Income Tax – Charities – Business Income exemption

The latest guidance received from the Inland Revenue regarding business income for registered charities clarifies the conditions under which such income is exempt from income tax. To qualify, the income must be derived from a business conducted exclusively for charitable purposes. The guidance also highlights the relevance of charitable purposes being limited to New Zealand and application of the control restriction rule, in order for business income to be exempt.

The Inland Revenue have issued guidance on when business income a registered charity derives is exempt from tax under the Income Tax Act 2007 CW 42, under interpretation statement (IS 24/08):

• Business income is exempt to the extent that it can be apportioned, on a reasonable basis, to a registered charity’s charitable purposes in New Zealand; and
• All business income is taxable if a person with some control over the business is able to direct or divert business income away from the charity (the ‘control restriction’).

Business income is subject to different rules that can result in some, or all, of a charity’s business income being taxable. In determining whether a registered charity’s business income is exempt, two main questions need to be answered:

• What, if any, income derived by a registered charity is income from a business?
• To what extent, is that business income attributable to its charitable purposes outside of New Zealand?

Where a registered charity’s charitable purposes, are in fact limited to New Zealand, all business income derived will be exempt from income tax.

Charities can derive income from various business activities, such as operating a retail store. Income generated from these activities that is not directly related to charitable purposes, this income may be taxable. The IRD distinguishes between income generated from activities integral to the charity’s purpose and income from unrelated business activities.

Feel free to contact us for advice, if you are concerned or unsure as to your eligibility of income tax exemption on your charity’s activities, income or the apportionment of business income.

Charities Amendment Act – Charities governance procedures
 

The final changes under the Charities Amendment Act 2023 took effect recently (July 2024).

We will focus in this article on what could be viewed as one of the more significant changes that will impact upon all registered charities – your rules and governance procedures.

All charities now have a statutory duty to review their rules and governance procedures at least every 3 years.

Your review will need to comprise two main aspects:

• your charity’s rules documents, which could be a trust deed or constitution;
• any policies or guidelines relevant to your charity’s governance obligations, such as policies on financial management, conflicts of interest and staff and volunteers.

When you review your governance procedures, you need to look at whether your rules and other procedures are still fit for purpose, and that they allow your charity to achieve its charitable purpose and meet its obligations.

You are now required to indicate in your annual return to Charities Services when you have carried out a review of your rules and governance procedures.

Charities Services has issued guidance and resources to assist with this process, including a Governance Checklist. Visit Charities Services website and go to page “New requirement to review your governance procedures”.

Feel free to contact us if you need any advice or assistance regarding these new requirements or accessing relevant resources provided by Charities Services.

Incorporated Societies Act – reminder for re-registration
 

We have updated you regularly over the last two years on the new Incorporated Societies Act 2022, including the wide raft of changes which fundamentally impact upon all incorporated societies.

The changes take effect progressively over a period of time from when the Act become effective leading up to 5 April 2026, which is the final date for re-registration for all existing societies.

You can find updates on these changes on our website - go to our Updates and Articles page:

https://www.lynchandassociates.co.nz/updates-and-articles

We are aware that only a small percentage of all incorporated societies have re-registered so far. Some, no doubt, are waiting to re-register in the period running up to April 2026.

Some societies however, are likely to be unaware of the new requirements or are unsure on how best to start. If you are impacted by the new Act or know of any societies that need to register, please do make contact with us and we will be very happy to assist you.

We have assisted many societies in understanding how the changes specifically impact upon their society and arranging for re-registration – feel free to contact us if you need any help.