Income Tax for Not-For-Profits
Are You Liable for Income Tax?
CCA quite regularly comes across organisations that ‘fly under the radar’ of Inland Revenue: they are not registered Charities but also have never registered with Inland Revenue and therefore have no IRD number.
Some organisations believe that having registered as a Society automatically makes you a not-for-profit and entitles you either to a tax exemption or at least to an exemption from filing tax returns if your net income is below $1,000. This is incorrect.
By default, all organisations are taxable entities, whether you are a Charitable Trust, Society, Company or have no legal form at all. If you have registered as a Charity you are automatically exempt from Income Tax. In all other cases any tax exemption or concession must be applied for in writing with Inland Revenue.
Full Income Tax exemptions are also available for a very limited set of other organisations, such as amateur sports or the improvement of an area or district. If you are not one of those organisations that is eligible for a full income tax exemption, then you can apply for the exemption that provides a $1000 deduction for not-for-profits. There are certain clauses that must be present in your constitution before Inland Revenue acknowledges not-for-profit status, a key one being a clause that prohibits you from distributing any surplus as private income (‘pecuniary benefit’).
If Inland Revenue does acknowledge you as a not-for-profit you become entitled to an automatic deduction of $1,000 from your net income. You do not have to file a tax return if your profit prior to the deduction is less than $1000, but you should retain an annual set of accounts. If the organisations profit exceeds $1000 then a tax return is required and the $1000 deduction may be claimed in the accounts.
Some not-for-profit income, such as membership fees, grants or donations, does not count towards your taxable income at all, virtually guaranteeing that most not-for-profit organisations will end up with a loss for tax purposes even if they have a cash surplus
For more information on tax exemptions and the $1,000 deduction see the Inland Revenue web site here: http://www.ird.govt.nz/non-profit/np-gst/exemption/