Question

The Tax Working Group in September 2018 released a Background Paper ‘Charities and the not-for- profit sector’. The Executive Summary highlights some particular issues which are prominent either to the public or for the sector. Paragraphs 3 and 4 of the Executive Summary state: “3. One of these [issues] is the tax exemption that applies to business income earned by charities. Concerns are often expressed that the exemption provides an unfair competitive advantage to charitable businesses at the expense of taxpaying for-profit businesses. 4. Officials note that New Zealand’s review of the tax treatment of charities in 2001 and recent reviews of the tax system in Australia (2010) have not supported this perceived unfairness. In principle, the tax concession does not impart a competitive advantage because a trading operation owned by a charity faces the same incentives as a commercial entity when it comes to setting prices. Its tax-exempt status alone should not lead to undercutting of rivals.” Further, a recommended action in the Background Paper suggests that the treatment of accumulations (including the potential to require a particular level of distribution each year) be included in the Interim Report. Some charities accumulate significant reserves and own substantial assets.

REQUIRED: a) Discuss whether or not in your opinion the charitable income tax exemption for commercial operations should remain. Explain your answer and include any suggestions you may have to improve tax equity and fairness in relation to charities running commercial operations in New Zealand.

b) Discuss whether a reserves policy should be mandatory for all charities.

Answer 1

1.the charitable income tax exemption for commercial operations should remain

Not for profit is facing loss of exemption to avi=oid paying tax on charitable activities.Income tax and resident with holding tax are exempted from benefits to charitable activities.

-Charitable exemption is only for business income used for charitable purposes is exempt.
-If charity is fully exempt from income tax so no need to file tax return
-Registered charity is exempt having RWT deducted from intrest and dividend income.

2.whether a reserves policy should be mandatory for all charities.

Reserve policy:
It is a policy which explains about the potential funders,donors and stake holders about the holding of particular amount in reserves.

Reserves are so important to maintain about making resilient.it will protect the organisation from excessive expenditure and a float of trouble times.

Low reserve balance lead to risk of financial insolvency.Collapse of many charities are due to mismaintainance of reserves.Reserves can be spent on any charitable purpose.if any funds are not readily available those cannot be included.

trustees have to update each and every addition or use of funds from reserves because it shows how much protected organisation is.and also charities should maintain timing and make decisions to avaoid major risks.