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Tax changes for charities and volunteers

By Melissa Gibson - October 2017

Charity deregistration tax

Current tax rules for when an entity ceases charitable purposes only apply to registered charities under s HR 12 of the Income Tax Act 2007 (“the Act”).  This excludes non-registered charities that cease being charitable at law.

The Taxation (Annual Rates for 2017-18, Employment and Investment Income, and Remedial Matters) Bill (“the Bill”) proposes, in clause 90, a replacement for s HR 12.  The proposed amendment would extend deregistration tax rules to any entity that derives exempt income under s CW 42 of the Act.  These entities are those who:

  • RHR Carry out charitable purposes in New Zealand;
  • When income is derived, have trustees who are a tax charity; and
  • Have no person with control over the business able to direct an amount to the benefit of anyone other than the trust or in the interests of the trust.

When a registered charity ceases to be carried on for charitable purposes, that entity is subject to the deregistration tax rules.  The Bill adds that any non-registered charity which ceases the undertaking of charitable purposes is then subject to deregistration tax rules also, as they no longer meet the requirements of s CW 42 of the Act.

Further, the current law sets out that assets that have been “distributed or applied” can be ignored in determining deregistration tax.  However, this may allow for some deregistered charities to escape payment of tax.  The Bill amends the words used, to clarify that assets to be excluded from this calculation will only be those “disposed of or transferred”.  Such assets must have been disposed of or transferred:

  • For charitable purposes;
  • In accordance with the entity’s rules; and
  • Within one year of deregistering.

Payment of volunteers

Section CO 1 of the Act states that any amount received by a volunteer for voluntary activity is taxable income.  However, this is overridden by s CW 62B, which differentiates between payments that are a reimbursement or payments which are an honorarium.

IRD defines volunteers as “people who freely undertake activity in New Zealand that has been chosen either by them or a group of which they are a member”.  The activity must provide some kind of public benefit and not be for the private gain of the volunteer.

Reimbursement payments are paid to volunteers to cover expenses that have been incurred in carrying out voluntary activities.  These payments will be considered tax-exempt income under s CW 62B if:

  • They are based on actual expenses incurred through voluntary activities; or
  • They are based on reasonable estimates of the expenses likely to be incurred through voluntary activities.

Honoraria payments are paid to volunteers in return for services that would not normally receive payment, and are generally paid at less than the market rate for such services.  These types of payments are subject to withholding tax which, until 31 March 2017, meant a tax rate of 33%.  However, from 1 April 2017, the tax rate for contractors (IR330C) form allows volunteers to choose their own tax rate starting from 10%.

Combined payments are partially reimbursement and partially honoraria payments.  With such payments, if the component parts can be clearly identified then the reimbursement payment will be tax-exempt and the honoraria will be subject to withholding tax.  If a clear distinction cannot be made, the entire payment will be considered honoraria and will therefore constitute taxable income.

Melissa is a Director in our Commercial and Asset Planning Teams, specialising in Charities and Not for Profits, and can be contacted on 07 958 7440.