Taxation Reform for Maori Organisations:Background
Taxation Reform for Maori Organisations:
Summary of Background Issues
Features of the Current Regime
The current rules are 50 years old. They operate differently from other regimes in the Act. They are largely unknown and widely misunderstood. Even at Inland Revenue level there are regional inconsistencies in the way the rules are applied.
Effectively there are three sets of rules in operation: one for large Maori authorities (more than 20 beneficiaries), one for small Maori authorities (20 or fewer beneficiaries) and one that taxes some agencies administered by the Maori Trustee.
The comments focus on the rules for large Maori authorities because they have the broadest application.
Under the current rules there is the potential for the income of a Maori authority to be taxed at 49.75%. This arises as a result of double taxation.
There is a mechanism for the relief of double taxation. It works badly at the best of times, and does not work at all if the Maori authority distributes income more than 4 years after earning it.
The resident withholding tax rate applicable to distributions from large Maori authorities is 33%. This is very high given that the bulk (c.90%) of Maori are thought to earn less than $38,000 per annum and therefore pay tax at 19.5% or less. (Based on estimates provided by government agencies. It is not known what the exact figures are.)
The drop in personal tax rates has exaggerated the distortion caused by the RWT rate. The fact that the tax system now discourages individuals from filing tax returns means that withholding taxes tend to become final taxes and the distortions are locked in.
The same issue arises with retained income. There the applicable tax rate is 25%, 5.5% higher than the rates individual beneficiaries would pay if they earned the income directly.
Proposals contained in the Tax Bill will substantially reduce the problems by reducing the applicable tax rate to 19.5% to reduce the difference between tax paid and withheld by Maori organisations and the marginal tax rates of their members, and by introducing an imputation type system to counter double taxation.
The imputation system is based closely on the system currently in place for companies, but is not identical to it. In particular the Maori authority credit account rules seem to have been drafted on the assumption that Maori organisations will not be involved in cross border transactions.
The exact design of the imputation/withholding tax system is key in determining how easily Maori authorities can comply with the system, and how much flexibility they will have in dealing with sums from non-taxable sources. A favourable result could have been achieved by making use of the additional rules currently in existence for qualifying companies, however these have not been included.
Instead the treatment of distributions from Maori authorities will depend on whether they represent “gross income” or whether they fall within the meaning of a “non-taxable distribution”. Maori authorities will need to track income from various sources, resulting in increased compliance costs and an increased likelihood that amounts from non-taxable sources will end up being paid out as taxable distributions.
Further there is still a potential for double taxation where there are differences between taxable income and cash available for distribution, or where there are differences between income calculated for tax and accounting purposes where distributions are based on accounting income.
Another problem relates to the currently circular definitions of the terms “member” and “distribution”. In brief, a distribution is something paid to a member, while a member is defined as someone legally or beneficially entitled to receive a distribution.
The timing of the implementation of the new regime is important in determining how quickly the new rules can bring relief from the adverse affects of the current regime.
Currently changes set to come into effect from the beginning of the 2004-2005 income year. Indeed earlier implementation of structural changes would leave most organisations hard pressed to make the necessary changes in time for the implementation of the new regime.
However, implementation of the new tax rates, especially RWT rates, ahead of the structural changes would alleviate some of the inequity of the current regime without putting pressure on the infrastructure of taxpayers or government. These could be implemented for the 2003-2004 year, but are currently set to start in 2004-2005.
Entities currently included in the Maori authorities regime are largely trusts or trust based entities created by Statute or Court order to manage assets subject to common Maori ownership (usually land).
For example, the owners of a block of Maori freehold land may own a piece of land in fixed shares. Often the Maori Land Court will establish a trust over that land under the Maori Land Act 1993 to facilitate the management of the land. In the absence of the trust, the land owners’ relationship would be more akin to a partnership. The trust is something external imposed upon the ownership of the asset, however some of the owners may participate in the management of the trust.
A common feature of Maori authorities is that individuals have little or no flexibility regarding their interests in the authority. Similarly, the authority will usually be restricted in its ability to deal with its assets.
The perpetuation of a separate tax regime for Maori authorities is appropriate in that it recognises that these entities operate in a unique environment.
The proposed tightening of the Maori authority definition means that there are entities that currently come within the regime that may be excluded after the implementation of the new regime.
The new Maori authority definition includes:
o Persons established
in accordance with an order made under Te Ture Whenua Maori
o The Maori Trustee acting as an agent for the collection and distribution of rents, royalties or interest;
o A Maori Trust Board;
o The Crown Forestry Rental Trust;
o A settlement entity established to hold, and who holds, assets as part of a Treaty of Waitangi settlement redress; and
o The wholly owned subsidiary of a Maori authority or a group of Maori authorities.
There is no longer a catch all provision for organisations that exist for the benefit of Maori.
It is important to challenge the boundaries of the new definition to ensure that it is appropriate not only for the entities currently in existence, but also those which may be created in the future and before the next review (hopefully not another 50 years off).
The inclusion of wholly owned subsidiaries as Maori authorities is an important step forward in providing Maori authorities with greater freedom in the way they order their affairs.
Marae and Charities
Under the current law it is, at best, unclear whether or not marae have charitable purposes. If they do not, they cannot claim charitable status to claim an income tax exemption.
The issue arises because many of the functions marae serve would, if viewed individually, render them charitable. Those functions which are not charitable in the legal sense, may be considered to be philanthropic as they support cultural structures important to Māori and New Zealand.
There is some debate in the community as to whether it is appropriate for marae to be treated as being charitable or whether they should be exempt on some other basis.
Likewise there have been problems with entities which are intuitively charitable (such as education funds), but that fail on the public benefit test because they are established to benefit members of, for example, an Iwi or Hapu group. The pool of potential beneficiaries may be very widely dispersed, but the fact that they have blood ties disqualifies the entity from being charitable.
The proposed change to allow marae to qualify for charitable status appears to be quite limited. Where a marae body applies its funds to anything other than the administration and maintenance of its physical structures (for example purchasing provisions for a tangi or hui), it will fail to qualify for the exemption. Thus it may be necessary for marae to have two bodies – one to look after the physical structure and one to attend to other needs – and to maintain a strict separation between the two.
In order to qualify for the exemption, marae must be established on Maori reservations.
The government has proposed relaxing the public benefit requirement so that the mere existence of blood ties will not exclude the entity from being charitable. The entity must still confer a public benefit in all other respects. It is unlikely that this provision could be used to shelter private family trusts and the like.
The relaxation of the public benefit rule will apply across the board regardless of the race of the would-be charity’s beneficiaries. The nature of some public comment appears to be alarmist and suggests that the true application of the changes has been overlooked.
Election and Interaction with Other Parts of the Act
The Bill contains provision for a Maori authority to be able to elect to be taxed under the Maori authority rules or to be taxed under the general rules. These rules appear to be reasonable, but could still produce unfavourable consequences. This underlines the need for Maori authorities to think carefully before making an election of this type.
The Bill provides that authorities which are trusts can be treated as ordinary trusts and that authorities which are companies for tax purposes can choose to be taxed as ordinary companies.
There is no ability for a Maori authority which would otherwise be taxed as an individual to elect to do so. However, it is difficult to think of circumstances in which this would be desirable.
There is a lack of clarity in the rules as to the exact boundary between regimes.
This review has addressed tax problems arising from the structure of the Maori authorities regime itself. This regime deals with the taxation of taxable income earned by Maori authorities.
As with any other taxpayer, the taxable income itself is calculated using the general provisions in the Income Tax Act 1994. Issues often arise for Maori authorities in applying the general provisions because they not been drafted to take into account the unusual circumstances that can arise through the common ownership of the assets and legal issues surrounding the administration of the entities which manage them. This reform does not address these issues.
31 May 2002