The Government is to consult on proposals to better target assistance to charities through the tax system.

The discussion document released today -Tax and charities - includes options to update the legal definition of what is a charity and to improve the accountability of charitable organisations receiving government support through tax rebates.

"The current definition which determines whether an organisation is entitled to tax concessions on charitable grounds is based on English law which is 400 years old - The Charitable Uses Act 1601.

"There is a real question about whether it is still appropriate to New Zealand in the 21st century," Revenue Minister Michael Cullen said.

"Most countries provide tax support to charities in one way or another, in recognition of their contribution to society. In New Zealand, most of this support takes the form of an income tax exemption for charities, and a tax rebate for those who make charitable donations.

"This assistance amounts to a government subsidy, yet is expenditure that is not subject to direct control by the Government, as other subsidies are. Nor can the Government readily monitor the use to which the money is put to ascertain whether charities are meeting the purposes for which they were established," Dr Cullen said.

Tax and charities also canvasses whether the rebate limits for donations should be raised and how the law allowing GST refunds to charities might be clarified.

"I know many charities, organisations and businesses will consider it timely to raise debate on these issues. Over the years I have often been approached by groups who feel that the tax exemption, for instance, is not being appropriately used: that it is too widely available and being used by some businesses to gain an advantage over their competitors," Dr Cullen said.

The main proposals in Tax and charities are:

- Defining charities: Introduce safeguards into the definition of "charitable purpose" or modernise it, to ensure that it is appropriate for today's society.

- Improving accountability: Limit the tax exemption to entities that register as charities, require them to file publicly available annual accounts, and monitor them to ensure they are meeting the charitable purpose for which their tax exemption was granted.

- Rebates for donations: Raise maximum rebates for donations by individuals from $500 to $600.

- Taxing trading operations: Make trading operations owned by charities subject to income tax in the same way as other businesses, but with an unlimited deduction for distributions made for the relevant charitable purposes.

- Claiming GST refunds: To provide certainty, amend the law to clarify that registered charities and other non-profit bodies are allowed to claim GST input tax credits in relation to all their activities except for the sale of donated goods and services and other exempt supplies.

The issue of whether the charitable tax exemption should be extended to entities whose beneficiaries are connected by bloodlines, such as iwi-based organisations, will be dealt with in the Government's forthcoming discussion document on the taxation of Maori authorities.

Tax and charities is available at Bennetts Government Bookshop and on the web site of the Policy Advice Division of Inland Revenue at http://www.taxpolicy.ird.govt.nz.

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