Charities inadvertently lose tax exemption
In New Zealand there are many registered charities, some with millions of dollars of assets under management. Yet up to 1000 registered charities are losing their charitable status each year by failing to lodge their annual return with the Charities Commission.
Registered charities must prepare and lodge an annual return with the Charities Commission no later than 6 months after year end. This is an ongoing requirement to remain on the charities register.
One of the consequences of being struck off the register is the forfeiture of the charity's income tax exemption, meaning that the charity becomes liable to pay income tax from the moment it is struck off.
The Charities Commission's powers come from the Charities Act 2005 and generally do not allow a charity to backdate re-registration to the date it was struck off. This provides no relief for administrative oversights.
It is often the beneficiaries of charities who suffer from the decrease in available funds and such a punitive regime seems inconsistent with encouraging their good work.
Inland Revenue is sympathetic in cases of genuine oversight but will uphold the law and demand a tax return for the period starting at the date of striking off to reregistration. To illustrate the impact, a charity is struck off and six months later is reregistered. The period spans three months either side of year end. A three-month tax return will need to be lodged with Inland Revenue for both tax years. It will be a costly exercise to prepare part year accounts to underpin the tax returns filed.
Governors of charities need to exercise care as they may sign the annual accounts thinking there is no tax liability yet discover subsequently that a liability does exist. This is not a comfortable position for trustees or directors.
Inland Revenue is targeting charities in its latest compliance focus document. It is working closely with the Charities Commission to identify noncompliance. Information transparency between the two departments has made it easier to identify charities and individuals that warrant investigation.
Greg Harris is a specialist tax partner in the Hamilton office of Deloitte.