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/
Afraid of the Tax Man?
Editorial, by Harald Breiding-Buss
May 2025
IRD has recently undertaken some consultation on a tax on charity business income, as well as tidying up various stray provisions for not-for-profits in general. Not surprisingly, the idea of taxing charities was not popular amongst charities. The core idea of distinguishing between income that is “related” (not taxable) and “unrelated” (taxable) to a charity’s mission proved too complex for Finance Minister Nicola Willis in the end, who decided to ditch the idea for now.
In our submission CCA pointed out that charities could relatively easily avoid the tax through either structural adjustments, or tweaking to the working of their stated purpose, and any attempt by IRD to define something as ‘unrelated’ would likely simply meet a legal response. Willis estimated that $40-$50 million dollars could be raised with this tax, which she felt was not worth the effort, but is also most probably wildly optimistic.
A small handful of other countries do have a tax on business income by charities, but those countries do not have our complex standardised financial reporting regime (except sometimes for larger entities), which does not align with the rules laid down by Inland Revenue for tax purposes. Any tax levied on charities would mean a double-compliance regime: one report under rules required by the Financial Reporting Act, and another under IRD rules. To complicate matters further, the majority of charities do not have balance dates that align with the standard tax year.
But there is also the fact that charities overall continue to accumulate wealth. A lot of money, billions in fact, is locked away in investments (including investment property) and not used for charitable purposes. Where charities make continuous profits through the charges they raise, business activities they may do, or investment returns they have, it is not unreasonable to consider whether this money could actually do more good in the hands of the government compared to not being used at all. There is a growing consensus amongst economists that New Zealand’s tax take is far too low, especially with a view to a future with a higher proportion of retirees and much higher costs resulting from natural disasters and having to adapt to climate change. Taxing unused income of larger charities is a reasonably painless way to make a contribution, since there is no actual loss of services charities provide, only a reduction in the funds they continue to accumulate. Alternatively, charities should maybe be asked to use these accumulated funds within a reasonable time period.
Anyway, maybe it’s worth having a discussion about the money that the charity sector does have, and how it could best be used for the greatest public benefit.