When IRD put out an issues paper on possible changes to tax for our sector, Hui E! and Volunteering New Zealand prepared a 3-in-1 explainer, survey and template feedback form to support engagement on these issues.
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.
This analysis is being shared with IRD as part of feedback from the Community Constellation.
- 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, especially affecting smaller organisations.
- 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 innovation: 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:
- Reduced Funding for Charitable Activities & Services:
- “Reduced funding available for our charitable purpose.”
- “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”
- Impaired Financial Sustainability & Innovation:
- “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.”
- “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.”
- Increased Complexity & Compliance Burdens:
- “Add huge complexity to our accounting workload and ultimately reduce our funding. Both are bad news.”
- “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.”
- Negative Impact on Employment & Volunteerism:
- “Unemployment and the project closing”
- Undermining Social Value & Community Ownership:
- “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.”
- “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.”
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:
- “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.”
- “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.”
- “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:
- “All ways of making money for a charity are related to their purpose as without funds the charity cannot fulfil its purpose.”
- “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).
- “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:
- “Yes, we have a very narrow scope and everything we do is related to our mission.”
- “Yes, it is very easy to see the difference”
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).
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.
- Impacts on Māori
The IRD consultation document does not mention iwi or Māori organisations at all. 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.”
- 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).
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 tax exemption of 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.
