Six Christmas wishes for the charitable sector
In the spirit of Christmas, and its messages of peace on earth and goodwill to all people, I have 6 Christmas wishes for the charitable sector:
1.Minister, please involve the sector
At Charities Services’ annual meeting on 1 December 2020, the new Minister for the Community and Voluntary Sector, Hon Priyanca Radhakrishnan, acknowledged that the review of the Charities Act 2005 was important work, and that she wants to give it the respect and due diligence it requires and to “proceed with care”.
These comments could not be more welcome.
However, both the Minister and a representative from the policy team of the Department of Internal Affairs (“DIA”) mentioned that discussions were ongoing about how the Minister sees the Department engaging with the sector.
Please could the sector be involved in discussions about how best to consult with the sector? I am continually struck by the tremendous amount of expertise, knowledge and experience that exists within the sector: we need to draw on that and co-design the best framework of charities law for New Zealand with the sector’s full involvement (see Christmas wish #3).
2.Please honour the commitment to carry out a first principles review
In contrast to the terms of reference for the current review, it was actually Labour Party policy for the 2017 general election to:
(i) consult with the community and voluntary sector on whether the disestablishment of the Charities Commission and transfer of its functions to the DIA has resulted in effectiveness and improved services and information for the sector; and
(ii) prioritise the long-promised review of the Charities Act, beginning with a first principles review of the legislation, including examining, updating and widening rather than narrowing, the definition of charitable purpose.
Nearly all submitters that commented on the topic asked for the scope of the Charities Act review to be widened, to include: the definition of charitable purpose, tax issues, and other legislation that impacts charities such as the Incorporated Societies Act 1908. About 2/3 of these submitters sought an independent review of the Act.
If the charitable sector matters (and I challenge anyone to say that it doesn’t), it is worth taking the time to try to get the legal framework right.
3. Support and fund a co-design process with the sector
As the summary of submissions demonstrates, there is a very broad diversity of views as to how best to improve the legal framework for charities. Such diversity is to be expected, indeed welcomed, from a sector that is itself extremely diverse.
Developing a legal framework that will have sufficient support to stand the test of time requires following a “natural justice” type process that allows the various voices to feel heard, and to feel that they have had the opportunity to provide meaningful input into formulating policy (rather than just reacting to proposals that have already been formulated). To that end, my Christmas wish would be for the government to support and fund co-design workshops on key issues, such as the definition of charitable purpose. The upfront investment of time and cost would reduce costs in the longer term, as the costs of administering the regime are likely to be significantly less if the sector supports and has confidence in the final product.
4.Please don’t change the tax treatment of charities until a proper review of the Charities Act has been carried out
We appreciate that, particularly without a capital gains tax, the Government is looking for revenue in a covid-affected environment.
But, Minister, please don’t look to the charitable sector to “fill the gap”.
The “charities” and “tax exemptions” entries on the tax policy work programme raise concerns that government may be looking to reduce or even remove some or all of the tax privileges currently available for charities.
These entries appear to have come directly from the recommendations of the Tax Working Group (“TWG”). But the focus of the TWG was on a capital gains tax, with the tax treatment of charities apparently receiving little more than 1 hour of formal consideration during the TWG’s entire 16 months of deliberations.
With respect, charities appear to have been treated as an afterthought: the value and importance of the charitable sector to New Zealand, and what we might gain by enabling rather than restricting their work, appears to have been entirely overlooked.
At the very least, fundamental change to the tax treatment of charities should not occur in advance of the review of the Charities Act. What if the review demonstrated that the tax privileges for charities in fact deliver benefits to our society that outweigh their apparent “fiscal cost”; that charities provide a net benefit to society, and in fact reduce the burden on government in respect of almost every aspect of what it is trying to achieve (such as housing, poverty reduction, environment protection, wellbeing of New Zealanders, etc)?
Reducing the tax privileges for charities may not deliver any additional revenue for Government and may in fact simply increase its costs. Shouldn’t we at least consider this question first?
5.Support charities to support New Zealand businesses
One charity-friendly tax change that could be made would be to permit imputation credits to be refundable.
Briefly, imputation is a mechanism that allows a company to attach a credit when it pays dividends to its shareholders. The credit reflects income tax already paid at the company level, and New Zealand-resident shareholders can use the credit to reduce the amount of New Zealand income tax they would otherwise be required to pay.
This mechanism is problematic for shareholders, such as registered charities, that are exempt from income tax, because they do not have a tax liability against which imputation credits can be offset. Unlike Australia, surplus imputation credits cannot be refunded in New Zealand, meaning that New Zealand charities effectively pay income tax on investments in New Zealand companies.
This setting has a distortionary effect, disincentivising New Zealand charities from investing in New Zealand companies.
It is acknowledged to be “bad policy” for the tax system to drive investment decisions, and many New Zealand charities have been calling for this anomaly to be corrected for some time. Making this simple change could materially assist with “unlocking the balance sheets of philanthropy”: why block the flow of capital when access to capital is so badly needed by New Zealand companies (especially small to medium-sized ones)?
6.Interpret the definition of charitable purpose as intended
There are, we understand, hundreds of community housing charities standing ready, willing and able to help people into affordable housing; however, they are not doing so for fear of losing their registered charitable status.
The consequences of loss of registered charitable status are not limited to loss of tax privileges such as income tax exemption and donee status: deregistered charities must divest themselves of all their assets within 12 months or pay tax on the balance (see section HR 12 of the Income Tax Act 2007). Deregistration is a death blow that many, if not most, charities could not withstand.
Charities Services apparently considers that providing affordable housing delivers a “private benefit” that is inconsistent with registered charitable status. Following the controversial Queenstown Lakes’ decision, the Government went to considerable effort trying to “work around” this controversial interpretation, even providing community housing providers with their own specific income tax exemption. However, while such efforts are appreciated, a specific income tax exemption is the “booby prize”, because without charitable registration, many community housing providers simply cannot access funding.
Surely in the midst of the current housing crisis, it is obvious that the security of tenure that would flow from helping people into affordable housing, and the social cohesion it would provide, would be of public benefit to all of us as a community.
New Zealand needs all hands on deck to address its housing crisis, yet community housing providers continue to be prevented from helping people into affordable housing due to arbitrary and controversial jurisprudential interpretations of the definition of charitable purpose, just when we need them the most.
Charities Services repeatedly tells us this problem is fixed when clearly it is not.
Similar issues arise with sport (which has been recognised as charitable in its own right by many other jurisdictions), and so many others too numerous to mention.
All of this demonstrates why we need a proper review of the Charities Act: refer Christmas wish #2.
In the meantime, Merry Christmas (or happy summer holidays if you don’t celebrate it) and here’s hoping we might make some positive progress on charities law reform in all of our interests in 2021!