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A charity is deregistered when it is removed from the Charities Register held with Charities Services, Department of Internal Affairs. As entities on the Charities Register are entitled to charities-related tax concessions, deregistration has tax consequences.
Charities Services may decide to remove an entity from the Charities Register if:
An entity can also ask to be removed from the register for any reason, such as if it:
The following rules determine whether a deregistered charity will be liable for income tax:
Cessation of income tax exemption
Tax on net assets
A charity deregistered before 1 April 2015 by Charities Services (or before 14 April 2014 if you chose voluntary deregistration) will not be liable for tax on their net assets.
A deregistered charity will be liable for income tax on any income it derives after the end date at the relevant rate:
|If the charity is a …||then it will be taxed at the ...|
|company||company tax rate.|
|trust||trust tax rate.|
|Māori authority||Māori authority tax rate.|
|If the charity ...||then the date the entity will be subject to income tax will be from ...|
|has always complied within its rules held on the Charities Register||the later of:
|stopped complying with its rules held on the Charities Register||the date it stopped complying with its rules.|
|never complied with its rules held on the Charities Register||It will be subject to income tax as if it was never registered|
|was not registered with Charities Services and later ceased to meet the requirements of the exemption||the date it ceased to meet the requirements.|
For a deregistered charity, if the entity has always acted in keeping with its rules, the end date for the charitable income tax exemption is the later of:
For organisations not registered with Charities Services which cease to be eligible for the business income tax exemption, the end date is the day they no longer met the criteria for the exemption.
The following table shows when a deregistered charity may be required to file their first tax return if they have a 31 March balance date. The examples in the table all use 1 May 2015 as the day of charitable registration and 1 November 2017 as the date the entity is removed from the Charities Register.
|If you ...||then you are liable for income tax from …||and if required the first tax return will be the return for the year ended...|
|have always complied with your rules, and you do not dispute the decision to remove you from the Charities Register||1 November 2017||31 March 2018|
|have always complied with your rules, and you:
||1 February 2018||31 March 2018|
|have always complied with your rules, and:
||1 October 2018||31 March 2019|
|stopped complying with your rules on 1 August 2016||1 August 2016||31 March 2017|
|have never complied with your rules, and you have been on the Charities Register since registration on 1 May 2015||1 May 2015||31 March 2016|
|are not registered charity but previously qualified for an income tax exemption for business income under section CW 42 of the income Tax Act 2007. Ceased to meet the requirements of the exemption on 1 November 2017||1 November 2017||31 March 2018|
Ceasing to comply or never complying with your rules may result in a back-dated tax liability.
Charity A is registered on 1 May 2015 and deregistered on 1 November 2017. It earns rental income of $16,000 (gross) from 1 November 2017 to 31 March 2018 (its balance date for the 2018 income year).
The entity must include the net profit or loss from this income in its 2018 tax return.
The rules for deregistered charities determine how the charity must treat all income and assets it has accumulated while the entity was entitled to the income tax exemption. This rule does not apply if the entity is entitled to another income tax exemption, or is re-registered on the Charities Register within one year.
The entity has one year from the end date to dispose of or transfer its net assets for charitable purposes or in keeping with its rules on the Charities Register.
Up until 31 March 2019 if the entity chose to retain any net assets which it has accumulated, tax will be payable on the value of any assets (including accumulated income) less liabilities the entity had at the end date. Any amount of income arising due to the net assets retained will be included in the entity's income tax return for the period that includes the day one year after the end date.
From 1 April 2019 if net assets are $10,000 or under no tax will apply. However if net assets exceed $10,000 income tax will be payable on the total value of the net assets.
Not all assets have to be included in this calculation - see Adjustments to the net asset calculation.
Charity One’s date of deregistration is 1 July 2019. Its balance sheet at 1 July 2019 is shown below.
|Cash||$ 50||Loan||$ 200|
The income calculation will be:
|Assets $550||-||liabilities $200||=||net assets of $350|
As deregistration is after 1 April 2019 and net assets are less than $10,000 no income arises.
Charity D’s date of deregistration is 1 July 2019. It’s balance sheet at 1 July 2019 is shown below.
|Cash||$ 10,500||Loan||$ 200|
|Land donated||$ 3,000||Organisation's equity||$13,150|
One year later no assets have been disposed of or transferred.
The income calculation will be:
|Assets $13,350||-||liabilities $200||=||net assets of $13,150||-||value of donated land $3,000||=||$10,150|
Charity D will include $10,150 as income for tax purposes.
Using the information from the table in Income tax return dates when a charity is deregistered, find out in the table below the year tax on net assets must be returned.
|If you ...||then you are liable for income tax from …||and if required the tax return including accumulated income/assets will be ...|
|do not dispute the decision to remove you from the Charities Register on 1 November 2017||1 November 2017||31 March 2019 (this is the return covering 1 November 2018, being one year from the end date, 1 November 2015).|
||1 February 2018||31 March 2019 (the return covering 1 February 2019).|
||1 October 2018||31 March 2020 (the return covering 1 October 2019).|
|are a charitable organisation not registered with Charities Services, and cease to meet the requirements for an income tax exemption on 1 November 2017||1 November 2017||31 March 2019 (the return covering 1 November 2018)|
The tax rules on the accumulated assets and income of a charity always apply from the final deregistration date, even if the charity had stopped complying with its rules on the Charities Register.
Some of the assets that an entity had at its end date don't have to be included in its net assets calculation. These are:
From 1 April 2019 if there is no prescribed valuation method then all assets and liabilities are to be recorded at market value.
Market value refers in general terms to the price an asset would be sold for in an arm's length transaction. The market value can be established by reference to other items with similar characteristics, in similar circumstances and location. This is usually determined from market based evidence by appraisal.
To calculate the net asset balance to be included in the income tax return, take the entity's assets (including accumulated income) less liabilities, less the value of any of the groups of assets mentioned above in "Adjustments to the net asset calculation".
Record the balance in the entity's income tax return for the period that includes the day one year after the entity's end date.
Below is an example of how to calculate the value of financial arrangements to determine the tax value at the end date. This value is then used to calculate the tax position in each subsequent year.
Charity D lent $100,000 to B in 2013. The loan was repayable on demand and the annual interest rate was 10% (compounding). No loan repayments were made.
In 2018, the charity was deregistered by Charities Services as they had not been compliant with their constitution since they were registered.
Charity D must account for this loan under the financial arrangement rules in each of the years it had ceased to meet the requirements of being a charity. It must also calculate an opening value using this formula:
|Consideration paid to person + expenditure - consideration paid by person = income|
The definitions for the terms in the formula are as follows:
Consideration paid to person is the amount paid to the person before the date the charity ceased.
Expenditure is the amount incurred under the financial arrangement rules before the date the charity ceased.
Consideration paid by the person is the amount repaid before the date the charity ceased.
Income is the amount that would have been derived under the financial arrangement rules before the date the charity ceased.
Charity D calculates the loan as follows:
In 2013, the opening value would be $100,000 and the closing value would be $110,000.
Charity D accounts for $10,000 accrued interest income in its 2013 tax return.
When a charity is deregistered, the entity will no longer be entitled to an exemption from FBT, unless it meets other requirements to be a charitable organisation.
FBT rules will apply from the earlier of two dates:
This means that if an entity has complied with its rules up until the time of deregistration, it will not face a back-dated FBT liability. If, however, the entity:
it will have an FBT liability from the first day of the quarter or income year after the date it stopped complying.
The entity will retain its donee status up until the later date of when it is either removed from the Charities Register by Charities Services or when all court or appeal proceedings have been finalised.
This will protect donors who have claimed donations tax relief in good faith, assuming that an organisation was a donee organisation. Any donations made before the entity was removed from the Charities Register will still qualify for the tax credit.
As outlined in the table above, if the entity has always acted in keeping with its rules on the Charities Register, and is involved in court proceedings or appealing a decision to deregister, it will not be liable for income tax until the date that all disputes, court proceedings or appeals are finished or exhausted.
Read more information in the Tax Information Bulletin (TIB), Vol 26, No 7 on pages 65 to 69 and Vol 31, May 2019.