Tax status - do we register with IRD?

A brief introduction to tax exemptions and charitable status for community groups.

Regardless of whether your group adopts a formal legal structure, you may have tax obligations for any income received or expenses paid.  Inland Revenue has a publication that provides comprehensive information about these issues:    

• IR 255 is a comprehensive guide to the tax issues for charities. 

IR 255 can be obtained by phoning 0800 377774 or by downloading from IRD's website.

The main tax exemptions available are as follows:

1. Charitable

To gain charitable status, an organisation must be established for charitable purposes or objectives. The organisation will then be exempt from all income tax but will still have to register for GST and PAYE where applicable.

• After 1 July 2008, organisations must be registered with the Charities Commission to be eligible for the exemption from resident withholding tax (RWT) that IRD allows for organisations that have a charitable purpose (see below).  
• For those not registered before 1 July 2008, legislation has introduced a transitional measure, to be used in limited circumstances, to protect the tax-exempt status of organisations that run into difficulty with completing their registration applications before that date. For further information go to www.ird.govt.nz
• The organisation will then normally get donee status (see below). The organisation does not need to apply separately for this status. If the donation box in question 20 has been ticked on the Form 1 Application for registration as a charitable entity that will be treated as an application for donee status and advised to IRD.  
• Charitable objectives generally need to potentially be of benefit to the wider community rather than just being available to a limited group.
• Where a group’s objectives include political aims it is unlikely to obtain charitable status.
• An objective is charitable if falls within one or more of the following categories:
   
  A. Relief of poverty: this is generally about meeting some sort of necessity of life.  This would include care for the aged, the sick, the infirm, and those lacking access to housing or other basic necessities of life. 
   
  B. Advancement of education: this has been broadly interpreted to include all situations involving the improvement of human knowledge and the human character through activities recognised as being specifically beneficial in those respects.  This would generally include scholarship funds, programmes to educate adults in a wide range of matters as well as work-based skills training. Preschools, schools, kohanga, and any community based education groups would fit into this category. Research activities will also be considered charitable if they improve human knowledge in the wider sense.
  
  C. Advancement of religion: any activity based on a genuinely held religious belief should qualify under this provided some benefit is provided to the wider community.
   
  D. Other purposes beneficial to the community: this is not as broad as it sounds but generally includes things seen as being charitable and beneficial to society as a whole. There are a number of specific categories that come under this including:
  
  
  • the promotion of industry and commerce;
  • promotion of safety and protection in a community;
  • things which benefit a particular geographical area  such as a public park or hall;
  • relief for refugees;
  • advancement of the armed forces; and
  • environmental matters generally.

Limitations on charitable status

While all the group’s objectives and activities need not be exclusively charitable, all of its primary objects must be charitable. 

Determining what are the primary objectives is not always straightforward, however they can generally be thought of as the main reasons for which the group was established. 

While these will normally be the objectives outlined in the groups rules, what the group does in practice will also be important.  As noted above groups with a primary purpose of engaging in advocacy or political activity are not generally considered charitable. 

Charities registration for tax exemptions

After 1 July 2008, organisations must be registered with the Charities Commission to be eligible for the exemption from resident withholding tax (RWT) and the exemption from gift duty that IRD allows for organisations that have a charitable purpose.

• If your charity has an IRD certificate of exemption from RWT because IRD have already accepted that you have a charitable purpose, you don’t need to get a new certificate if you are on the Charities Register.
• If your charity doesn’t have a certificate, you must apply to IRD for a certificate of exemption using their form IR451.
• At some point after 1 July 2008, IRD will review and may cancel certificates of exemption from RWT for organisations that IRD had accepted as charitable prior to 1 July 2008, but that are not registered with the Charities Commission.

For more information about the affects of the Charities Act on your tax status, see Fact Sheet 18 on the Charities Commission website.

The Charities Commission have available a booklet A Guide to the Charities Act which can be downloaded from their website www.charities.govt.nz. For further information about the Charities Act or to obtain a copy of the booklet call freephone 0508 CHARITIES (0508 242 748).

2. Sports promoter

• any society for the promotion of any amateur game or sport;
• organisation will be exempt from all income tax. Will still have to register for GST and PAYE where applicable;
• cannot get donee status.

3. Other full exemptions

• includes district improvement societies, herd and livestock promoters;
• organisation will be exempt from all income tax. Will still have to register for GST and PAYE where applicable;
• may be able to get donee status (see below).

4. Non profit

• for any organisation unable to get one of the above exemptions provided not set up for personal benefit or profit;
• first $1,000 of taxable income tax deductible (much of income will not be taxable). Will still have to register for GST and PAYE where applicable;
• may get donee status e.g. cultural group (see below).

Donee Status

• if granted to an organisation means individuals and companies can get rebates on donations to that organisation.
• available if organisation has charitable benevolent, philanthropic or cultural purposes that use most of the funds in New Zealand.