The Changing Landscape for Charities: Under Fire or Under Review?

The latest changes proposed by Inland Revenue (IR) may have significant tax implications for not-for-profits, societies, trade associations, and various other community-focused organisations.

As outlined in a recently released submission paper the proposed changes will apply to tax exemptions and incentives for New Zealand's not-for-profit (NFP) sector. 

Currently, charities, benefit from tax exemptions if their activities serve charitable purposes. However, there are concerns about potential misuse of these exemptions, especially in relation to commercial activities and donor-controlled charities. The proposals aim to introduce clearer guidelines, including a public benefit test, taxation on unrelated commercial income, and stricter governance and reporting standards. The goal is to ensure that tax exemptions genuinely support public good while preventing unfair advantages and misuse in the sector. 

IR is also reconsidering its long-standing interpretation of the tax treatment of subscriptions and levies paid to these organisations. Up to 9000 clubs, societies, and associations in New Zealand could be affected if the proposed changes come into effect.

Our Comment

There is a very fine line between preserving the generous tax exemptions that enable genuine charities to do their valuable work and closing the loopholes that allow others to misuse the system. It is about finding that balance.

Whilst we agree that a review of the current rules is warranted, amending the regime should not be akin to “throwing the baby out with the bathwater”. Narrowing the scope of tax exemptions for unrelated business activities could help level the playing field between charities and private businesses, reducing concerns about unfair competition.  However, the issue may also lie in whether current rules governing charity status and by default, tax exemption, continues to operate as Parliament intended when providing the charity status.

We can see how there is public perception that transactions between a donor’s business and their controlled charities offer unfair competition advantage. However, we do not agree with the suggestion that subscriptions and membership fees for NFPs that are mutual associations should be removed, as this will mark a departure from the fundamental principle of mutuality.  Additionally, we believe that it is time to review the deduction available to NFPs. The $1,000 threshold, which may have been relevant when initially set, is no longer meaningful or sufficient.

We are also concerned with the proposed removal of the fringe benefit tax (FBT) exemption for charities, as this has long been a leverage point, allowing charities to attract talent without increasing administrative costs. 
In summary, while some of the proposed changes make sense, many of the suggestions give the impression of being another “revenue-grabbing” exercise initiated by IR. We will be including these as our standing points in our submission. 

Charity business income tax exemption

New Zealand's 29,000 registered charities often raise funds through a variety of business activities, ranging from small ventures to large commercial enterprises. Since 1940, income from these charity-run businesses has been tax-exempt if the charity’s work is carried out in New Zealand.

While some business activities are directly related to charitable purposes (like charity hospitals or schools), others, such as unrelated ventures like dairy farms or food manufacturers, also benefit from this tax exemption. The review focuses on these unrelated activities, as New Zealand's policy is considered an outlier compared to other OECD countries, many of which either limit the scope of commercial activities charities can undertake or tax business income that is unrelated to their charitable purpose. These international policies aim to protect tax revenue, prevent unfair competition, and ensure profits are directed to charitable purposes.

Donor-Controlled Charities

A "donor-controlled charity" refers to a charity registered under the Charities Act 2005, controlled by the donor, their family, or associates. These entities often take the form of charitable trusts or limited liability companies, similar to private foundations in other countries. In New Zealand, individuals can establish these charities and access the same tax concessions as widely supported charities, including donation tax credits and gift deductions.
There are currently no specific tax rules for donor-controlled charities, though medium and large charities must disclose related party transactions and report on their accumulated funds from 2024 onwards. The lack of distinction between donor-controlled and other charities raises concerns about tax avoidance and compliance, as donors can maintain significant control over the charity’s funds. Examples of abuse include circular arrangements, delayed charitable distributions, and transactions with donors or associates at inflated prices or non-market terms.

NFP and friendly society member transactions and related matters
Historically, many not-for-profits have operated under the assumption that membership subscriptions and levies are non-taxable. However, IR’s newly-released submission paper signals a shift in this approach, suggesting that some of these payments may now be subject to tax. This has sparked concerns within the community, especially as IR has not yet clarified how it intends to implement the new rules.

Why the Change?

This shift follows the Government’s broader review of charities and their tax obligations, as part of its focus on closing loopholes and ensuring fairness within the tax system. Finance Minister Nicola Willis has made it clear that the Government intends to crack down on businesses posing as charities to reduce their tax bills. There is growing pressure to ensure that tax concessions are not exploited, and that legitimate community-focused charities are not unfairly burdened by compliance costs.

While no formal decision has been made, the submission paper reflects the growing desire to make tax rules more robust, reducing the potential for loopholes and abuse. Revenue Minister Simon Watts commented that the goal is to simplify rules, lower compliance costs for smaller organisations, and reduce tax integrity risks.

Potential Impact on Smaller Not-For-Profits

The submission paper acknowledges that some small not-for-profits could face increased tax bills and administrative burdens that could affect their ability to serve their communities. Although the submission paper states that IR is keen to keep compliance costs low for smaller not-for-profits, it has not outlined how this would be achieved. The concern is that these changes could have a disproportionate impact on smaller organisations as many larger not-for-profits have already structured themselves in ways that may avoid these new tax liabilities. This further raises the concern that smaller community organisations will bear the brunt of the changes.

Business-Owned Charities in the Spotlight

The wider review is also focusing on businesses owned by charities, many of which currently enjoy broad tax exemptions. A government consultation paper revealed that 12,000 out of 29,000 charities in New Zealand reported business income in 2024. Of these, about 1300 reported expenses over $5 million, with 100 reporting expenses over $33 million. The review estimates a potential taxable profit of $2 billion from this sector, highlighting the scale of the issue.

Prime examples of businesses that could be affected include the breakfast manufacturer Sanitarium, owned by the Seventh-Day Adventist Church, and the childcare charity Best Start. The Government is concerned that certain businesses might be exploiting the tax exemption rules and has indicated that changes may be announced in the upcoming 2025 Budget.

Call for Submissions

The Government is keen to hear from the public and stakeholders on how best to address these issues. The deadline for feedback on the broader charities tax review is March 31 and any interested parties are encouraged to participate in the consultation process.

If you believe your organisation could be impacted by the proposed changes or if have specific concerns that you would like to raise, we invite you to contact us for more information or guidance on how to submit feedback to Inland Revenue. We are also happy to include your thoughts into our own submission, which will be submitted by 31 March. 

By participating in the consultation, we can all contribute to ensuring that any changes to the tax system are fair, balanced, and continue to support the important work of not-for-profit and charitable organisations in New Zealand.

Author - Galina Bell