There is no doubt about it, the South Island iwi Ngai Tahu has done well. Through a total of five taxpayer-funded settlements – including a payment of $170 million in 1998 – this tribal corporation is now worth over a billion dollars …$1.075 billion to be exact.
According to their 2014 Annual Report, many of those working for Ngai Tahu have also done well. Some 44 directors and key management personnel have received over $5 million in short-term compensation and benefits. The number of employees being paid over $100,000 has increased to 92. Collectively they earn in the region of $20 million, with the top income earner receiving between $820,000 and $829,000.
Over the last twelve months, Ngai Tahu has more than doubled its annual profit from $77.9 million to $160.58 million. This increase is attributed to property revaluations, residential section sales, seafood exports to China, insurance proceeds, and the sale of Ryman Healthcare shares.
With the company tax rate at 28 percent, this means that Ngai Tahu will have contributed around $45 million in tax to the government coffers; right?
Since Ngai Tahu manages Treaty settlement assets and marae, they will probably have registered as a Maori Authority to take advantage of the special tax rate of 17.5 percent that applies to such organisations – that means a tax contribution in the region of $28 million; right?
Although Ngai Tahu is now one of the country’s wealthiest corporations, it pays no tax at all on any of its New Zealand businesses, because it is registered as a charity. A note in the annual accounts clarifies their tax status: “With the exception of Seafood’s Australian subsidiary, the Ngai Tahu Charitable Trust and its subsidiaries have charitable status for Income Tax purposes.”
So, with Ngai Tahu registered as a charity and paying no tax on its extensive New Zealand commercial operations (which include Shotover Jet, Rainbow Springs, and the country’s leading bus operator Go Bus), it must mean that its profits are distributed for charitable purposes; right?
No – wrong again.
Of the $160.58 million in profits, just $31.36 million – less than 20 percent – was distributed for charitable purposes. This leaves over 80 percent of Ngai Tahu’s profit – more than $129 million – as tax-free income.
Without a doubt, commercial operators like Ngai Tahu, that have obtained charitable status, are able to gain a considerable competitive advantage by not paying tax on their New Zealand businesses ventures. Of course, Ngai Tahu is not the only large enterprise trading with the tax exemption of a charity, but the settlement wealth gained by tribes is now making them some of the largest players in the charities sector.
According to the Charities Service, there are 27,438 registered charities in New Zealand, with an annual income of $15.85 billion – up from 20,207 registered charities with an annual income of $9.97 billion five years ago. The increase is largely due to the tax changes introduced by the Labour Government in 2007, that abolished the limits on charitable giving for individuals and companies. From 1 April 2008, all charitable donations, up to the amount of the person’s taxable income, can qualify for a tax credit. Similarly, companies can now claim a tax deduction for charitable donations up to the amount of their taxable income.
However, the fact that the country’s top 50 charities made $1 billion in retained profits in the last financial year, raises a legitimate question: is it right that some of New Zealand’s richest business corporations are able to use our liberal charities laws to avoid paying tax?
Dr Michael Gousmett, this week’s NZCPR Guest Commentator, an independent researcher in the charity and non-profit sector with nearly 25 years of front line experience as a general manager and executive officer, says no.
“In my opinion, commercial operations should not be entitled to the income tax exemption on the basis that they operate for charitable purposes. It may be their intention that any surplus funds are to be applied to charitable purposes, but that is not their primary function. Their primary function is to provide a return to their shareholders, which may well be a charitable entity, through operating a successful commercial operation. New Zealand now has a philanthropic regime whereby companies can claim donations as deductible items to the extent of a company’s taxable income.
“However, tax equity and fairness is being distorted by allowing commercially-oriented companies to claim that they are in effect charitable operations on the basis that charitable purposes are described in their constitutions and as such are therefore entitled to the charitable purposes exemption from income tax. They are not bona fide charitable operations, and it is time that this distortion in the tax system in New Zealand was addressed by requiring limited liability companies to file their accounts independently of their related charitable purpose entities, with funds being supplied from the commercial entities in the form of donations that are treated as deductible items of expenditure by the commercial entities to the extent of their taxable income. Tax losses created by excess donations would be disallowed, with income tax being paid on any remaining profits. The charitable entities, which would not be disbarred from being a shareholder in the commercial entities, would then report their income and expenditure through the Department of Internal Affairs Charities Services, thus providing transparency and accountability to the public in accordance with the intent of the Charities Act 2005.”
Changing the law to introduce such provisions may not be as simple as it might sound. As Dr Gousmett has found through his research, there have been many attempts by past governments to introduce law changes along these lines, but all have failed.
In 1966, the Holyoake Government established a committee, under the Chairmanship of Sir Lewis Ross, the former Bank of New Zealand Chairman, to undertake a comprehensive review of New Zealand’s tax laws. The rules relating to the trading activities of charitable operations were also considered and the committee concluded that “incomes derived from activities of a commercial nature should, in principle, be included in the tax base”.
Their recommendation was to amend the legislation relating to charities: “Profits from trading derived directly or indirectly by charitable organisations and dividends derived from any company substantially owned by such organisations are assessable for income tax at normal rates.”
That recommendation was never adopted.
In 1987, Roger Douglas, then Minister of Finance in the Lange Government, recommended a number of law changes to prevent tax avoidance. In particular he proposed changing the law affecting charities: “No charity receiving donations would have to pay tax on any aspect of that operation, but a charity that was involved in commercial business to raise money would be treated like any other business. It would pay tax on its profits, but its legitimate expenses would be deductible”.
The Minister explained that “the reason for including income from charitable activities – but not from donations – in the tax base was to limit the scope for charities to be used for tax avoidance.”
As with the Ross Committee recommendations, these changes were never adopted.
In 2001, Michael Cullen, then Minister of Finance in the Clark Government released a discussion document Tax and Charities in which one of the main proposals was to tax the trading operations of charities: “Make trading operations owned by charities subject to income tax in the same way as other businesses, but with an unlimited deduction for distributions made for the relevant charitable purposes”.
While Labour’s attempt to tax commercial businesses being run by charities met the same fate as all previous government efforts, and died a natural death, they nevertheless made a number of significant changes through the introduction of the Charities Act 2005 – including opening the door to charitable registration by Maori tribal groups.
Until that time, for an entity to be considered to be charitable for tax purposes it had to meet the common law requirements of a charity – that is, it had to be established for a charitable purpose and it had to meet the public benefit test. Essentially, the public benefit test was used to ensure a charity had been set up to provide a genuine benefit to the wider community, and not a private benefit to individuals. The aim was to avoid taxpayers’ funds being applied in any situation where there was a risk of private benefit.
Factors that were taken into account to determine whether the public benefit test was satisfied, included the nature of the entity, its charitable purpose, the number of beneficiaries likely to be affected, and the degree of connection between those beneficiaries – including details of their personal relationships to ensure there were no blood ties, nor contractual arrangements.
Since Maori tribal organisations are based on blood ties, they failed the common law public benefit test and were unable to register for charitable status. However, as a result of intense lobbying, the Labour government changed the law enabling them to gain charitable status – even though the beneficiaries are relatives.
In effect section 5 (2) of the Charities Act 2005 introduced an exemption from the blood tie disqualification by allowing blood relatives to register as a charity so long as they are involved in the administration and management of a marae. In other words, a charity cannot be set up to benefit relatives except where it is a marae.
When National came to office, it too sought to appraise the laws affecting charities, announcing in 2010 a first principles review of the Charities Act – to be completed by 2015. In particular it wanted to assess the effectiveness of the Charities Commission, as well as review the definition of “charitable purpose” in the Act: “In this Act, unless the context otherwise requires, charitable purpose includes every charitable purpose, whether it relates to the relief of poverty, the advancement of education or religion, or any other matter beneficial to the community”.
However, following the disestablishment of the Charities Commission in 2012 and the transfer of its functions to the Department of Internal Affairs – to save an estimated $2 million over 4 years – the review was cancelled. There have been no indications that further work is anticipated until the new Charities Service has become fully established.
Historically, charities have always played an extremely important role in New Zealand society and they continue to make an invaluable contribution. Not only do they have the power to enrich lives, but they also provide an opportunity for citizens to contribute directly – through giving time and money – to improve public well-being in their communities and their country.
That’s why it is crucial that the rules under which charities operate are regularly reviewed to ensure that any problems that have been identified – such as tax avoidance and anti-competitive behaviour – are dealt with in a proper manner, so that public confidence in the sector can be maintained.
THIS WEEK’S POLL ASKS:
Should charities that operate commercial businesses be required to pay income tax on retained earnings?
*All NZCPR poll results can be seen in the Archive.