On behalf of The Community Constellation, we submit our feedback on the proposed changes outlined in the consultation document ‘Taxation and the not-for-profit sector’. We welcome the consultation opportunity.

This feedback includes analysis of feedback received from a sector-wide survey conducted to assess the potential impact of proposed changes to the taxation of charities and tangata whenua, community, and voluntary organisations. The survey garnered 113 responses, predominantly from registered charities (76%) and incorporated societies (10%), with the majority (76%) being Tier 3 or 4 organisations (under NZD $5 million annual expenditure). Most respondents (77%) took the option to send their individual survey response data directly to IRD through the survey.

The Community Constellation are committed to working together to deliver a community-powered Aotearoa that gives effect to Te Tiriti, and include the following 14 organisations:

  • Ara Taiohi
  • Community Waikato
  • Home and Community Health Association
  • Hui E! Community Aotearoa
  • Inclusive Aotearoa Collective Tāhono
  • Inspiring Communities
  • LEAD Centre for Not for Profit Governance & Leadership
  • New Zealand Council of Christian Social Services
  • NZ Navigator Trust
  • Platform Trust
  • REAP Aotearoa
  • SociaLink
  • Te Pai Ora Social Service Providers Aotearoa
  • Volunteering New Zealand.

General comments

  1. The announcement of potential changes to tax, prior to any engagement with the sector, and without a clear problem definition beyond revenue-raising, has caused concern in our networks. This comes at a time when a cut to the corporate tax rate is being floated and the tangata whenua, community and voluntary sector is facing both unprecedented demand and significant funding cuts.
  2. Our sector is incredibly diverse (and 90% entirely voluntary), and it is vital not to create unintended negative consequences that will increase reliance on government grants and philanthropy, impact the capacity of our sector to deliver for whānau, and put pressure on the government to fill the gaps.
  3. These concerns were raised in an email from Hui E! to Ministers Watts and Upston on 20 December 2024. Minister Watts replied on 28 February assuring us that, “It’s important we make sure the settings are right and fit-for-purpose. No decisions have been made and all feedback will be considered.”
  4. IRD already have insights about the challenges faced by our sector, including the need to ensure sustainability and capacity to deliver for communities:
    “Funding is essential to the survival and growth of Not-for-profits and Charities. Without funds they cannot provide or extend services, facilitate participation or promote their cause. Sourcing funds, however, is their biggest challenge. Not-for-profits and Charities are looking at ways to optimise funding sources and diversify income. The fundraising environment and the way people support causes is changing. The nature of incentivising giving needs to adapt accordingly.” (IRD Not-for-profits and Charities Landscape, 2020).
  5. We note that this is an issues paper outlining potential areas for change and not a consultation on specific proposals. If this is to proceed then we expect to see wide consultation. These are technical issues, and even with explanations in the survey to support organisations to be able to engage in the consultation, many expressed how challenging this was. It is essential that any policy or legislative proposals demonstrate a deep understanding of our diverse sector and their potential impacts.
  6. The consultation document is silent on how these proposed areas of change would impact iwi and Māori organisations. It is critical that you make this clear in any proposals before decisions are made, and that you consult on them fully.
  7. The current taxation model is outcomes focused. This ensures that Charities undertaking business activities can only do so to further their charitable purposes. Any proposals to change this framework will undermine Charities’ ability to serve communities, innovate and ensure capacity and sustainability in their operations. Those entering contractual arrangements with government agencies are often required to go through an accreditation process, including an assessment of financial viability and sustainability.
  8. The introduction of tax for ‘unrelated’ charitable businesses is unclear in its definition, unworkable in its application, and would result in a reduction in community services and supports. It is also at odds with the advice the community sector is getting from elsewhere. For example, DIA’s community-led development programme offers multiyear grants to place-based groups. The risks inherent in short term funding are recognised and agency advice includes suggesting charities develop models of social enterprise in order to be sustainable longer term.
  9. Provisions already exist to deal with charities acting illegally or undermining the integrity of the sector which sits within Charities Services. The most effective way to deal with any abuse of resources within the charitable sector is to ensure that the regulator is working effectively and resourced to do so. All registered charities are required to ensure our activities are in line with our charitable purposes, have annual public reporting accountabilities and cannot produce profits for individuals.
  10. The tax threshold of $1000 has not been increased for more than 45 years , and an increase would reduce the administrative burden for very small organisations.
  11. We support the Government’s intention to grow philanthropic and individual giving. We encourage exploration of how tax incentives could enable such growth. We encourage you to engage with Philanthropy New Zealand and the Fundraising Institute of New Zealand for advice on this.

Survey findings:
A. Taxing unrelated charity business
Fifty per cent of survey respondents oppose taxing charity business activities entirely, with a further 26% agreeing that charities should be taxed on income unrelated to their charitable purposes, if this excludes fundraising activities.
The predominant concerns raised are:
• Negative impact on core charitable functions: The predominant fear is that taxing business activities will drain resources and ultimately reduce the capacity of charities to fulfil their missions.
• Disproportionate burden: The compliance costs, complexity, and potential for double taxation create a sense that the burden is too high for the potential benefits.
• Undermining sustainability and innovation: Charities have found sustainable ways to fund themselves in order to remain viable. Taxing business income could stifle the development of sustainable funding models for charities.

The arguments for taxation tend to assume a degree of abuse. All registered charities are required to ensure our activities are in line with our charitable purposes, have public reporting accountabilities and cannot produce profits for individuals.

Those who identified they would be directly impacted shared the following concerns:

  1. Reduced Funding for Charitable Activities & Services:
    a. “Reduced funding available for our charitable purpose.”
    b. “Net income will reduce dramatically, which will mean we cannot provide as many services to those in need. We will have to seek even more donations from the public – during a cost of living crisis when the average person is struggling to make ends meet.”
    c. “Depending on what is considered as ‘unrelated charitable business’ earning revenue as a landlord could be unrelated and therefore taxed, meaning a significant drop in the funds we have available to distribute”
    d. “Charities need flexibility to make their own decisions about how to further their charitable purposes, including through income generating activities. Placing restriction will stifle innovation and reduce ability to develop other funding generating models.”
  2. Impaired Financial Sustainability & Innovation:
    a. “We are considering undertaking business activities in order to increase our financial resilience and less reliance on govt funding. This will impact on our confidence to proceed.”
    b. “We are currently looking to acquire a traditional ‘for-profit’ business to help diversify our income stream. Although this activity will be unrelated to our core purpose, the profit we hope to draw from this business will provide no personal benefit and be 100% focused towards the mission and purpose of our charitable entity.”
  3. Increased Complexity & Compliance Burdens:
    a. “Add huge complexity to our accounting workload and ultimately reduce our funding. Both are bad news.”
    b. “We have a small amount of business income. It is difficult at present to understand if it would be caught within definition of unrelated business income. If it were to be taxed, that would have both a cash cost and compliance cost for our charity, thus reducing funds available for our charitable purpose.”
  4. Negative Impact on Employment & Volunteerism:
    a. “Unemployment and the project closing”
  5. Undermining Social Value & Community Ownership:
    a. “Destroys community owned business. Business becomes the sole province of individuals, companies and corporates whilst charities will need to rely on grants, donations and fundraising. Not a level playing field.”
    b. “We run a social supermarket… If we were taxed on the social supermarket, it would inhibit our ability to help those in desperate, immediate need.”

Related vs unrelated charity business:
When asked about whether charities can distinguish between related and unrelated business income, most found this difficult:

  1. Difficult to Distinguish / Lack of Clarity (Most Common View):
    • Core Argument: Respondents struggle to understand what IRD will consider “related” vs. “unrelated.” The lack of clear definitions makes it impossible to reliably categorise income.
    • Impact: Creates uncertainty, anxiety about compliance, and a perception of potential unfairness. Charities fear being penalised for misinterpreting complex rules.
    • Examples:
    o “I think I would need more information on what is related or not. Any income we get goes straight back into supporting our work therefore it seems related.”
    o “Not really. Are biscuits from the Girl Guides related to what they do… We need a clearer definition of what IRD consider related and unrelated mean.”
    o “Impossible. Both words need defining as they incorporate many possible levels of proximity.”
  2. “Everything is Related” (Significant Minority):
    • Core Argument: Because ALL income-generating activities ultimately support the charity’s mission, they should be considered related. The primary purpose is charitable, regardless of the specific activity. The money goes back into charity to further its charitable purposes.
    • Impact: These respondents view the distinction as artificial and unnecessary. They believe that taxing any income used for charitable purposes is inherently unfair.
    • Examples:
    o “All ways of making money for a charity are related to their purpose as without funds the charity cannot fulfil its purpose.”
    o “From our charity perspective, any activity that results in financial gain and that gain does not go back or support the charitable purpose is ‘unrelated’.” (Implies that if it does support the purpose, it’s related).
    o “No, everything we do to raise money is for advancing the purposes of our charity. I would not know how to determine what is related or unrelated.”
  3. Clear Distinction Possible (Smaller Group):
    • Core Argument: These charities believe they can readily identify related vs. unrelated activities, often because their scope is narrow, or they have a clear understanding of what directly furthers their mission.
    • Impact: These organisations are generally less concerned about the changes, but still highlight the potential for increased compliance work.
    • Examples:
    o “Yes, we have a very narrow scope and everything we do is related to our mission.”
    o “Yes, it is very easy to see the difference”

Examples of charity businesses:
When presented with the following examples, most respondents classed every one of these charity businesses as related:
• Op shop owned and run by a charity (73% related, 17% unsure, 10% unrelated)
• A religious charity renting out rooms for events (58% related, 27% unsure, 15% unrelated)
• Public sales of native trees by an environmental charity (88% related, 7% unsure, 5% unrelated)
• Consultancy services of a capability-building charity (61% related, 25% unsure, 14% unrelated)
• Cafe run by a disability charity that trains and employs disabled people (89% related, 7% unsure, 4% unrelated).

Minimum threshold:
Views were split on how any minimum threshold should be determined (32% agreed that any threshold should be based on the amount of business income, 26% agreed that this should only apply to tier 1 charities, 18% were unsure and 17% selected other – most stating that this was not a question to answer given they did not agree in introducing such a tax) and only 7% thought there should be no threshold. Forty-six per cent agreed that if the income is distributed for charitable purposes, there should be no minimum time for this to be distributed in order to remain tax exempt.

B. Impacts on Māori
The IRD consultation document does not mention iwi or Māori organisations at all. This is a large oversight given the likely breath of impact of these proposals on iwi and Māori organisations and crown obligations under Te Tiriti o Waitangi. We would expect to see analysis presented in the consultation document of the likely size of these impacts, particularly for charitable businesses. Any development of these areas for change will require specific iwi and Māori consultation, including any impacts on post-settlement entities.
Only 5% of respondents identified themselves as part of an iwi and/or kaupapa Māori organisation or rōpū. These respondents raised concerns that the tax changes will disproportionately harm marae, kaupapa Māori organisations, and other Māori-led initiatives, which are already operating with limited resources and facing numerous challenges. Examples included:
• “It would have a huge impact on our marae.”
• “Most organisations are marae or Māori Reservation – every cent counts for our organisations. All funds are injected back into marae infrastructure and upkeep.”
• “The lack of specific analysis on the impacts of these tax proposals on iwi, kaupapa Māori organisations, and rōpū is deeply concerning, as it fails to acknowledge the systemic racism that has historically disadvantaged Māori and the disproportionate impact these changes could have.”

C. Other proposed changes
For those in the sector who are not registered charities, there is currently a $1000 threshold to remove small scale voluntary and community groups from the tax system. Only 5% of respondents did not agree with the proposal to increase this threshold (29% to $50k, 21% to $10k and 14% to $5k).
Feedback regarding the proposal to introduce tax on certain tax-exempt groups included a strong preference for maintaining the tax-exempt status of community-focused groups. The main concerns revolve around the potential negative impact on their services, the burden of compliance, and the need for a clear and targeted approach that considers the specific activities and benefits provided by each organisation. There is also a sense that more information and transparency are needed to ensure a fair and informed debate on this issue.
When asked if investment restrictions be introduced for donor-controlled charities for tax purposes, to address the risk of tax abuse, 37% of respondents said yes, 19% said no and 31% did not know. Only 16% of respondents agreed that fringe benefit tax should apply to charities.
When asked about honoraria, only 15% of respondents were happy with the status quo (up to volunteers to ensure tax compliance), 18% favoured the organisation treating the payment as income for tax purposes (as FENZ do) and 46% favoured exemption from tax and ACC levies for these payments.
When asked about increasing the uptake of tax credits on donations, almost half of respondents (46%) supported real-time tax credits (rather than waiting until year end) and a third (31%) supported providing data to IRD so tax returns could be pre-filled.