The Commissioner has steered his focus on reviewing the taxation of the charity and not-for-profit sector. Public views are sought on the points highlighted in a recent issues paper.
One of the key questions submitted by IRD is whether charities should still benefit from their tax-exempt status on unrelated business activities carried out by the charitable organisation.
NZ is an outlier in that most countries tax charities or significantly restrict activities that are tax-exempt for the charity. The reasoning in NZ is that the proceeds will ultimately flow through to a charitable purpose. However, this method allows for proceeds to be accumulated for many years or transferred within a group of companies before the public receives any benefit.
IRD is concerned that the fiscal cost of not taxing unrelated business income is significant and will only increase.
The nature of the charitable and not-for-profit sector generally places the organisation at the mercy of grants and funding that are often applied for on an annual basis. The ability for a charitable organisation to self-sustain the cost of delivering their charitable purpose can reduce the burden on organisations to secure funding and frees up resources to deliver their charitable purpose.
Any reform must balance the fiscal cost of not taxing charity business income against the risk of diminishing a charitable organisation’s ability to deliver its charitable purpose. By taxing charity business income, it implies that the government can provide public services better than the charitable organisation it taxes, or, that the funds are better allocated towards a different public benefit. Where this is true, taxing charity business income might be appropriate.
Public consultation closes on 31 March 2025. A copy of the full issues paper can be found here.