Charities and Not-for-Profits Targeted for Tax Revenue

3/03/2025·4 mins to read

Charities and Not-for-Profits Targeted for Tax Revenue

Inland Revenue has released a new "Taxation and the not-for-profit sector" issues paper (Issues Paper) signalling significant and wide-ranging prospective changes to long-standing charity and not-for-profit (NFP) tax concessions.

The timeframe for submissions is short, with a hard deadline of 31 March 2025. The Government intends to make decisions on prospective changes ahead of the 2025 budget.

If you are affected by or interested in any of the changes signalled by the Issues Paper and you want your voice to be heard, it is critical to make a timely submission.

Which charities and NFPs are in the firing line of adverse changes?

The prospective taxation of charities’ “unrelated” business income has grabbed headlines, but changes signalled by the Issues Paper are much more wide-ranging than that.

Changes signalled by the Issues Paper may have a material adverse effect on a multitude of different charities and other NFPs. This includes all of the following:

Charities that derive business income: For any tax-exempt charity deriving any income that would or might be viewed as income from a business "unrelated" to the charity's charitable purposes, either directly or indirectly (eg through a limited partnership), the Issues Paper points to the prospective taxation of that “unrelated” business income.
Donor-controlled charities: For any “donor-controlled charity”, such as a charity set up by an individual, couple or family for their charitable work and contributions, the Issues Paper points to the imposition of significant restrictions on activities and transactions and/or minimum distribution requirements.
Non-exempt NFPs that rely upon mutuality: For any society, association or other NFP that is not tax-exempt but treats any revenue from its membership as non-income revenue based on the “mutuality principle”, the Issues Paper points to Inland Revenue adopting a very narrow approach to the application of that principle. The paper notes that Inland Revenue has already prepared a draft operational statement to that effect.
NFPs eligible for non-charity income tax exemptions: For any entity that uses any of the current exemptions for friendly societies and credit unions, local and regional promotion bodies, herd improvement societies, veterinary services bodies, and scientific and industrial research bodies, the paper points to the potential removal of those exemptions.
Non-resident charities: For any non-resident charity deriving New Zealand sourced income that is tax-exempt based on Inland Revenue “tax charity” approval (rather than Charities Act registration), the paper points to potential removal of that exemption.
Charities and other NFPs providing FBT-exempt benefits to employees: For charities and other “donee organisations” currently able to provide benefits to employees that are exempt from fringe benefit tax (FBT), the paper points to the potential removal of the FBT exemption for charities and other donee organisations.

Charities and other NFPs in all of the above categories should consider making submissions on the signalled changes, to oppose the changes and/or to influence the design details of any changes.

Are any charities and NFPs left out of the firing line?

Tax-exempt charities that are not donor-controlled and only derive non-business income and/or income from business “related” to their charitable purposes (the Issues Paper gives the examples of charity schools and hospitals) may be unaffected by the income tax changes that have been signalled.

However, the demarcation of non-business vs. business income (especially investment vs. business income) and unrelated vs. related business is not clear-cut. Charities need to be careful about assuming that prospective changes will not affect their income streams.

Charities and NFPs that qualify for income tax exemptions that are not targeted by the paper should also be unaffected by the income tax changes that have been signalled.

For example, sport and recreation organisations that qualify for exemption from income tax as amateur sports promoters (including NSOs, RSOs and sport clubs) should not be affected by the income tax changes, even if those organisations are also charities.

Note, however, that charities and NFPs unaffected by the income tax changes that have been signalled might still have a position on those changes and/or they might be affected by any change to the FBT exemption if they use that exemption.

Are there any positive changes for charities and NFPs to support?

The main focus of the Issues Paper is the prospective removal or restriction of tax concessions, and the imposition of additional restrictions and requirements, for charities and NFPs.

The paper does, however, invite submissions on potentially positive prospective changes, including:

increasing or redesigning the current $1,000 concessionary deduction for NFPs that are not tax-exempt, which would benefit small-scale NFPs;
simplifying tax compliance costs for NFPs in relation to engaging volunteers; and
improving donation tax incentive, and in particular donation tax credit (DTC), rules.

In relation to the DTC rules, the Issues Paper refers to and seeks feedback on the findings and recommendations of Inland Revenue’s recent DTC regime regulatory stewardship review.

Submissions also should not be limited by the Issues Paper’s submission questions and provide an opportunity to bring attention to other charity and NFP tax issues - such as addressing the longstanding issue of non-refundability of imputation credits for tax-exempt charities and NFPs.