Christopher Adams

The Business Herald’s markets and banking reporter.

Lifting the lid on Sanitarium

The breakfast food giant doesn't pay company tax because of its owner's charitable status. Christopher Adams finds there are some questions about why it is investing some of its cash overseas.

Sanitarium GM Pierre van Heerden doesn't see any difference between rival food firms and a charity-owned, company tax-exempt enterprise. Photo / Dean Purcell
Sanitarium GM Pierre van Heerden doesn't see any difference between rival food firms and a charity-owned, company tax-exempt enterprise. Photo / Dean Purcell

Down any New Zealand supermarket's breakfast cereal aisle, there's one company that dominates the shelves.

Sanitarium - the maker of Kiwi staples Weet-Bix and Skippy Cornflakes - has evolved into a giant of the local food manufacturing sector over the last century.

The Royal Oak-based firm says its share of the New Zealand cereal market sits at about 35 per cent, while Kellogg's, its nearest rival, holds roughly 23 per cent.

Sanitarium's ownership structure, however, sets the company apart from its multi-national competitors such as Kellogg's, Kraft and Nestle, which are publicly listed.

Wholly owned by the Seventh-day Adventist Church, Sanitarium's arms on both sides of the Tasman are exempt from paying company tax on their earnings because their profits help fund the church's charitable and religious activities.

But that tax break doesn't mean all of the income generated by the church's local businesses is required to stay in this country.

Following enquiries by the Business Herald, the church confirmed that its New Zealand-based companies have invested roughly $13 million into three ventures in the United States since 2007.

James Standish, communications director for the South Pacific Division of the Seventh-day Adventist Church, would not specify which firms had made the investments, only saying they had been made by its "Group One" entities.

The businesses owned by those entities, which reported a combined revenue of $86.1 million last year, include the New Zealand arm of Sanitarium, Avondale's Life Health Food - which manufactures brands such as Lisa's and Naked Organics - and the Bethesda retirement village in South Auckland.

The $13 million has been invested into Washington state-based Sweet Green Fields, which has developed a natural, calorie-free food sweetener, Minnesota-based Primordia Seeds and Asklepion Pharmaceuticals, headquartered in Baltimore.

An Inland Revenue Department spokesman says tax-exempt organisations are free to apply funds outside New Zealand, although business income that leaves the country can be liable for tax.

However, Standish says that as long as a charitable entity retains ownership of an overseas investment the funds invested remain tax free.

"I'm advised the Group One entities were not required, under New Zealand law, to pay tax on business income they reinvested and continue to retain ownership of," he says.

Canterbury-based charities researcher Michael Gousmett questioned why the church's businesses had invested such a large sum of cash outside New Zealand that could go towards charitable work in this country.

"If they've got so much money that they can afford to invest in other countries rather than apply the funds for charitable purposes, then you'd have to question that," Gousmett says.

Max Wallace, an Australian author and vocal critic of the tax exemptions enjoyed by religious organisations, says the investments support the idea that churches have become "corporations trading on their tax-exempt status".

"It's certainly in the economic interest of governments now, with stretched budgets, to reconsider [the tax exemption] because the cost to the state is very significant," says Wallace.

The IRD considers the "advancement of religion" a charitable purpose that qualifies for a tax break.

Wallace says that rationale harks back to archaic British law and is "way past its use-by date, especially in New Zealand, where religious belief is on the verge of dropping below 50 per cent of the population".

Standish says the US investments will benefit the church's food businesses in this country and returns gained from them will be used in New Zealand for charitable activities, which include the Adventist Development & Relief Agency, schools and aged care facilities.

"Investing offshore is like buying a capital asset such as machinery internationally and then using it to generate revenue," he says, adding that Sanitarium's multi-national competitors are making similar investments to gain access to technology. "We would have a very bleak future if we didn't access similarly cutting edge technology for the sectors we're involved in."

Sanitarium general manager Pierre van Heerden also defended the investments, saying Nestle has adopted a similar strategy in order to "ensure its future".

He says he doesn't see any difference between a firm like Nestle or Kellogg's and a charity-owned, company tax-exempt enterprise like Sanitarium.

"The food industry constantly invests in new innovation and our company's no different to that," van Heerden says.

But the church's overseas investment push hasn't been all plain sailing.

Primordia Seeds filed for Chapter 11 bankruptcy protection - which allows a company to reorganise its finances while it is having difficulty servicing debt - late last year.

Sanitarium's New Zealand arm was listed as Primordia Seeds' largest unsecured creditor, with a claim on more than US$1 million in unsecured credit, in a US Bankruptcy Court document filed in September.

That document lists Jeff Courtney, a former general manager of Sanitarium's New Zealand operation, as Primordia's chief executive.

Standish, who would not give any details on Primordia's business activities, citing commercial sensitivity, confirmed that the church had extended credit to the Minnesota-based firm as well as holding an equity stake in it.

The company entered Chapter 11 as a result of a dispute over the ownership of intellectual property between the church and its business partner in Primordia, Standish says.

"This [Chapter 11] was action we initiated in order to bring the dispute to resolution," he says. "Now the dispute is settled the company will shortly emerge from Chapter 11 and continue functioning. We now fully own the key technology from this venture."

Standish says the church had to make "a provision" on its investment in Primordia because of the dispute, which resulted in an adjustment to the investment's carrying value.

While a business that appears to have something to do with seeds seems a logical investment for an organisation involved in the cereal trade, Asklepion Pharmaceuticals doesn't appear to be carrying out activities that would benefit food companies.

It's developing treatments for liver diseases, according to its website, which lists the chief executive of Sanitarium's Australian arm, Kevin Jackson, as its chairman.

Courtney, the general manager of Sanitarium's international operations, is also a director, the website says.

Standish says all three of the church's US investments have technology that will benefit its core businesses and Asklepion, which is developing "world first food products", is no exception.

He wouldn't provide any further details on the food products.

"We see a convergence occurring globally between pharmaceuticals and food," Standish says. "This is not a strategy we have talked about publicly but we have over the past few years been quietly and deliberately moving in this direction."

Standish confirmed that a church administrator owned a personal stake in one of the three US ventures before the church made its investments into them.

"That small stake was purchased before the church decided to invest in the firm and was fully disclosed to the relevant board before the church decided to invest," he says. "We prefer to keep the individual's name and specifics of their holdings private unless they decide to make them public, but the holder is not among our church's most senior officers."

The church's New Zealand operations are audited by its General Conference Auditing Service, which Standish says "operates independently".

Asked for his opinion on the church's overseas investments, Revenue Minister Peter Dunne said the Government had committed to reviewing the Charities Act by the end of 2015.

"Policy issues concerning activities of charities and whether they are charitable and consequently eligible for tax concessions should be considered alongside that review, as the issues are closely related," he says.

Such a review might be quietly welcomed by Sanitarium's competitors, who have grumbled about its tax exemptions in the past.

Of course, many large corporates use various techniques to pay as little tax as possible.

But in a 2001 submission to an Australian inquiry into the definition of charities, Kellogg's complained that Sanitarium's tax exemption gave it a competitive advantage.

Jackson hit back then, saying: "Sanitarium's non-profit status doesn't give us a commercial advantage ... even without non-profit status we would continue to put all our profits into community support."

Breakfast cereals began with two brothers

Sanitarium and Kellogg's might be cut-throat competitors today, but both firms owe their origins to an American doctor and his brother who began experimenting with cereals in the late 19th century.

Dr John Kellogg - a Seventh-day Adventist physician at the Western Health Reform Institute in Battle Creek, Michigan - and his brother Will Keith Kellogg stumbled upon a process for making flaked breakfast cereal in 1894 during an attempt to develop a more digestible form of bread.

The cereal was offered to patients at the institute, which was owned by the Seventh-day Adventist Church and later renamed the Battle Creek Sanitarium, alongside lessons in healthy eating, exercise regimes and regular enemas.

In 1906 Will Keith Kellogg founded the Battle Creek Toasted Corn Flake Company.

That firm eventually became international cereal giant Kellogg's, which posted sales of US$13 billion ($16.3 billion) last year.

The company, which is listed on the New York Stock Exchange, remains headquartered in Battle Creek, also known as "The Cereal City", about 180km west of Detroit.

Sanitarium's history in New Zealand begins in 1900 when an Adventist baker who had trained at Battle Creek, Edward Halsey, arrived in Christchurch and began making breakfast cereals and wholemeal bread out of a wooden shed in Papanui, according to the company's website.

Sanitarium's Christchurch factory - which is now shut down while repairs to earthquake damage are carried out, resulting in the national Marmite shortage - was built on the original Papanui site.

Like Kellogg's and Sanitarium, the Seventh-day Adventist Church's roots go back to Battle Creek, where the religious sect was founded in 1863.

Adventist theology resembles that of Protestantism, although the Church has some distinctive practices including a Saturday Sabbath and a health message that advocates vegetarianism and avoidance of foods considered "unclean" such as pork and shellfish.

In keeping with Adventist practices, Sanitarium's factories observe the Sabbath and are closed between sundown on Friday and dusk on Saturday.

- NZ Herald

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