Not-for-profit Issues

Not-for-profit Issues

June-September 2019

By NFP, for NFP

by Harald Breiding-Buss

When asked what a not-for-profit is, many people would instinctively think of a ‘community organisation’, and examples come to hand easily: sports, health groups, food banks, community centres and so on.

But the definition of a not-for-profit is not one of community benefit. It is simply that the venture exists for a purpose other than profit-making, although helping people generate income can actually be a part of that purpose. Professional organisations like Master Builders, Professional Accounting Bodies or similar, for example, exist for the purpose of maintaining quality in services to the public – however, as the many emails I receive from a professional accounting body testify, they are very much into maximising their members’ incomes as well! Social not-for-profits are involved in helping people that are disadvantaged in the job market find work – and income.

Any activity where money is involved can be structured as a not-for-profit. Because a not-for-profit cannot be run by a single individual (or group of individuals) for their own monetary benefit, any earnings from a not-for-profit will have to be through salary or wages, or contract payments. This restricts earnings from not-for-profits to market rates, or at least a rate that is agreed on by a group of people. You can make a living from being in charge of a not-for-profit, but you can’t get ‘filthy rich’, even if that not-for-profit engages in a highly profitable business activity.

Sanitarium is often criticised for being a registered Charity, and the argument is about tax avoidance. Even though Sanitarium sells food profitably, it is subject to the same restrictions as all other Charities – no individual can take money out of it other than through arms-length payments for services or goods, and all surpluses have to go to charitable purposes, either now or in future.

If a ‘normal’ company would donate all its profits to charitable purposes, they would also pay no tax, as such donations are fully tax deductible. Some businesses do this, and are called ‘Social Enterprise’ for it, but the model is essentially the same.

If tax avoidance was as easy as setting up a not-for-profit, every business would do it.

A key disadvantage for setting up a business activity as a not-for-profit is that NFPs do not have access to one of the most important financing tools of a business: selling shares (or other equity-based ‘securities’). This makes it difficult for not-for-profits to expand rapidly, as any investments needed for such an expansion would have to be paid out of past surpluses, or bank loans. Banks are reluctant to provide loans (other than mortgages) to not-for-profits for a number of reasons – one of them being that there are no shareholders.

There are small not-for-profits that essentially run a business activity, such as pre-schools, after-school care, plant nurseries and others. They compete with private businesses directly in the same market – but, unlike their business counterparts, they have no incentive to maximise profits by overcharging you, or underpaying staff.

 

June-September 2019

Societies Act Under Review

The Incorporated Societies Act, hailing back to 1908, is being radically revamped, and in the process will add new compliance on Societies.

Under the draft, Societies will now have to be not-for-profits, i.e. they will not be allowed to distribute any surplus assets to their members on winding up, which is possible under current legislation. This represents a departure from a Society simply being a co-operative venture of any kind. So far it has been the vehicle of choice for people who wanted to do things co-operatively, even with the aim of generating sales or financial benefits for members. Examples would be fruit & vege co-ops, business associations or professional bodies, as well as the ‘true’ not-for-profits such as sports clubs. Societies are not, by default, exempt from Income Tax, so there is no tax avoidance here. However, such organisations may in future no longer be able to be Societies, and may have to incorporate under the much less known and rarely used Co-operative Companies Act.

The biggest new compliance costs will come from the requirement to comply with Generally Accepted Accounting Practice (GAAP), as defined in the Financial Reporting Act. This will put Societies on the same compliance footing as registered Charities, including the requirement to report on ‘outputs’ and ‘outcomes’.

Companies and Charitable Trusts are not required to comply with GAAP, and this is unlikely to ever be a requirement of the Companies Act, because of the compliance costs this would put on small businesses.

Submissions are expected to be called for later this year or next year.