Commentary: A response to Ngai Tahu’s opinion on their commercial trading activities and income-tax exempt charitable status
It is interesting to read Ngai Tahu’s defence on their website of their charitable status and the income tax exemption that applies to its commercial empire, which begins with the statement that “[t]he commercial success of Ngai Tahu needs no introduction. A $170 million settlement in 1998 has, in the space of 20 years, been turned into $1.3 billion (give or take a dollar or two).” What then is the issue about Ngai Tahu’s income tax exempt status as a charity, and why the need to defend their charitable status? The phenomenal rate of growth of their empire has been achieved through the significant acquisition of many previously income-tax paying for-profit entities which overnight, because of the income tax exempt status of Ngai Tahu Charitable Trust as the sole shareholder, also claims that fiscal privilege – yet those activities are unrelated to the charitable purposes of the trustee. Over the past 20 years, there have been, at one time or another, 70 limited liability companies, 18 joint ventures and 3 associate companies under Ngai Tahu control. Currently Ngai Tahu has 39 trading entities that are registered as tax charities; some entities have been merged with others, or do not appear to be now trading. Nevertheless, today the reality is that Ngai Tahu operate a substantial commercial operation that the taxpayers of New Zealand subsidise. Disappointingly, politicians of all but the ACT party are fearful of addressing the income-tax exempt status of iwi-owned commercial operations because of the risk of accusations of Maori-bashing. It is indeed disappointing that in New Zealand today that we cannot openly discuss tax policy issues that affect us all without fear of such baseless accusations. Since 1967, numerous tax reviews have argued for the taxation of such activities. At this stage, the Tax Working Group appears to be treading lightly around the issue, having been captivated by the influence of an Australian tax review rather than listening to our own experts from the past, as well as ignoring how this issue is addressed in a pragmatic manner in the UK.
The basis on which tax policy is developed in New Zealand was described in the January 2010 Report of the Victoria University of Wellington Tax Working Group, “A Tax System for New Zealand’s Future” – not to be confused with the current Tax Working Group under Sir Michael Cullen. The Report lists the principles of a good taxation system, with equity and fairness being the second principle after efficiency and growth, which I would have listed as the first principle. There is little that is new in tax: in essence, equity and fairness are the essential elements of tax policy, as determined by Adam Smith under his maxims regarding taxation in his Wealth of Nations in 1776. How then does this apply not only to Ngai Tahu but also to the many tax charities – there’s an oxymoron for you – on the Charities Register that are limited liability companies? At the time of writing, of the 27,183 tax charities 1,372 are limited liability companies, but there will no doubt be many more than that number because of the different ways in which entities can register. Ngai Tahu is one such entity, along with Waikato-Tainui’s many entities, Ngati Awa Group Holdings Limited, Trinity Lands Limited (dairy and kiwifruit growers operated by the Open Brethren which as at 15 August 2018 was under investigation by Charities Services) and Marist Holdings (Greenmeadows) Limited (“Mission Estate” wines which provide funds to the Marist Brothers), and “Gloriavale,” not forgetting “Sanitarium,” by way of example.
It is well known that today Ngai Tahu is a billion-dollar plus entity, and growing. Ngai Tahu claim that they are under “attack … led by “fiscal conservatives who attribute our remarkable success to not paying tax.” In this Ngai Tahu are wrong on two points. I for one do not “attack” Ngai Tahu, but if believing in equity and fairness in our tax system is to be a fiscal conservative, then I am indeed one. Ngai Tahu clearly understand the nature of the criticism levelled against the iwi, and I apply the same argument against all large-scale trading activities undertaken by tax charities where that trading is not related to those charitable purposes. That is the distinction. Ngai Tahu say, in responding to the suggestion that they should make their charitable distributions “then pay tax on what is retained inside the business, “[t]hank God these people don’t run Inland Revenue!” Ngai Tahu seem to be unaware of the provisions that have been in the Income Tax Act 2007 for the past ten years that allows companies, as well as donors and Maori Authorities, to donate to the extent of their taxable income. What Ngai Tahu do not understand, or do not wish to acknowledge, is that the fiscal anomaly under which they benefit significantly is one of historic origin, and I suggest that the politicians of the past would never have envisaged that this fiscal privilege would be applied on the scale to which it is now used. Ngai Tahu would claim that it is fair and equitable that they should continue to receive Treaty settlement top-ups in order to retain parity as other settlements are achieved, as they and Waikato-Tainui did in 2017 when Stuff reported in January 2018 that a further $370 million was paid between them ($180m and $190m respectively) with more to come, yet is it not fair an equitable that they should pay income tax on those commercial operations unrelated to their charitable purposes?
The concept of charitable purposes is well stated in law, having been exemplified in England in 1891 in a landmark case, known as Pemsel, which continues to have influence today. In order to fulfil those charitable purposes, something needs to be done by somebody. This is where New Zealand differs from England as, in the 1920s, that issue was resolved in another landmark case that resulted in the “related purposes” concept. Charging fees for students was then considered by the Revenue to be a trading activity but the English courts held that the fees were being charged for the purposes of advancing education, being one the the four charitable purposes stated in Pemsel in 1891, therefore were exempt from income tax. The Ngai Tahu Charitable Trust owns the company that takes tourists for jet boat rides on the Shotover River. Taking a tourist for a ride in a jet boat is not an activity that of itself advances any charitable purpose, as it is purely and solely a commercial trading activity with the intention of generating profits – adventure tourism. However, funds from the success of that activity eventually flow to Ngai Tahu’s charitable trust through its shareholding in that company, and ultimately on to TRONT as the corporate trustee and then the 61,000 members of Ngai Tahu. This is where Inland Revenue need to step in, by requiring the jet boat company to claim the distributions by the company, and all other of Ngai Tahu’s companies, to the Ngai Tahu Charitable Trust as tax-deductible items, paying income tax on any profits retained for the continuing operation of the business. There is no need for any legislative amendments to do this, as this provision already exists in the Income Tax Act 2007. It is not a dividend that might attract imputation credits – unless every member of Ngai Tahu becomes a shareholder in each and every company that the charitable trusts owns which in this day of advanced technology is not impossible but, in practical terms, not likely. This then becomes a decision for every company owned by a charity, to decide how much to retain, and how much to distribute for charitable purposes, just as any company in New Zealand can do when deciding on what level of dividends to pay to its shareholders, what imputation credits if any to attach to the dividends, and what funds to retain. If Ngai Tahu require each company to pay close to half its surplus to the charitable trust, as stated by Ngai Tahu, that is their commercial decision. At some point Ngai Tahu decided to invest its Treaty funds by buying for-profit companies that overnight became income tax exempt, instead of investing in other income-generating assets. That was also a commercial decision by Ngai Tahu. Ngai Tahu claim that iwi-owned assets limit their access to debt. Surely that issue was factored into their decisions to acquire companies beforehand, by applying techniques such as the Capital Asset Pricing Model and Weighted Average Cost of Capital? Ngai Tahu claim that the iwi are criticised because of the fact that they pay no income tax therefore have a competitive advantage. Surely that is more than obvious? If you have the ability to accumulate funds through not having to pay income tax then ipso facto you must be in a better off position than an entity which has to pay. Maybe Ngai Tahu should consider what benefits they might gain by deregistering their companies from the charity fiscal regime and operating them as full tax-paying entities with any associated benefits that might be available to the iwi. Parliament might have to provide such companies with an exemption from the taxes arising on deregistration by allowing an amnesty period during which to deregister. Why in fact did they choose the charitable trust model in the first place and not operate as a Maori Authority as other iwi have done? Maori Authorities are required to pay income tax, albeit at a lower rate (which is also long overdue for a review) than the company rate but at least they are contributing to the common good. Ngai Tahu could have chosen this path, but did not do so. What is so wrong about paying your fair share and contributing to the wellbeing of all New Zealanders, just as all those who pay income tax do? I have heard a leader of Waikato-Tainui claim that social problems amongst Maori are not the problem of Maori – that is the job of government. If that is the case, then where do Waikato-Tainui expect those funds to come from? In this regard, perhaps Waikato-Tainui could follow the lead of Ngai Tahu who the Press of 13 November reported as having announced a partnership with Oranga Tamariki, based on legislation requiring such partnerships as from 1 July 2019 that will not cease until there are no Ngai Tahu children in state care. Will this mean that Ngai Tahu will be contributing funds to that programme as well as accepting government funding from taxpayers as a condition of the partnership agreement?
I acknowledge the impressive commercial success that Ngai Tahu is, as I have always done, as well as the eventual application of their funds for the benefit of iwi, but I challenge their belief that they, and those who are in a similar position who operate unrelated commercial operations through limited liability companies, are entitled to qualify for charitable status and its related fiscal privileges purely because of the charitable income tax exempt status of the shareholder. I remain optimistic that the Tax Working Group will head the advice of earlier tax reviews, beginning with the Ross Committee in 1967, and the experience of the UK rather than Australia, to finally address this issue by correcting this failing in tax policy that has lead to this situation, given that is possible that the scale of trading that would eventually be undertaken was unforeseen by Parliament when this fiscal provision was inserted into the income tax legislation during WWII in 1940. My hope is that this issue will be addressed through the Select Committee process so that all who have an interest in this matter can be heard in a democratic way, with Parliament being the final arbitrator of tax policy.