Feedback sought on possible tax changes for deregistered charities
Introduction
IRD has released a consultation paper seeking feedback on proposals to clarify the tax rules that apply when a charity is removed from the Department of Internal Affairs’ Charities Register.
There are many benefits for an entity which qualifies as a registered charity, including tax-exempt status. However when a charity is deregistered it can face significant tax consequences, depending on the reason for deregistration. This issue has resulted in uncertainty for some entities.
The paper seeks to canvass public opinion on proposed changes to the tax rules that could help to deal better with the varied circumstances of charities when they are deregistered. These include:
- Clarifying how the general tax rules, including the company, trust or other entity-specific regimes, apply to deregistered charities;
- Establishing the opening values of any depreciable property or consideration for any financial arrangements held by a deregistered charity when it becomes a tax-paying entity; and
- Prescribing specific timing rules for when the tax provisions apply.
Feedback is also being sought on whether additional measures might be helpful to ensure that affected charities are aware of their tax obligations following deregistration.
The complete paper is available on the IRD website.
Proposed solution
The paper outlines the proposed solution as follows:
Situation |
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Timing |
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A charity that came into existence after 1 July 2008 has been deregistered by the Department of Internal Affairs. |
Subject to tax on income earned from the effective date of deregistration. |
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A charity that came into existence after 1 July 2008 has been deregistered because it was found by Charities Services or the Courts not to have a charitable purpose. |
Subject to tax on income earned from the date on which the entity was found not to have a charitable purpose. |
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A charity that came into existence after 1 July 2008 has voluntarily deregistered and Inland Revenue has found the entity not to have had a charitable purpose. |
Subject to tax on income earned from the date on which the entity was found not to have a charitable purpose. |
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Before 1 July 2008 Inland Revenue had confirmed that the charity was entitled to the charities related income tax exemption and Charities Services (or its predecessor) has either declined its application or deregistered the charity, after 1 July 2008. |
Subject to tax on income earned from 1 July 2008. |
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Before 1 July 2008 the charity made a self assessment that it was eligible for the charities related income tax exemption and Charities Services (or its predecessor) has either declined its application or deregistered the charity after 1 July 2008. |
Subject to tax on income from 1 July 2008. Such charities might be required, however, to provide evidence to Inland Revenue that they were eligible for the charities-related income tax exemption before 1 July 2008. |
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A charity that came into existence after 1 July 2008 has been deregistered by Charities Service. |
Subject to tax on income earned from the effective date of deregistration. |
If you would like further information please contact Jessica Middleton on 07 958 7436.
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