Recent amendments to the Income Tax Act 2007 create a tax exemption for charities that provide affordable housing.  Until the amendment, the provision of affordable housing was not seen as charitable. This is because it did not relieve poverty and there were associated private benefits to the housing provider (for example see Re Queenstown Lakes Community Housing Trust).  Organisations that only provided affordable community housing were not eligible for a tax exemption.

The Income Tax Act was amended with the introduction of new section CW42B, which created a general tax exemption for “income derived by a community housing entity”.  The section defines a community housing entity as a trust or company whose activities are predominantly for the provision of housing.  The entity must not carry out the activities for the private pecuniary profit of any individual or for the benefit of any individual who has some control over the activities; the profit must either be retained by the entity, or distributed to one of the following sources:

• Other community housing entities that meet the requirements under this section;
• Beneficiaries or clients of the entity;
• Tax charities (registered under the Charities Act 2005);
• For charitable purposes (as defined by law).

When the above threshold is met the entity will, on the face of it, be eligible for the tax exemption under this section.  However two exceptions are contained within the section.  Firstly, if less than 85% of the entities beneficiaries/clients are persons, or classes of persons described in the regulations then the entity will not be eligible for a tax exemption.  Secondly, if the beneficiaries /clients of the entity are substantially different from the persons described in the regulations, the entity will not be eligible for a tax exemption.  The problem with these exceptions being that the regulations are yet to be released (as at December 2014).

The general factors that may be used by the Minister of Revenue and Minister for Housing for creating the regulations have been released however.  The factors for determining the “persons or class of persons” for the purposes of assessing whether an entity is eligible for a tax exemption are:

• Each person’s location;
• The composition of each person’s household;
• The combined income of each person’s household must be below a maximum (yet to be set);
• The value of the assets held by each person (in relation to a cap yet to be set).

The regulations, when released, will detail what the relevant geographical locations, household compositions, and income and asset caps are.  Before the regulations are published it is difficult to speculate on where the line will be drawn in relation to each of these factors.  However we recommend that charities or other entities that may be affected by the changes begin collating this information.  When the regulations are released, the affected entities should seek advice on how the regulations will affect tax liability.

If you would like further information please contact Dale Thomas on 07 958 7428.