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The Charities Act - A Recap NZ Lawyer Magazine 16 May 2008

Mon April 14th 2014

It's been almost 2 years since the Charities Act 2005 ("the Act") was passed by Parliament and became law in New Zealand. It has also been nearly 2 years since Gaze Burt began to keep the not-for-profit community informed about this crucial legislation and apprised of developments in the implementation of the registration process.

However, it spite of the plethora of information available in the public sphere on the subject, there still appears to be some uncertainty amongst a few charities as to what changes the Act has brought about, or what is required under the new regime.

There are still a few charitable organisations that are not completely informed about the Act, or what is required in order to comply with the new regime. This is unfortunate because existing charities have only until 1 July 2008 to register under the new regime.

The new law - what does it mean?

The Act established the Charities Commission to register and monitor new and existing charitable entities. It is not mandatory for charities to register with the Charities Commission. However, registration under the new regime will have significant advantages for most Trusts and Charities in the fulness of time. While there will be greater efforts to check whether Charities abide by the terms of their Trust Deeds or Rules and operate in a transparent manner, it may be that obtaining grants and other types of Government funding will be easier for those charities that are registered under the new regime.

Why Register?

Registration enables a charitable entity to qualify for exemptions for non-business income and possibly business income in some cases. (The business income exemption is limited to income that is applied to charitable purposes in New Zealand.) However, registration will not itself confer donee status (the status allowing the donee to receive a tax rebate of $1.00 for every $3.00 donated). A charity does not have to register with the Commission to obtain donee status. In fact, the granting of donee status will continue to be administered by the IRD, and where the charity already has donee status this privilege will continue regardless of whether it registers with the Commission.

Existing charities will be required to register with the Charities Commission if they intend to retain their tax exempt status. All charities that register under the new regime will be subject to ongoing monitoring by the Commission. Failure to register results in a charitable organisation forfeiting its respective tax exemptions (other than donee status).

Where gifts are made to charitable causes, and then provided those charities receiving such gifts are registered, there will also be an exemption from gift duty. This is highly beneficial for those charities that receive large amounts of income from gifts and estate bequests.

In addition, a registered charity may apply to the IRD for exemption on paying resident withholding tax.

On the other hand, if a charity does not register then this could be a potential disaster - all of its tax exemptions, including resident withholding tax, will be cancelled. Where the charity continues to earn income (bearing in mind that donations are not income) after the cancellation date, it will have to show that income on its annual income tax returns and pay tax accordingly. For a charity making a profit this could be problem. If a charity makes a small loss or breaks even it will not incur any income tax, but resident withholding tax will still be deducted from any interest that it earns.

Registration - Don't Delay

The actual registration process involves completing standard application forms (Forms 1 and 2), and submitting these together with the foundational documents of the respective charity. The application forms for registration are available on the Charities Commission website. The forms are detailed and will require specific data about the charitable organisation in question, namely details about the organisation's objects and purposes and its officers (i.e. trustees of the Trust, etcetera). Law firms such as Gaze Burt can also assist in the actual registration process.

It is important for charities to begin to apply for registration promptly, given that the deadline is 1 July 2008. At present, the Commission is still processing applications that it received in August 2007. The official line from the Commission is that charities should allow for up to 14 weeks to process an application. This means that a charitable organisation submitting an application in June and hoping for registration by July will have just about as much success as I would in playing for the All Blacks at the next World Cup.

The Next Step

Someone once said that the only thing procrastination ever achieved was the assurance of a heavier burden tomorrow. Many charities have been finding that not only is this adage true, but that the reality of not acting in a timely way causes huge convenience and unnecessary financial cost. For those charities that have not actively considered registration under the Charities Commission, or the implications of the new regime, then now is the time to act. Existing charities should review their foundation documents to check that their present operations comply with the requirements of the Act. It is imperative that existing charities ensure that their documentation can pass the scrutiny of the Charities Commission, and that operations and administrative procedures are in accordance with their charitable purposes.

Charities intending to register should also ensure that they can satisfy the other obligations of registration, such as ensuring that their officers are not disqualified and that their financial reporting practices are consistent with their documentation. As there is no substitute for experience, it will pay for existing charities to have their foundation documents reviewed by an expert in this field.