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Dr Michael Gousmett

Tax-payer subsidised charities and their business activities – time for change

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“It is not the source from which the funds are derived, but the purpose to which they are to be applied, that makes a charity.” – Attorney-General v Eastlake 11 Hare 205 (1853)

Many of you will no doubt remember the Sanitarium advertisement from the 1960s, “Kiwi kids are Weet-bix kids.”  During the long summer evenings you may have enjoyed a glass or two of Cabernet Sauvignon from New Zealand’s oldest winery, Mission Estate.  Down in the South Island, during the day tourists will have had the thrill of a jet-boat ride on the Shotover River, courtesy of Shotover Jet.  What you probably did not realise is that these apparently commercial organisations, operated by the Seventh-day Adventist Church, Marist Holdings (Greenmeadows) Limited, and the Ngai Tahu Charitable Group, have charitable therefore income tax exempt status.  If they were for-profit commercial organisations, their income tax liabilities would potentially be significant.  However, New Zealand does not have an income tax environment that requires charities which operate commercial activities that are not related to their charitable purposes to pay income tax, unlike North America and Australia.

In New Zealand, if an organisation is approved by the Department of Internal Affairs as having charitable purposes, it is registered as a tax charity, an unusual description for an entity that is in fact exempt from income tax.  What then is the origin of this privilege?  The answer is that not requiring charities to pay taxes can be traced back for many centuries, as far back as the times of the Crusades.  However, the concessionary exemption from income tax that is provided by the IRD has its origins in William Pitt the Younger’s duties, or tax, on income in England in January 1799.  In New Zealand the concession dates back 120 years to 1892.  In 1891 the Land and Income Tax Assessment Act had provided charities with an exemption from land tax but Parliament had overlooked providing charities with an exemption from income tax, an oversight that was corrected in the Land and Income Assessment Act Amendment Act 1892 which provided that income received by public charitable institutions would be exempt from taxation.  There was very little debate over the concession, as was the case in December 1798 when Pitt had introduced his much-despised duties on income Bill.  If any justification for the exemption was needed, then history provided the answer.  For example, in England in 1798 hospitals were not required to pay taxes on their buildings, or windows, just as in 1797 they had not been required to pay duties on any clocks that they owned.  Today, the exemption from income tax in New Zealand resides in the Income Tax Act 2007.

The problem with the charitable purposes exemption from income tax in New Zealand is that charities do not have to justify, in their annual reports or returns to the Department of Internal Affairs, what it is that they actually do for that privilege.  The income tax exemption is considered by the IRD to be a subsidy, a point with which many charities vehemently disagree.  As a consequence of the Charities Act 2006, charities in England and Wales now have to provide a written report to the Charity Commission, which is also made available to the public on the Commission’s website, of what it is that the charity does that provides a benefit to the public through their activities.  There is no such requirement in New Zealand, yet our charities should also be required to explain what it is that they do, with their tax-payer subsidised income, that is of benefit to the public.  Even religious institutions are required to do so in England and Wales.  Charities might object to this requirement as yet another bureaucratic burden, but that is a small price that charities should be required to pay in return for the privilege of being exempt from income tax. It also forces trustees to take notice of the organisation’s charitable purposes as described in the trust deed or constitution, and ensures that they work within those objects and not drift off into other ventures.  It is called accountability and transparency, which is why we have the Charities Act 2005.

For example, what of the Royston Hospital Trust Board, with income in 2012 of $988,013 and expenses of $63,254 before charitable distributions of $68,345 (7 percent of income), leaving total trust funds of $25 million?  The Royston Hospital Trust Board is a 41.23% shareholder in Austron Ltd, and a 19.99% shareholder in Acurity Health Group Ltd, previously the Wakefield Health Ltd.  Royston’s Trust Deed states that it will receive a limited number of non-paying patients for treatment.  If so, how many people benefited from this charitable gesture?  What of St George’s Hospital in Christchurch, with its charitable object of altruistic nursing?  Yet in 2012, from total income of $44 million, and an asset base of $175 million, the hospital reported payment to philanthropic causes of $91,463, or 0.2 per cent of income.  Like Royston, St George’s also has an interesting and complex corporate structure leading to numerous individuals, which rather begs the question – why?  To what extent, if any, is the association of those companies with St George’s Hospital exploiting the income tax exempt status of the charity hospital?  Is this possibly evidence of a Penny-Hooper type tax avoidance arrangement?  Why are people struggling to receive healthcare when we have such wealthy charity hospitals?  While Royston’s and St George’s hospitals are exempt from income tax, the irony is that New Zealand’s district health boards are levied an 8 per cent capital charge, which is nothing more than a property tax, on their net equity.  The cost to the Canterbury District Health Board last year was $15 million and, with a projected cost of $600 million for new buildings, of which the CDHB will contribute $100 million, the annual capital charge will increase by $40 million.

What of the South Island based Te Runanga o Ngai Tahu (TRONT) and its Ngai Tahu Charitable Trust?  To understand their financial activity, reference must be made to both the Charities Register and Ngai Tahu’s website.  The Charities Register carries the combined group financial statements for the Ngai Tahu Charitable Trust, a group comprised of the Trust, Ngai Tahu Holdings Corporations and its subsidiaries and trusts.  This structure contains 38 limited liability companies, three trusts including the Ngai Tahu Charitable Trust, and a scholarship fund.  There is also another set of financial statements on Ngai Tahu’s website which reports the summary group financial statements comprised of TRONT and the Ngai Tahu Charitable Trust, which is “extracted” from the audited full group financial Statements.  For 2012, these financial statements reported revenue and other income from trading operations of $209 million, and a profit of $69 million before Maori authority and Australian taxation of $427,000.  Distributions relating to tribal, runanga and whanau amount to $16.6 million, or 8 per cent of revenue, from an asset base of $658 million, yet the report by the chair and chief executive claims that distributions to TRONT totalled $26.26 million.  It is difficult to see where in the financial statements this figure can be found.  Why also the need for two sets of financial statements?  By extrapolation between the two sets of financial statements, it appears that TRONT earned revenue of $8.2 million, not $26.26 million as claimed, and spent $10.8 million on what was described as tribal, runanga and whanau distribution “expenses.”  Why then, with these levels of funding, are there reports of housing and poverty issues amongst Maori in Canterbury?  The TRONT report also discloses levels of remuneration in bands of $100,000.  In 2012 there were 67 employees who earned $100,000 or more, at a total cost of $12.8 million, an 18.5 per cent increase on 2011 at a cost of $10.8 million.  How then is it possible for an organisation which argues that it is a charity can pay its top three earners between $1.76 and $1.79 million, or 14 per cent of the remuneration paid to the 67 employees, with the top earner receiving between $680,000 and $689,999?  In 2011 there were 61 employees who earned in excess of $100,000, with the top of the remuneration band being $499,999.  This suggests that the top earner received an increase in remuneration of 38 per cent, or a maximum of $190,000 in 2012.  The simple question is, why?  Excesses in remuneration are not unique to the for-profit corporate sector, as such figures now show.

What of Marist Holdings (Greenmeadows) Limited, with its annual dividends of $1.5 million to the Society of Mary General New Zealand Trust in Wellington? In 2012 the Society made donations of $210,000 while spending $749,433 on religious personnel and living expenses, with an asset base is $14.4 million.  Pope Francis is calling for a Catholic church for the poor.  “Ah, how I would like a church,” he said, “that is poor and is for the poor.”  In New Zealand, will the Society of Mary General New Zealand Trust lead by way of example by dispossessing themselves of their wealth?  Who was the unidentified registered charity to whom Aidanfield Holdings Limited, one of the 1,056 limited liability companies on the Charities Register, distributed $13 million in the 2011 and 2012 financial years?  Was it the Good Shepherd Convent Trust Board, for which the company appears to act as fundraiser through its land sales in 2011 and 2012 of $22.6 million?   The financial statements for the Convent on the Charities Register do not appear to reflect that sum, as their income for 2011 and 2012 was only $241,880 while distributions made by the Convent totalled $8.7 million.  To whom, and for what purpose, were the funds distributed by Aidanfield and the Convent?  In 2011 and 2012 the Seventh-day Adventist Church generated income of $334 million, of which $4.5 million was used for Adventist development and relief agency expenses, $8 million for aged care expenses, with a further $19 million being appropriated to Seventh-day church entities, a total of $31.5 million, or 9 per cent of total income.  Before the charitable distributions the church earned an income tax free net income of $22 million, and after the distributions, reported a deficit of $9 million.

The public have an expectation that the spirit as well as the letter of charity trust deeds is respected.  To encourage charitable distributions the IRD should have the power to impose an excess surpluses retention tax on those charities that fail to distribute, as is effectively happening in North America and Australia through their unrelated activities tax.  Grant-making charitable trusts should be required, as for community gaming trusts, to provide details to the public of the recipients of their largesse.

So this summer while you are enjoying your Weetbix, jet boat rides, and Mission Estate wines, while pontificating on your elective surgery cancellations at your underfunded district health board which pays a property tax because the government built you a hospital instead of investing the money in the bank, do so in the certain knowledge that as a taxpayer you are indirectly supporting charitable activity in our communities.  The question is, however, just how much public benefit do our income-tax exempt charities provide to our communities?