No-one can say that Ngai Tahu has not done well out of the settlement with the Crown of compensation worth $170 million in 1998, with the net worth of Ngai Tahu now being in excess of $1 billion. However, Ngai Tahu have taken advantage of the income tax legislation and charity law to grow the settlement to the point which must raise questions about the privilege of the exemption from income tax being granted to limited liability companies. This surely must raise issues of competitive neutrality, equity and fairness with respect to income tax. Adam Smith must be turning in his grave!
When in 1880 provision was made in our legislation for entities that undertook commercial activities for the promotion of charity to do so with the status of limited liability, the government of the day could not have foreseen what in tax parlance is described as the unintended consequence of that status. That unintended consequence now allows income–tax exempt commercial activity on a scale never before seen in New Zealand, as can be seen in Ngai Tahu’s latest results. Ngai Tahu can claim charitable status for their commercial operations because they are said to be for charitable purposes. However, in order to discover the legal basis for their charitable status requires effort, for it is not evident on the Ngai Tahu Charitable Group details on the Charities Register – in fact there is no constitution on the Register for the Group that the public can read. The constitution for Ngai Tahu Seafood Limited, a member of the Group which can be found on the Companies Office register as well as the Charities Register, empowers the company to carry out its business as trustee in trust for the Ngai Tahu Charitable Trust, another member of the Group. The Objects of that charitable trust include:
- assistance to the needy, poor, sick, the infirm, the disadvantaged, disabled or at risk children and young people;
- assistance in the development of employment opportunities;
- emergency relief services;
- education and research;
- environmental research and management of local resources;
- the relief of poverty, the advancement of education,; the advancement of religion, or other purpose beneficial to the community.
With their latest results, Ngai Tahu Holdings Corporation Limited have once again demonstrated that it has fallen short with respect to the charitable purposes privilege of being exempt from income tax, given the relatively low level of the profits it has distributed. According to the Press of 11 October (C22) the corporation distributed $31.36 million as a dividend to iwi. That amount represents only 19.5 per cent of the profits of $160.8 million which means that $129.44, or 80.5 percent, was not distributed for charitable purposes. On that basis, this supports my contention that limited liability companies that claim to have charitable purposes should be taxed at 28% on any undistributed profits, in this case an amount of $36.24 million by which the taxpayers of New Zealand are worse off because of the charitable purposes exemption from income tax.
The reality is that when tax privileges exist, as with non-rateable land under the Local Government (Ratings) Act 2002, revenue must be found elsewhere. With well in excess of 700 “limited liability” companies identified through an advanced search on the Charities Register generating in excess of $372 million in income-tax exempt surpluses and holding more than $3.6 billion in assets, excluding Ngai Tahu which does not file separate returns for the members of the Ngai Tahu Charitable Group, the time has come for a review of the status of those limited liability companies and the extent to which they fund charitable purposes, and other entities that also have limited liability companies as members of their group.
In my opinion, commercial operations should not be entitled to the income tax exemption on the basis that they operate for charitable purposes. It may be their intention that any surplus funds are to be applied to charitable purposes, but that is not their primary function. Their primary function is to provide a return to their shareholders, which may well be a charitable entity, through operating a successful commercial operation. New Zealand now has a philanthropic regime whereby companies can claim donations as deductible items to the extent of a company’s taxable income. The effect of this for a for-profit company is that profits are liable to income tax.
However, tax equity and fairness is being distorted by allowing commercially-oriented companies to claim that they are in effect charitable operations on the basis that charitable purposes are described in their constitutions and as such are therefore entitled to the charitable purposes exemption from income tax. They are not bona fide charitable operations, and it is time that this distortion in the tax system in New Zealand was addressed by requiring limited liability companies to file their accounts independently of their related charitable purpose entities, with funds being supplied from the commercial entities in the form of donations that are treated as deductible items of expenditure by the commercial entities to the extent of their taxable income. Tax losses created by excess donations would be disallowed, with income tax being paid on any remaining profits. The charitable entities, which would not be disbarred from being a shareholder in the commercial entities, would then report their income and expenditure through the Department of Internal Affairs Charities Services, thus providing transparency and accountability to the public in accordance with the intent of the Charities Act 2005. Currently this is not the case as can be seen in the Summary Statement of Accounting Policies for Te Runanga o Ngai Tahu and Ngai Tahu Charitable Trust for the year ended 30 June 2014 at 1.1 Reporting Entity:
The Summary Group Financial Statements for Te Runanga o Ngai Tahu [TRONT] and Ngai Tahu Charitable Trust include TRONT and its subsidiaries, including Ngai Tahu Charitable Trust, Ngai Tahu Holdings Corporation Limited and its subsidiaries and the trusts for which the company and its subsidiaries act as trustee, and the subsidiaries and associates of those trusts (the Group), adjusted to eliminate the effect of significant intra-group transactions.
A further analysis of the shareholding structure of the Ngai Tahu-related entities reveals a complex web which on consolidation allows the elimination of significant intra-group transactions thereby disguising the true extent of financial activity within the entity. While consolidation may be considered appropriate for financial reporting purposes in accordance with accounting standards, for taxation purposes with respect to commercial activities intermingled with charitable activities it is not appropriate. Consequently, the commercial activities of such entities should be separated from the charitable in order to identify their true income tax liabilities after allowing for donations as income tax deductible items in accordance with current tax legislation.
At the heart of the matter is, quite obviously, tax policy. History tells us that when charities are threatened with the removal of fiscal privileges, (England in 1863 and New Zealand in 1987) their response is such that politicians buckle under the pressure, such is the power of the charity sector. Nevertheless, while the issue has surfaced from time to time in New Zealand, there has never been a serious debate concerning the fiscal privileges accorded to charities, but the time has now come for such a debate at parliamentary level. No doubt academics and the sector will argue that such a debate is needless, that any taxation of commercial activities will be ineffective and will only impose further burdens on a supposedly financially stressed sector, as has been argued overseas. My answer is that as suggested above – that commercial activities should be separated from charitable activities and retained profits taxed at the same rate as that which applies to for-profit entities. Tax advisers will no doubt benefit as charities move to restructure to gain the best tax advantages, but at least those charities will then be behaving in the same way as their for-profit counterparts, on a level playing field.
I will leave the last word to William Pitt the Younger who, on the introduction of the exemption from income tax for funds applied to charitable purposes in 1799, required charities to explain what it was that they did that was for a charitable purpose. Funds not applied to charitable purposes were liable to income tax. Maybe we should also require commercially-oriented charities to pay income tax, then have them argue why they should have any of that tax refunded but only on the provision of proof of the application of funds to charitable purposes and the resulting public benefit. In other words, a tax credit against the income tax levied on retained surpluses and non-distributed funds.
APPENDIX: The members of the Ngai Tahu Charitable Group CC35565 as at October 2014
The members of the Ngai Tahu Charitable Group as they are currently reported on the Charities Register are listed at Appendix 1. However, the listing is inaccurate as it contains companies that have been struck off the Companies Register but are not identified as such in the listing, a fact that is not apparent until a search on individual registrations is undertaken which then identifies which entities have been removed from the Charities Register.