Inland Revenue (IR) recently sought public consultation via an officials’ issues paper called Taxation and the Not-For-Profit (NFP) Sector. The paper primarily focuses on unrelated business income derived by charities, and the NFP sector only received a passing (two-page) glance. 

In CA ANZ’s view, the proposals put forward are potentially far reaching, lack detailed comment and are likely to generate greater uncertainty than assistance. In our submission, we cautioned against haste, recommended that IR consult widely and take time to get any changes in tax settings right. 

The NFP sector is wide and diverse, important to society and deserves a more considered approach.

What counts as an NFP?

It is important that any changes are carefully considered and well thought out, as their impact has significant reach. 

It affects many organisations from the very small to the very large, such as local community hobby clubs, charities, incorporated societies, sports associations or bodies, mutual associations, member bodies, commercial collectives/trade bodies, unions and body corporates. The list goes on – but I’m sure you get the picture! 

Indeed, you are likely to be actively involved with one or more NFPs in a personal and/or professional capacity.

Inconsistency of tax treatment

CA ANZ’s key call out is for consistency of tax treatment of the NFP sector. There are currently two substantive issues – in terms of legislation and practice.

There are myriad ad hoc historical tax exemptions which advantage various structures and activities over others in the NFP sector. Friendly societies and credit unions are not taxed on member income, while all income of sports clubs (a body promoting amateur games and sports) is exempt. A level playing field is required for all. 

Different tax treatments and uncertainty abound in the sector, and with various interpretations adopted and advice given on the common-law principle of mutuality, and its interaction with relevant income tax legislation. IR’s operational practice and changes in guidance over time have also not helped. 

As a result, some NFP entities are treating member subscriptions and levies as exempt, while others are not. The tax treatment of wider member transactions is also varied. Many smaller clubs are relying on the NZ$1000 net income exemption to stay outside the tax net. Not all appreciate the limitations placed on this exemption. 

Certainty, consistency and fairness are needed. Tax compliance should also not overburden small clubs and societies that rely on volunteers to service key roles. 

Taxation aligned with purpose of entity

In our view, the appropriate tax policy position for the NFP sector should be guided by the nature and purpose of the entity that will be affected. By definition, a not-for-profit organisation means that profit is not its purpose for existence. All transactions of a NFP entity should not be taxable. Possible risks of abuse of the tax-free treatment could be alleviated by targeted integrity measures.

This would significantly reduce tax compliance costs.

Law should be clarified 

To achieve certainty and consistency, we recommend, at a minimum, the law be reviewed and amended to clarify that membership subscriptions and levies are non-taxable. The issue should not be left to be determined by a non-binding, public IR statement.

It would also be helpful to confirm the interaction between the tax rules for NFPs and the income tax exemption rules for registered charities (business income and non-business income).

De minimis required 

Given the significant number of organisations that would be required to pay tax if IR’s revised (but still in draft) position was enforced, we recommend a de minimis (about minimal things) rule be put in place. This would exclude most of the small NFPs in the sector and could be achieved by increasing the current net income exemption for NFPs from NZ$1000 to at least NZ$10,000.

Most small clubs look to break even annually and have very small cash reserves. Their primary focus is on member activity, rather than profiting from members. 

However, a de minimis may not work for all situations. Apartment body corporates will often have a component of membership levies that are to fund regular but less frequent building maintenance and may not benefit from the suggested de minimis. Additional levies may be required to cover the shortfall generated by taxation, with the prospect that losses may then arise in future years once the repair work is carried out, provided it meets the standard to be deductible repairs and maintenance, rather than a capital improvement.

Find out more

Read CA ANZ’s full submission.