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Charitable organisations Ngā rōpū kaupapa atawhai

Deregistration of charities

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.

Grounds for deregistration

Charities Services may decide to remove an entity from the Charities Register if:

  • the entity:
    • is not, or is no longer, qualified for registration as a charitable entity, or
    • has engaged in serious wrongdoing or any person has engaged in serious wrongdoing in connection with the entity.
  • there has been a significant or persistent failure by:
    • the entity to meet its obligations under the Charities Act 2005 or any other enactment, or
    • any one or more of the officers of the entity to meet their obligations under the Charities Act 2005, or
    • any one or more collectors who act on behalf of the entity to meet their obligations under the Charities Act 2005.

An entity can also ask to be removed from the register for any reason, such as if it:

  • has ceased and is winding up, or
  • continues to operate but not as a charitable organisation.

General tax rules for deregistered charities

The following rules determine whether a deregistered charity will be liable for income tax:

Cessation of income tax exemption

  • When a charity is deregistered it will become liable for income tax. This applies unless the entity qualifies for another tax exemption, for example, the charity exemption ceases but the charity then qualifies for a tax exemption as an amateur sports body or community housing entity. If you believe your entity qualifies for another exemption, following deregistration, please contact us at Charities.queries@ird.govt.nz so we may update our records.
  • The grounds for deregistration will determine the date the charity becomes liable for income tax on income earned on or after that date.

Tax on net assets

  • Tax will also be payable on any assets (including accumulated income) less liabilities that are held on the end date for its charitable tax exemption.
  • The tax on net assets also applies to entities not registered with Charities Services, which previously qualified for an exemption from income tax on business income under section CW 42 of the Income Tax Act 2007. In this case, the tax will apply to the net assets held on the date the entity stops meeting the criteria for a charitable income tax exemption.
  • The tax does not apply to assets which have been disposed of or transferred within one year for charitable purposes or in accordance with the entities governing documents.
  • This will apply from:
    • 14 April 2014 for entities which chose to voluntarily deregister,
    • 1 April 2015 if the charity is deregistered by Charities Services, or
    • 6 April 2016 for entities not registered with Charities Services which have previously been exempt from income tax on business income but no longer meet the requirements for an exemption.

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.

Income tax liability when a charity is deregistered

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:
  • the date it is removed from the Charities Register, or
  • the date that all appeals or court proceedings are finalised or exhausted.
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.

End date for the charitable income tax exemption

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:

  • the date it is removed from the Charities Register, and
  • the date it finishes or exhausts all appeals or court proceedings.
Note

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.

Income tax return dates when a charity is deregistered

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:
  • lodge an objection with Charities Services which is declined on 1 February 2018, and
  • do not take further action
1 February 2018 31 March 2018
have always complied with your rules, and:
  • you lodge an objection with Charities Services which is declined on 1 February 2018, and
  • you choose to take a case to the High Court, and
  • the High Court rules against you on 1 October 2018 and you do not consider appealing this decision
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.

Example - Charity A

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.

Applying the rules to tax on accumulated income and assets

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.

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.

Not all assets have to be included in this calculation - see Adjustments to the net asset calculation.

Example - Charity B

Charity B is registered as a charity on 1 May 2015 and removed from the Charities Register on 1 November 2017. It does not dispute the decision to remove it from the Charities Register. Its balance sheet at 1 November 2017 is:.

Assets Liabilities
cash
$50
loan
$200
inventory
$300
 
 
land
$3,000
net balance assets/liabilities
$3,150

One year later (1 November 2018) no net assets have been disposed of or transferred. If Charity B has a July balance date for tax purposes, it would include $3,150 as income in its 2019 return.

Tax return due on net assets

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).
  • have lodged an objection with Charities Services which is declined on 1 February 2018, and
  • do not take further action
1 February 2018 31 March 2019 (the return covering 1 February 2019).
  • have lodged an objection with Charities Services which is declined on 1 February 2018, and
  • you choose to take a case to the High Court, and
  • the High Court rules against you on 1 October 2018 and you do not consider appealing this decision
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)

 

Note

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.

Adjustments to the accumulated net asset calculation

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:

  • assets disposed of or transferred within one year of the end date:
    • for charitable purposes, or
    • in keeping with the entity's rules as they were while it was on the Charities Register.
  • assets received from the Crown:
    • to settle a Treaty of Waitangi claim
    • under the Maori Fisheries Act 2004
  • assets, other than money, gifted or left to the entity when it was exempt from income tax.

Calculating the net asset balance

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.

Example - using Charity B

Charity B is removed from the Charities Register on 1 November 2017. It does not dispute the decision.  Its balance sheet at 1 November 2017 is:

Assets Liabilities
cash
$50
loan
$200
inventory
$300
 
 
land (donated)
$3,000
 
 
Total assets
$3,350
Total liabilities
$200
net balance assets/liabilities
$3,150

The income calculation will be:

  • assets $3,350 less $200 liabilities equals $3,150
  • less the value of the donated land ($3,000)
  • The income therefore equals $150.

If Charity B has a July balance date for tax purposes, it would include $150 as income in its 2019 income tax return.

Calculating the value of depreciable property or financial arrangement

Below are examples of how to calculate the value of depreciable property and 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.

Example: Depreciable property

Charity C registered as a charitable entity in 2013. They bought office furniture for $50,000 GST-exclusive during the first month of the 2013 tax year.

In 2018, the charity was deregistered by Charities Services as they had not been compliant with their constitution since they were registered.

The charity still owned the office furniture at the date of deregistration so they must file an income tax return for each year starting from the 2013 year.

The value of the cost of premises, plant and equipment at the "date of cessation" must be depreciated under the general tax rules for each year it is used in their business. Using the depreciation rate of 19.2%, the cost of office furniture for each tax year from 2013 to the present day is:

Year 2013 2014 2015 2016 2017 2018
Opening value
$50,000
$40,400
$32,643
$26,376
$21,312
$17,220
Depreciation
$9,600
$7,757
$6,267
$5,064
$4,092
$3,306
Year-end balance
$40,400
$32,643
$26,376
$21,312
$17,220
$13,914

Charity C's assets are worth $50,000 so it applies depreciation of $9,600 in its 2013 income tax return.

 

Example: Financial arrangement

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:

Year 2013 2014 2015 2016 2017 2018
Opening value
$100,000
$110,000
$121,000
$133,100
$146,410
$161,051
Interest
$10,000
$11,000
$12,100
$13,310
$14,641
$16,105
Year-end balance
$110,000
$121,000
$133,100
$146,410
$161,051
$177,156

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.

FBT when a charity is deregistered

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:

  • the last day of the relevant quarter or income year the entity fails to act in accordance with its rules, or
  • the last day of the relevant quarter or income year the final deregistration on the entity's charitable status is made.

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:

  • had stopped complying with its rules, and
  • was not eligible for an FBT exemption on other grounds

it will have an FBT liability from the first day of the quarter or income year after the date it stopped complying.

Find out more about FBT

Donee organisation status when a charity is deregistered

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.

Income tax liability when there are court proceedings or appeals

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.

More information

Read more information in the Tax Information Bulletin (TIB), Vol 26, No 7 on pages 65 to 69.