Overseas Charities in New Zealand:
The application of Income Tax Act Schedule 32 to obtain tax exempt status
01 Mar 2017 Post by:
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New Zealanders are a generous people. Charities and social enterprises which are based overseas and doing good work in other parts of the world are increasingly looking to grow their support bases here. This article looks at how you can do that and what the options are for an overseas charity which is looking to either set up in New Zealand or establish a fundraising presence here. In particular it will focus on Schedule 32 status and when that special means can be used to become tax exempt in New Zealand.
What is the usual approach to setting up a charity in New Zealand?
There are a few options when it comes to setting up a legal entity in New Zealand ranging from a charitable trust to an incorporated society or a company. The most common would be a charitable trust which will then usually apply for tax exempt status where it can prove to Charities Services that it has charitable purposes as defined under New Zealand law. We have already covered this process in more detail in the article here.
Since most charities in New Zealand are focused within this country this is a relatively straightforward process. However, if a charity is aimed at purposes which are more than 50% outside of New Zealand then it will be much more difficult to achieve tax exempt status here. That brings us to the second option.
What other option is there for an overseas focused charity?
Applying to be added to Schedule 32 of the Income Tax Act 2007 can give qualifying charities a unique status in the New Zealand tax regime. Schedule 32 status is only granted to a select few international charities which as at the date of this article is around 120 (you can see them here). It provides the ability for the organisation to issue receipts to their donees for donations made to the charity. Those donees can then use those receipts to claim a credit or deduction against their income tax. If they are an individual they can get a third of the donation as a credit, just as long as the donation was not more than their taxable income. If a company, they can claim a deduction, as long as the donation was not more than their taxable income in the absence of that deduction. When it was first introduced the Government had a flood of requests and it even published special guidelines to charities on how to make the application. For those charities that do not have their charitable purposes principally (more than 50%) in New Zealand, then the charity cannot qualify as a donee organization (unless it is listed on Schedule 32).
What are the key points to consider?
We have done several Schedule 32 applications which have been successful. In our experience, international charities, or their advisors, can easily get tripped up when it comes to their tax status in New Zealand. As mentioned above, the law provides that donee organizations are those organizations with their charitable purposes principally in New Zealand. There is no case law on this, but it is accepted that if your purposes are more than 50% in New Zealand then you will qualify. Note that it is where your purposes are which is most critical. That may be different to where you spend money (eg buying toys in New Zealand to send to children in third world countries would mean that the purposes are overseas, not in New Zealand).
When charities are applying with the Charities Commission for registration, Form 1 question 22 asks: “What percentage of New Zealand sourced funds did you spend overseas in the last financial year? If the entity has not been operating for a year, what percentage of New Zealand sourced funds does it intend to spend overseas in the next financial year?” The explanation of this questions attempts to clarify the point regarding where charitable purposes are, but our experience is that this question still confuses some charities.
Our understanding is that IRD practice is to send out a “donee letter” if the charity puts down a percentage less than 50%. If you are a charity that spends your money in New Zealand, but your purposes are restricted to purely overseas purposes, you may think that this letter allows you to give tax-deductible receipts but it does not. You need to apply to be listed on Schedule 32 before you can get donee status.
What other hurdles should an overseas charity be aware of in seeking Schedule 32 status?
- The IRD will put forward a special request to Cabinet for approval if it agrees with the application by the charity. That is only done once or sometimes twice in a year and may coincide with the tax year (start of April).
- In our experience it can take a year or more to go through the process of applying for Schedule 32 status. The later stages are likely to benefit from approaching the IRD early on to discuss the proposal to see if they raise any “red flags” with the idea.
- We have seen some overseas charities set up a local charity to begin operations in New Zealand while they apply for Schedule 32 tax status. While tax deductible receipts cannot be issued if the NZ sourced finds are primarily spent overseas, it can start to raise awareness of the cause.
- Some local “champion” to promote the cause in New Zealand is far more likely to result in fundraising being successful in the New Zealand context – simply having a website and seeking support online is unlikely to be so effective.
- Many overseas charities may have purposes which will cause problems (for example, political advocacy may be an aim of a group). Where a charity is applying for Schedule 32 status, Cabinet will want to see that the purposes of charity fall within the following categories:
- The relief of poverty, hunger, sickness or the ravages of war or natural disaster, or
- The economy of developing countries; or
- Raising the educational standards of a developing country.
- “Developing countries” are those recognised as such by the United Nations.
- It will be important to “tell the story” and that includes not only the purposes of the charity but also who the trustees are, what they are involved in and explaining how the charitable purposes are checked to ensure that they are being followed in practice. In addition information on how long the organization has been operating, its source of funding, business plan etc will all help to paint the picture.
- There will need to be evidence that the NZ trustees of the charity regular visit the overseas offices and/or third party charities that the charity works with and self-audit to insure that the money raised is being properly used for the intended purposes.
Questions that the IRD are likely to ask include:
- Do the trustees of the Charity have relevant knowledge and experience of the relevant field, and other project and financial management systems? For example, is there a process for assessing, and monitoring projects and selecting beneficiaries
- Does the charity give funds to non-resident organisation(s)? If so, are the activities of the non-resident recipients consistent with the Cabinet criteria
- If the charity works with non-resident organisations, does it have access to regular and accurate information from these organisations
- Does the charity have a set of financial accounts that clearly identify receipts of donations and transfers of funds, on a regular basis, to its designated charitable purpose
- Can the charity demonstrate that its activities are likely to be effective in the long term
- Does the charity have procedures to prevent funds going directly, or indirectly, to individuals or organisations associated with terrorism?
What about the status of donations made to NZ charities for overseas purposes?
A charity that is registered with the Charities Commission can issue receipts for donations made to it where its funds are applied wholly or mainly to charitable purposes within New Zealand. The IRD usually recommend that charities maintain separate accounts which clearly identify funds applied or spent outside New Zealand. This has led to some charities believing that these overseas bound funds are ineligible for tax credits. “Wholly or mainly” has been interpreted as meaning 51% or more. So, provided a charity applies 51% or more of its funds to its New Zealand based charitable purposes, it can issue receipts to all of its donors, even those whose giving has been earmarked for the support of persons serving overseas. Our view is that the IRD advice to keep separate accounts is merely reiterating that this is a good idea to help the charity measure what percentage of funds are being applied toward NZ purposes vs overseas purposes. This is so that, when the charity’s annual return is completed, it can accurately state the proportions as required. We have found that shedding some clarity on this issue has enabled charities to increase the support base for persons they wish to support overseas, as potential donors are more likely to give to the charity if they can claim a tax credit/deduction.
As you can see, when it comes to seeking Schedule 32 status there are a number of issues to be thinking through. We have successfully applied for this status on multiple occasions so can confirm it is possible to achieve, depending on the purposes and nature of the charity involved. We have prepared a series of questions that refers to the Cabinet criteria which help to clarify with an organization whether they may qualify under Schedule 32 and can then be used to prepare the application.
Parry Field Lawyers provide legal advice on a range of charitable matters and are able to assist you with any questions in this area that you might have. One of our partners, Ken Lord, has also contributed chapters to several of the leading texts on charities law in New Zealand.
Please note that this article is not intended to be legal or investment advice, and is only intended as a general guide. Reliance should not be placed on this article where any specific issues are concerned.