Many charities sell goods and services, or own businesses that do, to generate their income.
The top nine revenue generating non-university charities in the country reported more than $1.9 billion of annual trading income with the largest 15 asset holders bringing in $1b solely from commercial activity.
This is entirely exempt from the 28% corporate business tax, as long as it is “used for charitable purposes in New Zealand”.
BusinessDesk spoke to two charities with sizeable commercial operations and asked whether their tax status handed them an unfair advantage over for-profit commercial outfits.
The products of Sanitarium, such as Weetbix, are well known to Kiwis. Last year, $191 million was generated from sales of their health food products.
But since the brand is owned by the Seventh Day Adventist Church, none of this revenue was taxed.
On this count, there’s a clear financial advantage over companies selling similar products that are obliged to pay their 28%.
But a spokesperson for the church denied this exemption dealt the charity a significant upper hand.
“Sanitarium operates under a model that is commercially disadvantageous for the business. For-profit companies are in a position to fund growth by having access to a broader range of financing options not available to charities, for example access to capital markets,” the spokesperson said.
The church argues that its contribution to the NZ economy, it employs 265 people, and to society, through charitable programmes, more than makes up for any loss of company tax.
“The work of charities has contributed enormously to society over many years while also helping to create significant savings for the government. That’s because, in many situations, charities can provide services more efficiently than the government, largely due to smaller overhead structures, lower remuneration levels, and the use of volunteer labour,” a spokesperson said.
Last year, the church made a number of charitable distributions, including $5.9m on elderly care, $4.9m on education and $4.5m for development and relief charity. This spend is equivalent to a quarter of the value of its investment property – a high ratio compared to other charities. Overall, using money in this way is better than “just paying dividends to offshore investors”, the spokesperson said.
Since its products are focused on healthy eating, it considers the sale of these products to be aligned with the ‘whole person health’ objectives of the Seventh Day Adventist church. This also restricts it from expanding into lucrative unhealthy foods.
But such an alignment between a charity’s philanthropic philosophy and its commercial activity, however broadly defined, is not in any sense a legal requirement.
Someone who wishes to change that is Michael Goussmett, an expert on tax and charitable organisations. He has criticised current legislation for allowing commercial trading activities that are unrelated to charitable purposes to remain untaxed.
In his view, a fairer system would be one in which commercial operations, that are unrelated to the organisation’s charitable activities, make tax-deductible donations to charitable causes “after the companies have decided how much to retain for their continuing commercial activities while paying their fair share of income tax on its net retained earnings as their contribution towards the greater common good".
Ngāi Tahu Charitable Trust operates Ngāi Tahu Holdings and all of its subsidiaries. It is the primary organisation for the principal iwi of the South Island.
Its stated purpose “is to grow the asset base and to create revenues to allow for increasing levels of distribution for charitable purposes to our whānau and communities on an intergenerational basis”. Causes supported span health and social services, education, te reo Māori and cultural initiatives.
Its commercial operations include tourism, quarrying, property investment and biotechnology – all of which are registered charities and helped bring in $525m of revenue in 2020/21.
It is nearly entirely tax-free. The trust does pay Australian income tax for its seafood company over the Tasman.
Te Rūnanga o Ngāi Tahu kaiwhakahaere, Lisa Tumahai, denied the charity gained a comparative advantage when it came to commercial operations. While being a charity means its charitable group is not liable to pay income tax, this advantage is offset by an obligation to make charitable distributions. Non-charities do not have this obligation.
The opportunity to become charitable is open to every commercial operation in Aotearoa provided the operation is willing to accept the consequences. The key consequence of being a charity is all profits from the operation must be used for charitable purposes and not for personal benefit of individuals. Ngāi Tahu has accepted this outcome and it is open to all commercial operations.
“Our commercial businesses also provide employment in their local communities and help rebuild a Ngāi Tahu presence within our takiwā,” she told BusinessDesk.
Last year Ngāi Tahu saw its best ever net profit of $240m which it attributed to selling GoBus, rising property and carbon credit values and “reducing corporate overheads by $16m”.
Despite record profits, its annual charitable distribution fell by more than a fifth to $55.9m – 23% of net profit or 3.3% of net assets. Over the charity’s existence, it has distributed $519m since 1999.
Gousmett said: “[Ngāi Tahu’s] charitable purpose is essentially support of iwi, so where is the connection between a commercial ride on a Shotover jet boat paid for by tourists and support of iwi? Prior to buying that company it was a taxpaying entity then overnight – because Ngai Tahu as 100% shareholder pays no tax, ditto for the jetboat company.”
On this topic, Tumahai believes the connection is clear. “The purpose of all our commercial activities, including our tourism operators, is to provide charitable distributions which create better outcomes for our whānau, now and in the future. This is in line with our tribal whakataukī – Mo tātou, ā, mō kā uri ā muri ake nei – for us and our children after us.
“Distributions paid to the Ngāi Tahu Charitable Trust help fund initiatives that improve social outcomes for whānau, which will, in turn, be beneficial for everybody in the community."