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What happened to Nicola Willis's plan for charities tax reform?
New reporting helps explain why the finance minister decided to leave charities' tax affairs out of the budget, writes Catherine McGregor in today's extract from The Bulletin.
A budget backtrack
When finance minister Nicola Willis announced a consultation in December on charities' tax exemptions, she signalled that change was imminent. The government wanted to close 'any loopholes that are being exploited that would allow entities that are structured as charities to avoid tax they should otherwise pay', she told reporters. The review, led by Inland Revenue, was explicitly aimed at charities operating business arms tax-free while competing with commercial firms. Willis hoped to include new rules in Budget 2025.
But in late April, she confirmed that wouldn't happen after all. 'The consultation has uncovered a lot of complexity,' she said, adding that while she remained committed to reform, 'I don't want to rush it and get it wrong.' The about-face leaves intact a system under which charities earned a $2 billion tax-free surplus last year, including prominent examples like Sanitarium and BestStart that compete directly with taxpaying businesses.
Level playing field or unfair advantage?
Charities are permitted to run businesses without paying company income tax, provided all profits are reinvested into charitable activities. According to a story by Stuff's Emma Ricketts, this includes well-known operations like Sanitarium, owned by the Seventh-day Adventist Church; Trinity Lands, Zespri's largest shareholder, linked to the Open Brethren; and Ngāi Tahu's extensive tourism and seafood businesses.
AUT lecturer Dr Ranjana Gupta is among the critics who argue these arrangements undermine the principle of 'horizontal equity' – that similar taxpayers should be treated alike. 'Sanitarium competes with Kellogg's and Hubbards, but only the latter pay tax,' she noted in The Conversation. Gupta and others don't question tax exemptions for charities' core purposes such as education, religion or poverty relief, but say unrelated business activity should not be shielded from tax.
Consultation cools appetite for reform
The reason for Willis's reversal became clear this week with the release of documents obtained by the NZ Herald's Matt Nippert (Premium paywalled). Of 901 submissions received during the two-month consultation, 86% opposed changes to charity tax exemptions. 'There was also much work flagged for tax and charity lawyers in determining what was and what was not unrelated business activity, with separate accounts needed to be generated for each,' Nippert writes. Major charities warned that increased compliance costs could harm their ability to deliver services.
As for the potential tax take, the biggest targets would have been a handful of large, commercially successful charities. Meanwhile, the vast majority of New Zealand's charities, many of them small and community-focused, would have been ultimately untouched, thanks to de minimis thresholds and other carve-outs. 'This narrowed scope saw the eye-popping $400m estimate of fresh tax revenue almost vanish entirely,' Nippert writes. According to IRD calculations, the benefit to the government would be just $50 million a year at most.
Donor-controlled charities still a live issue
However, not all parts of the sector have escaped scrutiny. Donor-controlled charities – entities in which donors retain effective control over how their funds are used – may still face reform. The IRD's February discussion paper outlined concerns including circular arrangements that let donors claim tax credits for donations that are then reinvested into their own ventures.
The government is considering stricter rules, and the charities sector seems much less opposition: only 46% of submitters objected to setting a mandatory minimum of distributions for donor-controlled charities, Nippert reports, and just 43% opposed placing restrictions on what such charities can invest in. As KPMG's Darshana Elwela put it, this was one area 'with some genuine concerns' and a clearer pathway forward.
