These administrative guidelines are intended to provide clarity about the tax position for entities that have not completed the process of registering with the Charities Commission by 1 July 2008. The guidelines describe:
- what happens to tax exempt and/or gift duty exempt status if a charity hasn't completed the Charities Commission registration process by 1 July 2008
- what a charity needs to do to retain tax exempt and/or gift duty exempt status
- how a charity can prove it has taken "reasonable steps" to register with the Charities Commission
- what won't count as proof that a charity has started the registration process
- answers to common questions for charities tha have not completed the registration process with the Charities Commission by 1 July 2008.
The 1 July 2008 law change
Under law that comes into force on 1 July 2008, a charity must be a "tax charity" to be entitled to the charitable purpose income tax exemption and for gifts to that entity be exempt from gift duty.
Charities that do not register by 1 July 2008 may be subject to income tax and will therefore no longer be exempt from resident withholding tax in their investment income.
The Charities Act 2005 gives powers to the Charities Commission to backdate registration to the date on which a properly-completed application was received.
Budget night legislation, section CW 41(5)(ii) of the Income Tax Act, contains a transitional measure for entities that have not completed the registration process by 1 July 2008. Entities that qualify will be treated as income tax exempt and gifts made to them will not attract gift duty.
The legislation preserves the income tax-exempt status of organisations currently exempt as a charity that can show that they have started to take reasonable steps in the process of preparing an application for registration before 1 July 2008, and that intend to complete the registration process.
The transitional measure is intended to apply to entities that need more time to complete the registration process, where those entities have genuinely tried to comply with the registration requirements, rather than to those entities that have just not turned their mind to the issue or decided not to comply. The measure is to be applied in limited circumstances.
We intend to review, by 31 March 2009, the income tax exempt status of those charities that have not registered with the Charities Commission or have not taken reasonable steps to start the process of registration.
What a charity needs to do to retain tax exempt and/or gift duty exempt status
The new section CW 41(5)(ii) of the Income Tax Act 2007 deals with transitional tax consequences for charities that need more time to complete the registration process. It applies to entities that:
- started, before 1 July 2008, to take reasonable steps in the process of preparing an application for registering as a charitable entity under the Charities Act 2005, and
- intend to complete the process of preparing an application in future, and have not been notified by the Inland Revenue that they are not a "tax charity".
The entity must first meet the technical requirements of a charity as set out in sections CW 41, 42, and 43 of the Income Tax Act.
Entities that meet the requirements of this transitional measure will retain their exemption from income tax and any gifts they receive will continue to be exempt from gift duty. This also means that for those entities that have been issued with a Certificate of exemption from resident withholding tax (COE), the exemption will continue to apply.If the application for registration as a charity is declined, the above exemptions will cease to apply from 1 July 2008.
Proving a charity has taken "reasonable steps" to register with the Charities Commission
A "process" is defined as a systematic series of actions directed to some end, in this case, being a properly completed application for registration.
An application for registration with the Charities Commission by 1 July 2008, whether online or otherwise, will be regarded by Inland Revenue as constituting a reasonable step in the process.
Applications by 1 July 2008 aside, Inland Revenue requires documented evidence that, by 1 July 2008, a charity has taken reasonable steps in the process of preparing an application for registration. For example, any board minutes, resolutions recording formal decisions and commitments to register (with timeframes given), any documented decisions to take active steps towards preparing a proper application (such as a recorded decision to instruct solicitors/advisors or other third party to begin preparation).
What your charity needs to give the Charities Commission
Section 17 of the Charities Act 2005 sets out what is required by an application for registration with the Charities Commission.The application must:
- be sent or delivered to the Commission and must be in the prescribed form, and
- be accompanied by a document in the prescribed form, signed by, or on behalf of, every person who is an officer of the entity, that contains a certification that the person is not disqualified from being an officer of a charitable entity in relation to the entity under section 16, and
- be accompanied by a copy of the rules of the entity, and
- be accompanied by the prescribed fee for the application (if any), and
- contain, or be accompanied by, any other prescribed information or documentation.
Starting the process of registration must include starting any of the steps to meet the application requirements. The process above can also be carried out online with the Charities Commission.
How to prove a charity has started the registration process
The following actions will be considered to be evidence of preparing an application for registration. Provided they commenced before 1 July 2008 and are supported by documentary evidence:
- request for professional advice to commence registration of an existing charity
- request for professional advice to draft rules/charter for an existing or proposed charity that will then be registered
- charter or draft rules are in the process of being prepared by an organisation that intends to register as a charity
- preparation of registration application form, even if not yet fully completed, that clearly shows intention to register
- commenced online registration with the Charities Commission, even where the submission stage has not been reached.
Each of these actions must include copies of file notes, draft copies of rules/charter, committee minutes, director or trustee resolutions, draft copy of registration form, a letter from a third party that the process has started for registration, or similar evidentiary documentation, if applicable.All documentary evidence must be dated.For a commenced online application, the record will be an electronic document held by the Charities Commission and the applicant will also have a log-in code.
Case by case assessment will be made of an entity's actions to determine whether a real intent can be shown.This will include consideration of an intention to make an application to complete the registration process within a reasonable timeframe.
What won't count as proof a charity has started the registration process
None of the following on their own will normally be considered sufficient evidence in preparing an application for registration by 1 July 2008:
- a call to Inland Revenue/advisor/Charities Commission expressing an intention to form a charity
- any general information requests about the registration process
- a call to Inland Revenue/advisor/Charities Commission for information about registering an existing charity
- request to Inland Revenue/advisor/Charities Commission to send registration forms
- "do I need to register" request to Inland Revenue/advisor/Charities Commission
- letter from Inland Revenue that an organisation needs to register
- downloading registration information and/or form from Charities Commission website.
A letter from Inland Revenue that an existing operating charity is exempt from tax will no longer have effect from 1 July 2008 if the registration process has not started.
A genuine enquiry to Inland Revenue to clarify an organisation's current tax status may indicate the start of a registration process if the purpose of that registration is solely to be treated as a tax charity. This will be determined on a case by case basis.
Questions and answers
What actions would prove a charity is serious about registering in future?
There should be a stated intention and commitment to register with the Charities Commission.An entity must have a genuine intention to complete the process of a Charities application in the near future.
An entity is required to specify the time period in which they intend to submit an application to the Charities Commission and complete the registration process.
What if a charity withdraws their application?
If an entity has submitted an application prior to 1 July 2008, but then withdraws the application, this on its own, is not an indication of having an intention to complete the process. An entity needs to satisfy the criteria set out above to qualify for the transitional measure.
What happens if an entity has started the process but has not submitted an application for registration within a reasonable period?
An entity would continue to have tax charity status provided the entity can demonstrate that it intends to complete the registration process within a reasonable timeframe, as set out in the administrative guidelines criteria.
What happens if an entity has submitted an application for registration and the registration had been declined, or the entity has been previously declined charitable status by Inland Revenue?
If the entity is found not to have a charitable purpose then the entity would fail to meet the requirements of the charities commission and income tax exemption.
If an entity is found not to have made a properly completed application, and intends to remedy this,by submitting a further application to the Charities Commission within a reasonable timeframe, Inland Revenue will consider the transitional measures criteria.Inland Revenue needs to be satisfied that all reasonable steps have been taken, and documented evidence provided, with a clear intention to complete the registration process within a reasonable timeframe
Does the entity need to register?
A non-profit body is any society, association or organisation, whether incorporated or not, that is not carried on for the profit or gain of any member, and whose rules/constitution do not allow money, property, or any other benefits to be distributed to any of its members.
Non profit organisations that do not qualify for an income tax exemption can qualify for a deduction against their net income. The deduction available to non-profit bodies is for an amount equal to the lesser of $1,000, or the amount that would be the net income of the society, association or organisation.
A non-profit body must have written rules in order to qualify for an income tax exemption or deduction. These rules give an organisation a set direction and purpose. If an organisation does not have rules or a constitution they will not qualify for an exemption or deduction, because there is nothing in writing to bind members to a particular course of action and ensure its funds are used in ways which are in line with its aims.
A charitable organisation will be required to be registered by the Charities Commission to be eligible for an income tax exemption. The requirement to register with the Commission will have no effect on other non-profit bodies that are not registered charities, although non-profit bodies will continue to be eligible for the $1,000 deduction from income.
An organisation is working to be group registered as a group, what is the effect of this?
Group registration with the Charities Commission will cover all organisations that are a party to that group registration and the Commission will notify Inland Revenue of the names of those organisations included in the group registration.
The organisation has numerous branches or associations that will be covered by a parent body's registration - what is the effect of this?
When sending an application for the transitional measure please inform us of all the entities that your application relates to. The transitional measure will apply to all the entities that are covered by the registration of the parent body provided they are all operating under the parent body's rules or constitution.
A marae has started working through an application last year. Many people are required to be consulted, so the application hasn't been sent in to the Charities Commission yet. Do the transitional measures apply here?
Yes, they should apply in this situation. The entity would need to provide Inland Revenue with documentation of what steps have been taken, and a timeline of when it intends to have the process completed. Include anything that may be relevant. If we need more information we will contact you.
An application has been sent to the Charities Commission - if it isn't approved by
1 July 2008 will the entity have to apply for the transitional guidelines?
No, the transitional guidelines are not intended for organisations that have already applied to the Charities Commission. When the Charities Commission approves your application they may backdate the registration to the date you applied. Please refer to the Charities Commission website for more details.
What is the tax position if an application for registration is filed and approved after 1 July 2008?
We will consider the circumstances on a case by case basis. If the entity can show it started the process of registration before 1 July 2008 then the transitional measure will apply.
Date published: 07 Aug 2008
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