Government still looking at tax on businesses masquerading as charities

Finance Minister Nicola Willis said looking at charities is currently part of IRD's work programme. Photo / Laura Smith

The Government continues to look at closing a longstanding loophole in the tax system that allows some businesses to legitimately pay no companies tax by declaring themselves charities.

The most famous example of this is breakfast goods manufacturer Sanitarium, which is owned by the Seventh Day Adventist church – a charity – making its profits tax-exempt.

The loophole has frustrated observers for many years. On the election campaign, Prime Minister Christopher Luxon hinted he was open to looking at the issue and has kept his options open in Government.

Finance Minister Nicola Willis confirmed that looking at whether some of these charities should pay tax “was on the tax policy work programme”.

Willis has a tough Budget to put together in 2025, with Treasury saying $2.5 billion worth of new spending will need to be found to maintain services at their current level. The Government has only set aside $2.4b in new spending to meet that demand, meaning $100 million needs to be found from cuts or new revenue initiatives just to stand still – even more money will need to be found if the Government wants to fund new things.

Asked whether revenue from closing the loophole would contribute positively to the amount of new spending the Government could set aside, Willis said “potentially, depending on the decisions we take”.

An answer to a Written Parliamentary Question from Labour’s Revenue spokeswoman Deborah Russell revealed Revenue Minister Simon Watts had received a briefing on charities and not-for-profits taxation in mid-August.

Act leader David Seymour said he supported the work, but said the Inland Revenue Department (IRD) had only a limited amount of policy resource and it was up to Watts to decide where he directed this.

“Certainly I believe there is a loophole to be closed and it should be closed. The challenge with any kind of policy like this is you’ve only got so many policy analysts and quite a number of problems so I’ll certainly be urging my colleagues to get onto it, but I also respect I’m not the Minister of Revenue and I’m not the one who has to organise which of a limited number of tax policy people work on which policy at which time,” Seymour said.

Seymour said some of these organisations maintain they are both business and charity.

He said he might “call their bluff” and say, “why don’t you separate into two organisations and any money you transfer from one to the other [business to charity] will be tax deductible, but earnings reinvested under the line will attract a tax as an investment rather than being able to recycle capital within one tax-exempt entity”.

NZ First leader Winston Peters said he would chat to his party first before taking a position.

Labour leader Chris Hipkins said it was something worth looking at.

“Where charities are engaging in activity for a profit then yes I think they should pay their fair share of tax,” Hipkins said, saying he would “absolutely” support the current work so long as the focus was on charities masquerading as businesses.

“We need to be careful to make sure we are not making life more difficult for genuine charities,” he said.

Deloitte tax partner Robyn Walker told the Herald the challenge with closing the loophole was that, as is often the case with tax, “an idea can sound simple conceptually... but when it it comes to implementing things, it’s not as straightforward”.

Walker said the challenge would be “all these new boundary lines between who is in and who is out of the rules”.

She said the current rules state that over the lifetime of the charity, no one is to profit from it, and that it has to undertake charitable purposes. This allows charities to raise funds in a businesslike manner to be disbursed in a charitable way later. The challenge is determining whether entities are exploiting this rule and determining who is in and who is out.

Walker said the risk with getting the change wrong would be imposing a large compliance burden on legitimate charities. This would be a win for accountants, and a loss for charities which might be forced to divert funds raised for charity to meeting these compliance costs.

Thomas Coughlan is Deputy Political Editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.