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In New Zealand, if a charity is registered with Charities Services, then it is eligible for an income tax exemption on business profits. This used to apply to business profits of entities that carried out work for the benefit of a charity. However, from the 2020-2021 tax year onwards, the law surrounding this area has changed. If your business works for a charity, it needs to be registered as a charitable entity to be eligible for a tax exemption on your income. This article will explain what a charitable entity is and how this may apply to your business.

What is a Charity?

Many community groups operate as not for profit organisations in New Zealand, without needing to apply for formal registration. However, registered charities gain certain tax exemptions on their business activities and have the right to call themselves a registered charity. These are typically:

  • incorporated societies; or
  • charitable trusts.

Registered charities qualify for exemptions surrounding:

  • income tax; and
  • resident withholding tax.

The Criteria for a Registered Charity 

Charities have certain criteria they need to meet before they are eligible for registration. Like your business, they need to have an IRD number and may need to register for GST and PAYE. Additionally, they need to have a formalised legal structure and have clear goals and purposes for their organisation. In particular, this means that a charity must:

  • have exclusively charitable purposes and activities; and
  • not use any of its income or funds to personally benefit any of its members, trustees, or associates, or have funds available for such use.

If a charity does not meet these criteria, it cannot be registered, and it will not be eligible for tax exemptions.

Additionally, a charity must pay income tax if it:

  • operates without written rules, a constitution, or a trust deed;
  • operates under a set of rules or constitution that is not for a charitable purpose or otherwise does not qualify for a tax exemption;
  • uses business income for charitable purposes outside of New Zealand; or
  • is not registered by Charities Services.

What Are Charitable Purposes?

For a charity to qualify for a tax exemption on business income, it needs to prove that profit is for a charitable purpose. A charitable purpose can include:

  • relieving poverty;
  • advancing education;
  • advancing religion; or
  • any other matter beneficial to the community.

For example, promoting your local amateur rugby club could be a charitable purpose if this promotion also includes one of the above purposes.

However, this charitable purpose needs to be an organisation’s primary purpose if it wants to qualify as a charity, and be eligible for a potential tax exemption. For instance, an organisation does not qualify for a tax exemption if its primary purpose is to make a personal profit and its charitable purpose is incidental.

Additionally, charities can have non-charitable purposes, as long as they are not its main purpose. For example, advocacy could be an acceptable purpose as long as it was a secondary purpose.

Carrying Out Business for a Charity

In the past, businesses could carry out work for charities without being registered and still qualify for an income tax exemption.

For example, companies could operate normally but have their sole shareholder be a registered charitable trust. The charitable status from the trust included the company, so its business profits were eligible for a tax exemption.

With law changes in 2020, businesses that carry out work with a profit for a charity’s benefit must be registered with Charity Services to get an income tax exemption. Therefore, if your business currently does this and is not registered, you should seek legal advice about charity eligibility, and contact Inland Revenue. Moreover, changing your business’s purposes may involve changing your constitution, clarifying that your business’s main purpose is to produce a profit for charity.

Tax exemption status also only applies to business income for charitable purposes acquired in New Zealand. Therefore, if you conduct such work out of the country and gain a profit, that is still taxable.

For example, your business may provide aid for relieving poverty in a different country. Because this does not occur in NZ, you may not be able to claim a tax exemption.

Donee Status

Charities have donee status, which means that the funds of the organisation are applied widely or wholly for purposes in New Zealand that are:

  • charitable;
  • benevolent;
  • philanthropic; or
  • cultural.

If your company donates to an organisation with donee status, you can claim a tax deduction.

Key Takeaways

In the past, businesses that carried out work to benefit a charity could rely on its charitable status to be eligible for an income tax exemption. However, that is not the case anymore, and businesses themselves need to register as a charitable entity if they wish to keep this tax exemption. If you would like more information or help with your business’s tax exemption status, contact LegalVison’s New Zealand business structuring lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

What is a charity?

A charity is a non-profit organisation, that has typically been registered with Charities Services. They provide a type of aid to the community and collect funds for a charitable purpose.

What are examples of charitable purposes?

A charitable purpose is usually something that benefits the community in some way. Examples include: alleviating poverty, advancing education or religion, or something else that has a positive benefit for the community.

Are charities tax-exempt?

Charities do not immediately qualify for an income tax exemption just because they exist. They need to register with Charities Services first and have some kind of formal legal structure. They also need to specify what their charitable purpose is.

Can my business get a tax exemption if it works for a charity?

If your business does work for the benefit of a charity, you do not get an income tax exemption just because you do so. You need to register your business as a charitable entity with Charities Services to qualify for a tax exemption.

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