The four heads of charity
It is a basic matter of law that to be able to be registered under the Charities Act (the Act), an organisation (whether a trust, society, or otherwise) must have a charitable purpose within one or more of the following “heads”:
- Advancement of education;
- Advancement of religion;
- Relief of poverty; and
- Other benefit to the community.
The principles behind these go as far back as the Statute of Elizabeth 1601 (which also, we might add, lists “marriage of poor maids” as a charitable purpose). The fourth head of charity is widely known as the most difficult “head” to satisfy, as the Court does not presume that there is any charitable benefit. Rather, the charity must show that its purpose is beneficial to the community and within the spirit of the Statute of Elizabeth 1601. It must also be demonstrated that the purpose is of a public nature.
A number of charities have been unable to show their purposes are charitable under this head – the most recent example being a High Court appeal by the Grand Lodge of Antient Free and Accepted Masons in New Zealand.
The Freemasons case
The Grand Lodge was refused registration as a charity by the Charities Commission. The Grand Lodge appealed to the High Court, making two arguments:
- First, that the Commission “got it wrong”, or erred in its assessment; and
- Second, that Grand Lodge had held charitable status with the IRD for over 50 years, and therefore the Commission could not refuse registration.
The Grand Lodge is the overarching body which administers and governs freemasonry in New Zealand. Freemasonry was described as essentially a male character building organisation. The Grand Lodge had been a tax exempt charity for over 50 years. Like many other charities, however it was required to re-apply for registration to the Charities Commission when the Act came into force. Its application for registration specified “matters beneficial to the community” as its charitable purpose. As noted above, this is the most problematic head, and the application failed.
The assets of the Grand Lodge fell into three groups, which included in short, assets held under the Fund of Benevolence, those held for particular purposes, and those held for general purposes. The Court did not deny that the Grand Lodge’s Fund of Benevolence fell within the charitable purpose definition. However, this was only part of the Lodge’s activities. The Lodge organised training seminars, ceremonial meetings and other activities exclusively for its members. The spending of this money was governed by section 222 of the Constitution. Section 222b provided that any income after such expenses was to be distributed for charitable purposes. Exactly how much the expenses and the income after expenses would be was undeterminable.
The Court therefore held that the main purposes of the Grand Lodge were those listed above and these were not all charitable – in particular, some were instead for the benefit just of members and not the public.
Further, the Court was not satisfied that the above activities were really “ancillary” to charitable purposes, as section 5 of the Act permits.
In relation to the second argument, the High Court found that the Charities Commission was not bound by decisions of the IRD about charitable status. In other words, the Charities Commission makes its own assessment. This could mean there are a number of organisations out there which had previously relied on IRD determinations or “letters of comfort”, which will not be charitable under the Charities Commission regime.
For many of these kinds of organisations, a reassessment of the terms of the constitution/rules will be necessary, and amendment is likely to be required to bring them within the scope of the Charities Act – and so registrable as a charity.
Canterbury Development Corporation
Another recent case was also an appeal against a Charities Commission decision to refuse registration of an organisation as a charity – in this case, Canterbury Development Corporation (CDC). The main purpose of CDC (and its interrelated affiliates) was to promote economic development in the Canterbury region, and this was achieved by promoting the establishment and development of businesses in the region, providing technical and financial advice to businesses and in some cases, providing financial assistance to eligible businesses.
CDC was incorporated and registered as a charitable trust under the Charitable Trusts Act 1957.
The Charities Commission declined the applications of CDC and its affiliates on the grounds that a community development purpose was only charitable where the relevant community was disadvantaged. On appeal, CDC argued that supporting businesses and promoting economic development were beneficial to the community and of public benefit. CDC also argued that the purpose of the organisation was to relieve poverty and to provide education for businesses – with the relief of poverty and providing education being charitable purposes on their own.
However, the High Court took the view that the fourth head of charity required a community benefit to meet an identified need: for example, providing services to a deprived rural community. As CDC could not establish that Canterbury was a disadvantaged region, the Court found CDC had not established that it could fall under the fourth head.
The Court held that the purpose of CDC was not to assist the unemployed and relieve poverty. Rather, the aim of the organisation was to assist businesses to prosper. Creating jobs and decreasing unemployment was seen as ancillary to this purpose and the benefit was indirect.
Therefore, the High Court supported the decision of the Charities Commission to refuse registration.
Conclusion
The Freemasons and the Canterbury Development Corporation are not the only organisations to be “caught out” by having to re-register under the Charities Act, and then being declined registration: it seems many other prominent charities, particularly those that undertake advocacy, are in the same boat.
Organisations that are refused registration as charities lose their tax-exempt status, though they can still apply to Inland Revenue to keep tax deductibility for their donors. Clearly the effects of this are significant. In practical terms:
- Being a “charitable trust” under the Charitable Trusts Act does not mean an organisation is a “charitable entity” for the purposes of the Charities Act;
- The charitable purpose of an organisation must be obvious;
- Many existing “charities” may need to review their documentation to ensure their purposes are properly charitable; and
- The Charities Commission and the Courts may also look beyond the wording in the rules of “charities”, to what these organisations do in practice – but getting the purpose and wording right is the essential first step.
If you would like further information please contact Jessica Middleton on 07 958 7436.
