Charities' finances face more scrutiny
Inland Revenue is expected to put ''bogus'' charities under much more scrutiny in 2012, aided by a new database which opens the books on charities' financial records.
The Charities Commission has taken the annual reports of more than 22,600 registered charities and put them into a public database as part of the Government's ''open data'' initiative.
Commission chief executive Trevor Garrett said many businesses operated as a charity, and the key test was how much of their income they gave away.
Charities do not pay tax and before the commission was established, many ''simply weren't known'' because they did not have to file a tax return, he said.
Since 2005, however, charities wanting to retain their tax exemption have had to be registered with the commission and provide an annual report.
Garrett gave one example of a trust which made income of $1.5 million last year but only gave away $50,000.
''Now I'm making no judgements about it, but I suppose I'm making the point that up until we started registering charities, there were a heck of a lot around ... that people didn't know about but which were all claiming tax exemptions.
''And what we are now doing is opening up the information about the sector and making charities transparent.''
He said the commission reported suspected tax avoidance and deregistrations, but it still only had two or three annual reports from many charities.
The database would provide valuable information not only to the IRD but also researchers and interested members of the public.
Last year, the charity sector earned nearly $15 billion, of which about $1b was given by the public and the vast majority provided in some form by the Government.
Revenue Minister Peter Dunne said tax avoidance among charities was part of the IRD's brief ''to focus strongly on areas of possible tax avoidance across all sectors of the economy''.
Craig Elliffe, Professor of Taxation Law and Policy at Auckland University, agreed that prior to 2005, entities could basically declare themselves a charity without scrutiny unless they were audited by the IRD.
''Most taxpayers would seek IRD approval but you didn't have to. There were controversial cases ... where the person in the charity exercised an ability to control and extract a personal benefit.''
The Charities Commission had changed all that with ''commendable transparency'', Prof Elliffe said. But changes to the rules on donations ''are really the big risk''.
Earlier this year, the IRD sounded a warning about dubious donation practices which have emerged since the ceiling on donation tax credits was lifted.
The tax department gave several examples, including one where a person who was owed money by a charity made a ''donation'' which equalled the loan.
This was done on the understanding that the money would be used to repay the debt, and the person then claimed a tax credit.
Cases like these not only risked having the tax credit recovered by IRD, but fines as well, said Prof Elliffe.
''In extreme cases, the IRD considers the arrangements amount to fraud and will consider criminal prosecution. So it is a obvious issue.''
With people able to claim up to a third of their taxable income in donations, the money involved could be considerable, he said.
Trevor Garrett of the Charities Commission agreed.
''If I look at the donations in the past year, there's over a $1 billion in donations. If everyone claims their tax exemptions, that's $300 million in tax exemptions.''
Ernst and Young tax partner Jo Doolan said she had not heard of many cases of tax avoidance by charities, but there had been considerable talk about Australia's recent Budget decision to cancel tax exemptions for charities running businesses.
''The concern was more whether New Zealand would follow suit. Most people predicted that they wouldn't before the election, so it was a question of what might happen afterwards.''
The charity sector was worth a total of $14.9 billion as of September 30 2011, of which:
* $4.9b was from government grants (up $834 million from 2010)
* $1.04b was from donations (up $152m)
* $5.66b was income from service provision (up $778m).
Of the 22,657 charities registered:
* More than 9000 have an income under $20,000
* Only 86 have an income over $20m.
TOP FIVE CHARITIES
(excludes universities and tertiary institutions)
Gross assets/Gross income
* St John of God Health Care Inc - $899.09m/$1.10b
* The Priory in NZ of the Most Venerable Order of the Hospital of St John of Jerusalem - $297.37m/$209.18m
* Ngai Tahu Charitable Group - $655.09m/$145.77m
* The Salvation Army NZ Group - $438.66m/$138.96m
* Waikato River Clean-up Trust - $113.83m/$113.83m
(source: Charities Commission at December 23)