

The new rules:

• clarify how the general tax rules (including the income tax, fringe benefit tax, and donations tax relief regimes) apply to deregistered charities
• establish the opening values of assets or consideration for any financial arrangements held by a deregistered charity when it becomes a tax-paying entity
• prescribe specific timing rules for the application of the taxing provisions, and
• outline new requirements for the treatment of the accumulated assets of deregistered charities.

 References:

• The Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014, s CV 17, CW 41, CW 42, HC 31(1B), HF 11 (3), HR 11, HR 12 and YA 1
• Officials’ issues paper, “Clarifying the tax consequences for deregistered charities” (July 2013)

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