Ten reasons why we should not tax the business income of charities

Ten reasons why we should not tax the business income of charities

On 3 December 2024, the Minister of Finance indicated that announcements would be made in the May 2025 Budget to tax the business income of charities, stating that "Best Start and Sanitarium are an example of the types of businesses that could be impacted”. It appears that such announcements will coincide with the introduction of a Bill into Parliament, precluding charities with any meaningful opportunity to provide input prior to the legislative process. There are at least 10 reasons why such a proposal should not progress.

1. There is no “loophole”

It is ubiquitous around the world for charities to be exempt from income tax. Charities law is agnostic as to how charities raise their funds because all funds of a charity must, by definition, be destined for charitable purposes (“the destination of funds test”). In other words, the exemption for the business income tax of charities is not a “loophole” but part of the design of the system.

2. Let's not compare apples and oranges

Charities are subject to rigorous constraints that for-profit companies do not face, including the “non-distribution constraint” which precludes charities from paying private pecuniary profit to any individual. For-profit businesses have the option of restructuring as charities if they wish, but generally they do not do so as it would mean forever forfeiting their ability to extract profits from the business. Comparing charitable businesses with for-profit businesses is not comparing apples with apples.

3. It would raise no revenue

If a New Zealand charity suddenly faces a tax liability for its business income, it would rationally cease that activity and redirect its funds/effort into other areas where tax will not be imposed. In other words, far from raising revenue, a “charities business tax” is more likely to simply cause the activity to cease.

No activity, no tax: a lot of unnecessary effort and cost for no additional revenue.

4. We could lose our weet-bix

It is offensive to suggest that Sanitarium should somehow be “punished” for doing nothing other than acting in good faith to further its charitable purposes in accordance with its constituting document. There is nothing to indicate it is anything other than a very well-run charity providing much important benefit to the community. Healthy food is central to the Seventh Day Adventist religion, rendering its cereal business effectively an outworking of its faith (that is, “related” or “primary purpose” trading). Even if the cereal business were “unrelated” to its charitable purposes, there is nothing conceptually wrong with charities running businesses to raise funds for their charitable purposes (refer “destination of funds test” above).

Given the hostility to which it is constantly and unfairly subjected, Sanitarium might rationally decide to simply relocate its cereal business to Australia, a jurisdiction that has no difficulty whatsoever with exempting the business income of charities from income tax. In other words, an ill-conceived tax could force New Zealanders to embrace the ignominy of having to import their iconic breakfast weet-bix from Australia.

5. What happened to evidence-based policy?

Can the “tax charities” lobby point to any evidence that actually demonstrates the business income tax exemption gives charities a competitive advantage over their for-profit counterparts? Or is the expectation that New Zealand should simply tax charities based on the “vibe” of the thing?

6. A solution in search of a problem

When the issue is actually analysed, rather than merely assumed, no competitive advantage is found to exist: the business income tax exemption merely provides a degree of offset to the considerable disadvantages that charities otherwise face in accessing capital. On that basis, a charities business tax would simply lumber charities with more unnecessary restrictions to address a perceived problem that doesn’t actually exist.

7. The existing law already contains adequate protections

If a charity genuinely was “building up funds that are building up its own coffers” in breach of its fiduciary duties, it is acting unlawfully, which already constitutes “serious wrongdoing” as that term is defined in the Charities Act 2005. Serious wrongdoing is the trigger for Charities Services to take a range of actions under the Charities Act, including deregistration. In other words, we do not need new, arbitrary rules to address any instance of undue “hoarding” in the charitable sector: we simply need to use the rules that already exist.

8. It will have unhelpful unintended consequences on op-shops

No activity, no tax – but lots of unnecessary compliance for disaster-relief charities and others that run opportunity shops to raise funds for their charitable purposes. In other words, taxing the business income of charities would tie many much-loved charities up in knots and reduce the funds available for charitable purposes at a time when they are never more needed. Own goal.

9. What happened to social investment?

The Government consistently expresses how important charities are to our society, but then in the same breath looks to slap unnecessary restrictions on them. Charities running businesses are, by definition, social enterprises: charities should be encouraged to run businesses to raise funds for their charitable purposes, to reduce their reliance on donations and government funding. Research indicates that charities carry out their services more efficiently and effectively than government. If tax law cause charities to reduce their services, and government has to pick up the slack, the net impact on government revenue is likely to be negative rather than positive.  

10. Tall-poppy syndrome

The fact that the Best Start business was and is successful is not a reason to impose blanket restrictions on all charities running businesses. Whether the purchase price for that business was paid for in a lump sum or spread over time, it was never going to be subject to income tax because it is capital. Once the original loan is fully paid, normal service will be resumed. Everything Best Start does must, by definition, be in furtherance of its charitable purposes of the advancement of education. Let’s not let envious hostility colour our approach to all charities.

We do not need more piecemeal, kneejerk changes to the legal settings for charities. Instead, Government needs to invest in the charitable sector and get out of the way.

Can we please have a proper consultation process before any final decisions are made.

Dr. Johnson Witehira

Māori innovator working across design, technology and game development | Head of School, Te Rewa o Puanga Massey University | Director @ IDIA and PAKU | Board member of NZGDA and Te Korowai-o-Wainuiārua Trust.

2w

While there a some good points in this, you only need to look to ECE Early Childhood Education in NZ and the biggest one - Beststart - to see that there are loop holes and NFPs like this are making massive profits that simply go back into family trusts. Keen to hear your thoughts on this Susan Barker and others. See here: https://www.stuff.co.nz/national/education/300814789/the-jugglenaut-how-childcare-became-a-forprofit-game

Thanks Sue. And let’s insist that ‘consultation’ is genuine and that it informs constructive policy decisions

David Hanna

Experienced Learner and Leader - Wesley Community Action and Inspiring Communities

3w

Timely, easy to digest and grounded in common-sense and evidence. Unfortunately none of these are attributes that align with the our current Govt?

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Gary Shuttleworth

CA with a passion to see businesses prosper and charities enabled.

3w

Agreed! Charities using business revenue to fund their social benefit activities is a strategic way of derisking their organisation. How many food banks have quit operations being unable to cope with the increased demand due to the current economic climate and increased competition for the funding dollar?

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