Is The Definition Of Charitable Purpose Relevant To NZ?
Is The Definition Of Charitable Purpose Relevant To New Zealand Society In 2012?
The Charities Commission hosted a forum to specifically explore the appropriateness of the existing definition of "charitable purpose" in New Zealand. This two day event was held in Wellington on 17 and 18 April 2012. Those selected to attend represented a cross section of people involved in the sector; all leaders in their respective areas.
Hayes Knight Audit Director Craig Fisher was invited to the forum as a panel presenter. Below is the paper he presented.
Do we have an appropriate definition of "charitable purpose" in New Zealand? Does it need updating? Put this question to those entities that have been refused charitable registration and they will tell you that our legal definition of “charitable purpose” is out-dated and not well suited to New Zealand society in 2012. To protect the country's income tax base the IRD is reluctant to widen the definition (a valid point). But as with many difficult situations, progress is often shaped by the exploration of a good question.
Firstly some context; why was I invited to present at the forum? I am a Chartered Accountant with an interest in not-for-profit (NFP) organisations. Hayes Knight’s client base represents a good snap-shot of New Zealand with an ideal mix of for-profit, NFP and state sector organisations; ranging from small to large. A significant portion of our team, myself included, specialise in working with NFP organisations, from tiny incorporated societies to large service providers and philanthropists. While I did not attend the forum to represent any individual clients, this breadth and depth of client base provides me the luxury of forming and sharing personal observations.
Secondly; accounting with regards to the NFP sector is all about accountability. This may sound like common sense but sadly it is not always common place. Accordingly I have a considerable interest in ensuring transparency and accountability.
This leads me to three bouquets to be given to the Charities Commission:
1. For helping to promote increased
transparency in the charitable sector in New
2. For holding this forum to explore the important question whether our current legal definition of charitable purpose is appropriate for New Zealand society in 2012 and beyond. This demonstrates bigger picture and longer term thinking.
3. For being a useful coordinator/educator in the sector, despite the relatively short time the Commission has been in existence.
The Charities Commission
has certainly not pleased everyone. I, like some others,
have provided my share of both brickbats and bouquets over
time. A regulatory body that is able to please everyone is
probably unrealistic, but it has created some useful
debates. On balance I believe it has had a net positive
impact on the New Zealand charitable sector, as well as on
the wider NFP sector, and as a result by extrapolation, a
net positive result on New Zealand society.
1. Charities are a subset of the wider NFP sector. We roughly have just over 26,000 charities in New Zealand and best estimates suggest approximately another 75,000 NFP entities in the wider sector. Having charitable status is different to just being a NFP entity. Many don’t seem to be aware of, or appreciate this distinction. Many incorrectly use the terms interchangeably. This can lead to fuzzy thinking and suboptimal outcomes.
2. So, what are the benefits of
charitable status? As far as I can see there are 3 main
ones, two in relation to tax favours and one about
a. An income tax exemption – beneficial if an entity creates a trading profit. Yet, interestingly, many in the charitable sector do not create consistent trading profits anyway.
b. Donation deductibility – beneficial to promote donations to the entity from the public; both individuals and businesses.
c. The brand/status/positive image perception of being seen as a charity. I believe this “badge” of being a registered charity is increasingly seen as a competitive branding and marketing benefit for entities within the wider NFP sector.
4. The sector has traditionally been disjointed with regards to information sharing. While there are some great examples of coordination and information sharing within the sector this has not traditionally been the case across the sector as a whole. In my opinion the Charities Commission has helped dramatically improve this. There is still evidence of this disjointed nature in the wider NFP sector. This is a tragedy because it creates inefficiency and costs the sector wasted time and money, valuable resources that could be directed to providing more services to end users in need.
An unscientific but interesting poll
In preparation of attending the forum I polled our client and contact base for input. One of the questions was; Why are you a charity? The main answers were:
1. Funding and competitive pressure. This is the number one challenge faced by most entities in the NFP sector in New Zealand. If an entity can establish itself as a charity then it gains a potential competitive advantage when it comes to funding applications. Many funding providers use registered charitable status as means to cull or limit applications to them. Furthermore it is suspected that some funders use charitable status as a defacto or lazy quality check because these entities are required to follow certain procedures to get and remain registered. This perceived competitive advantage by being branded a charity is also the reason that some entities that don’t otherwise need charitable status, such as sporting organisations that already have their own income tax exemption in the Tax Act, also seek to become registered charities. As one sporting client said to me; why would we cut off a possible funding stream if we can avoid it?
2. Tax favours. Income tax exemption and donation deductibility.
3. “Because we should be”. Entities that have always considered themselves charitable.
What we see in our practice as Auditors and Assurance providers for charities.
• As a generalisation, we see relatively few charitable service organisations that have significant trading profits requiring an income tax exemption. However, there is an increasing trend towards charities looking to create sustainable income streams. Many are considering business activities in order to achieve this to help fund their charitable works and reduce their reliance on grants and donors.
• Philanthropists do require charitable income tax exemptions given that their earnings tend to be dividend and interest income.
• On the subject of donation deductibility, donee status is important. Donation deductibility is a key tool for encouraging donations, even if the rebates are not always actually claimed. The recent study by BERL; Giving New Zealand Philanthropic Funding 2011 is a fascinating report and shows how generous New Zealand individuals are. This essential reading report commissioned by Philanthropy New Zealand is available from their website: www.philanthropy.org.nz. The report shows amongst other things how New Zealanders have doubled their donations in the last 6 years to charitable causes. Another point worth noting: giving by individuals is by far the greatest source at 58% and equating to $1.54 billion in 2011. Interestingly, only 40% of those who donate claim their rebates. This supports what we see anecdotally i.e. relatively low levels of awareness of the rebates and people not bothering to keep the paperwork or complete the necessary administration to claim a rebate.
• We are glad to report that we see relatively limited abuse of charitable status. Unfortunately we do see a frustratingly high level of ignorance across the whole NFP sector, including charities, regarding many of their legal and accountability responsibilities. Greater education around responsibilities, accounting and accountability is needed.
The elephant in the room
The elephant in the room regarding the charitable purpose definition is taxation.
Taxation at its boiled down essence is simply the Government collection of money from the public for distribution to public causes that the Government makes on the public’s behalf. Hence if the Government is allowed to decide tax favours via something like the charitable purpose definition in legislation then it is making charitable choices on the public’s behalf.
Broadening the definition of charitable purpose comes with the risk of widening the loss to the New Zealand tax base. However, is the Government best placed to decide (on behalf of the public) what is charitable in New Zealand society in 2012? Reflecting on the BERL study; as individuals we in New Zealand society want to support charitable causes and individual philanthropy allows individual choice.
Does the Government lose that much
from widening the charitable purpose definition in taxation?
I suspect not greatly via the income tax definition.
Possibly via the donation deductibility - but offsetting
this is the fact that a successful and well funded
charitable sector to a certain extent removes the need for
direct Government funding of various issues that are
addressed by various charities in New Zealand society. In
addition, a successful and vibrant charitable sector is also
still generating a substantial GST flow for the Government
The definition of Charitable Purpose
It currently is over 400 years old and consists of the four heads of charity being the advancement of religion, advancement of education, the relief of poverty, and the tricky one which has largely been determined by case law over the years; “and any other purposes beneficial to the community.”
It is still relevant today? The paternalistic concept of charity in Elizabethan society in the 1600’s when the definition was created, is very different to today when we have a much more sophisticated society with a variety of Government and other support systems in place. As well as pure charities in the traditional sense, many would argue that there are also many other things in our society today that deserve supporting. Therefore, does the definition need widening to encompass more of the NFP sector which currently provides community good but is not considered charitable under the statutory definition?
An individual’s definition of charity will be influenced by many things and be highly variable. That’s OK and is surely just a reflection of the diversity within our society. There will be as many definitions as there are individuals. This makes it difficult to exact a definition that we can all agree on.
Taking a very broad view of charitable purpose one could equate this with: Things good for New Zealand Society as a whole. Or “NZ Inc” as it is sometimes referred to.
Perhaps the answer
is to consider other support mechanisms for current
non-charitable entities in the wider NFP sector that provide
community good. This probably means tax favours for them,
although I suspect donation deductibility is far more
important than income tax exemption for many in the sector.
Perhaps it is also the branding credibility that comes with
being part of a regulated NFP population, just as charities
have benefited from being regulated by the Charities
Can business aims be charitable?
This point relates directly to a number of our current and past clients, including Business Mentors in the Community and the New Zealand Institute of Management. These two NFP organisations essentially exist to improve the general level of business skill and acumen in New Zealand. By providing these services their aim is to improve the overall business community resulting in more jobs, more income and a better society.
However they fail the current charities definition as they provide services to business individuals which can lead to individual gain.
My view is that these NFP organisations are doing public good and deserve supporting. The question is: should this be done via charitable status or via another channel of support?
Interestingly tax favours affect them differently. One is largely membership based, receives little in the way of grants or donations and lives very much within its annual membership funding means i.e. it has limited trading surpluses. For them the charitable tax favours have limited significant impact. The other receives a considerable amount of funding support from organisations providing donations. Therefore donation deductibility makes a potentially significant impact to their level of available funding and hence the level of services they can provide.
Looking at these examples I am attracted to the concept of defining charitable purpose by looking at altruism and volunteerism for the public benefit i.e. looking at the spirit in which the funds are given and for what intent. This would mean considering the good that is achieved and the purpose for which support is provided, with no expectation of personal gain as the appropriate “lens” with which to determine if charitable status and tax favours should be granted.
Maybe we don’t need to throw the baby out with the bathwater. What if we kept the long standing definition of charitable purpose, but progressively extended it to remain relevant to our society via a body like the Charities Commission which could in its decisions consider other important factors such as altruism and volunteerism for the public benefit.
Such a change
would require a balanced and flexible consideration of
direct and indirect community benefits. To do this we need
an independent, innovative and inclusive body such as the
Charities Commission. I’m not sure whether all these
factors could be consistently applied if it was under the
direct control of the Government of the day.
The issue of advocacy
This has been the source of much contentious, and sometimes what appears to be sensational and erroneous, media regarding decisions of the Charities Commission arising from the legal cases taken.
Political advocacy as a primary purpose is not currently considered charitable. This is especially the case when it comes to political parties which are not and should not be considered charitable. This is sound logic.
However like the business related examples already mentioned, many forms of advocacy can be for the public good. I act for a number of similar organisations which involve advocacy some of which are considered charitable and some not, so I don’t believe that the Charities Commission have necessarily made all correct decisions so far. That said, I suspect this will change as the Charities Commission evolves and becomes more sophisticated.
Among our client base is Greenpeace and I have often asked people if they think of Greenpeace as charitable? The majority say something along the lines of: while we may not always support their methods they do seem to be trying to save the planet, so yes. In fact the ratio used to be about 9/10 would consider them to be charitable. Interestingly that number has dropped back a bit in recent times as Greenpeace has stepped up their activity levels within New Zealand, particularly in areas that perhaps butt up more directly against New Zealand business vs. more remote issues such as saving the whales. Yet the majority still see them as being charitable. So have we got it wrong regarding advocacy?
In summary, advocacy, and the freedom of speech, is an essential ingredient in a democratic society. Advocacy is how positive change occurs in a democratic society. It is based on value judgments, but these change over time. Advocacy helps promote good public debate. Hence I believe it is important that we somehow work out how to accommodate and support an environment that allows advocacy and healthy debate to thrive in New Zealand even if it is not considered a charitable purpose.
About the Author
Craig Fisher FCA is Chairman and Audit Director at Hayes Knight Chartered Accountants, and a specialist regarding NFP and charitable entity issues.