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An amendment to the Commerce Act 1986, the Commerce (Cartels and Other Matters) Amendment Act 2017 (the “Act”) came into force on 15 August 2017, after six years before Parliament.  The Act enhances New Zealand’s protections against anti-competitive behaviour and expands the scope of what can be considered as illegal cartel conduct under the Commerce Act.

Cartel provisions

Section 30 of the Act provides that no person may enter into a contract or arrangement that contains a cartel provision, or give effect to a cartel provision.  A cartel provision includes the following in relation to the supply or acquisition of goods or services in New Zealand:

• Price fixing;
• Restricting output; or
• Market allocating.

“Price fixing” remains unchanged in this amendment, and includes agreements between competitors that fix or provide for the fixing of the price for goods and services supplied or acquired, or for the discount, allowance, rebate or credit in relation to any goods or services supplied or acquired.

The term “restricting output” has been expanded to not only include agreements between competitors that limit or restrict the production of goods or capacity to supply services, but also to agreements between competitors that limit or restrict the supply or acquisition of goods or services.

“Market allocating” includes agreements that allocate, between competitors, the consumers or suppliers of the goods or services in which they compete, or the geographic areas in which they compete.

Generally, a competitor relationship may exist between two parties where they carry on business:

• At the same functional level (i.e. wholesale or retail); and
• Within the same geographic area; or
• Be readily capable of both.

The Act provides a number of exceptions for entering into cartel provisions.  These include:

• Where at least two of the parties to an agreement are involved in collaborative activity, and the cartel provisions are reasonably necessary for the purpose of collaborative activity.  Collaborative activity means an enterprise or other activity in trade that is carried on in co-operation by two or more persons, of which its dominant purpose is not to lessen competition between the parties.
• Where a vertical supply contract exists.  A vertical supply contract exists between a supplier and customer when the cartel provision relates to the supply of goods or services to that customer and do not have the dominant purpose of lessening competition between the parties to the contract.
• Where there are joint buying or promotion agreements.  A provision in an agreement will not have the effect of price fixing where that provision relates to:
  • The price for goods or services that will be collectively acquired or collectively negotiated;
  • The joint advertising of the price; or
  • An intermediary taking title to goods to resell or resupply.

The Act also introduces a clearance regime in which parties can seek clearance from the Commerce Commission for proposed agreements that potentially contain a cartel provision falling under the collaborative activities exemption.  Having received a clearance, a party can proceed with the confidence of knowing they will not later be found in breach of the Act.

Penalties

The financial penalties for a party found in breach of the new cartel provisions are substantial.  Fines may be issued for the higher of:

• $10 million;
• Three (3)  times the commercial gain made from the breach; or
• 10% of the offending party’s annual turnover.

Implications for business

The Act is likely to affect suppliers and resellers as well as franchisors or franchisees as these traders typically rely on arrangements that include territorial allocation clauses and restraints of trade.

Common cartel provisions in supply agreements include clauses which:

• Set resale prices;
• Allocate geographical territories or a specific type of customer or reseller; or
• Prevent a reseller from also selling a competitor’s product.

Common cartel provisions in franchise business arrangements include clauses which:

• Allocate geographical territory to franchisees;
• Require franchisees to purchase stock from an approved supplier;
• Set the price at which a franchisees can sell at; or
• Restrict franchisees from carrying on other business activities.

There is a nine month transition period for existing contracts and arrangements to be updated to meet the new requirements.  Businesses should take care to ensure that any arrangements they have in place are compliant before this period expires on 14 May 2018.  Any new contracts or arrangements are immediately subject to the provisions brought about by the Amendment.

The collaborative activity exemption will likely be important for many businesses.  This exemption will cover arrangements like joint ventures, strategic alliances, syndicated loans and consortium bidding so long as the arrangement’s dominant purpose is not anti-competitive and the cartel provision is reasonably necessary to achieve that purpose.  The onus falls on the applicant to prove that an exemption applies.  The Courts and the Commerce Commission will likely look to business documentation as well as oral evidence in assessing whether a particular conduct is prohibited under the Act.  It is unclear at this stage the approach the Courts will take in applying the new provisions.

If you would like further information please contact Laura Monahan on 07 958 7479.

The past year has seen a number of Court decisions in the charities area which may impact on your charity.  As has long been established, only charities that advance exclusively charitable purposes (or non-charitable ancillary purposes) can remain registered charities under the Charities Act 2005.  For a purpose to be charitable it must advance the public benefit in a way that is analogous to cases that have previously been held to be charitable, thus it is important to be aware of recent decisions and consider how they may impact your charity or its purposes.

The role of the independent Charities Registration Board is to maintain the integrity of the Charities Register by ensuring that entities on the Charities Register qualify for registration.  The Board can direct charities to be removed from the Charities Register when they do not advance a charitable purpose for a public benefit and if it would be in the public interest to remove them.

ICE Foundation

The ICE Foundation owned two charitable companies that were deregistered.  There was also a significant amount of debt owed to the ICE Foundation.  In order to maintain charitable status the two companies restructured in order to operate to fundraise for the ICE Foundation and ensure its charitable purpose remained paramount to their operation.

This case shows the importance of distinguishing business activities from charitable purposes, especially in cases where charities are seeking to raise funds through their business activities.  To do this, the entity must show that the business is capable of making a profit that goes towards charitable purposes, and that the charity does not provide any resources to the trading body at less than market rates.

Kiwis Against Seabed Mining

Any non-charitable purpose, or means of achieving that purpose that is not “ancillary” to achieving a charitable purpose, will mean the requirements for registration as a charitable entity will not be met.

The Charities Registration Board in this case considered the Society’s purpose of advocating for the prevention of seabed mining in New Zealand as non-charitable.  This was due to the potential consequences of preventing seabed mining until all environmental impacts could be understood and mitigated, thus the Board could not determine a sufficient charitable public benefit.  Following this reasoning, the advocacy of a certain point of view regarding controversial issues is unlikely to be considered as having a charitable purpose due to an inability to determine the public benefit.

This case shows the difficulty in determining whether political purposes such as advocacy are charitable at law.  The Supreme Court decision of Re Greenpeace is referred to as binding the Charities Board to consider both the ends the Society is seeking to achieve and the means and the manner in which the Society is seeking to achieve the end.

Family First

This case provides that Courts generally do not find public benefit in advocacy cases involving the promotion of a particular point of view.  As such, purposes such as the one in this case are unlikely to be considered charitable.

It was considered that Family First sought to persuade the reader of their material to a particular point of view rather than educate them on the matter.  This meant that their publications lay outside the scope of the advancement of education as a charitable purpose.  This affirmed the approach taken in the Australian case of Aid/Watch Incorporated, in that reaching a conclusion of public benefit may be difficult where the activities of a society largely involve the assertion of its views.

This case cautions charities that are looking to rely on the Re Greenpeace decision in order to show that their advocacy is a charitable purpose.  While Greenpeace does establish that the advocacy of a charitable purpose is capable of being considered charitable, it cautions that “advancement of causes will often be non-charitable”.  This is because it is often not possible to say whether the views promoted will benefit the public in a way that is recognised as charitable.

The Family First case summarised the relevant case law and established what must be considered in order to determine whether research reports seek to promote a point of view, or advance genuine educational research.  This includes:

• The nature of the research;
• Whether it has been reviewed by objective third parties; and
• How the views are disseminated to the public.

Auckland Observatory Trust

This case concerned an application for an order of the High Court under s 33 of the Charitable Trusts Act 1957 for approval of a scheme varying the trust deed in relation to trustee appointments and powers.  The proposed amendments were to:

• Require the three longest standing trustees to be replaced each year;
• Allow removal of a trustee by unanimous resolution;
• Allow decisions to be made by written resolution signed by all trustees; and
• Allow the trust deed to be varied for administrative purposes without Court approval.

Section 33 requires that to vary the powers of trustees of a charitable trust the variation must make the administration or operation of the trust easier.  It was held that such changes would enable the Board of Trustees to conduct the Trust’s affairs in a more streamlined manner than had previously been the case, meaning the application was granted.

Foundation for Anti-Aging Research

It is interesting to note that this case found that if research is likely to advance the sum of human knowledge then the research is considered useful in a charitable sense.  Even in cases such as the one at hand, where the end goal may only be achieved in the distant future, the pursuit of such a goal is likely to yield useful knowledge along the way regardless of whether the endpoint is ever achieved.

If you would like further information please contact Jessica Middleton on 07 958 7436.

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 section HR 12.  The proposed amendment would extend deregistration tax rules to any entity that derives exempt income under section 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 section 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 section 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 section 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.

If you would like further information please contact Jessica Middleton on 07 958 7436.