The business of charity

Author:Mr Scott Moran
Profession:Duncan Cotterill

Submissions on the Department of Internal Affairs' Modernising the Charities Act 2005 Discussion Document ( Discussion Document) close on 31 May 2019.

One of the four main risks for established charities identified in our article last month is the spotlight on the commercial activities of charities, and whether regulation of charitable businesses needs to be changed.

Any law reform in this area of law would likely have a large impact on the way many charities, and the charitable sector in New Zealand, function.

In this article we look at the possible reform options.

Background to charities as a business

Businesses operated by charities are a key income source for many New Zealand charities. Much of the $2.9 billion of trading income that is applied to charitable purposes in New Zealand each year is earned through businesses run by charities.

Despite charitable businesses being relatively commonplace, the current Charities Act does not provide any explicit rules for how they should operate. The only legislative regulation is by way of provisions such as section 13 of the Charities Act 2005, which prohibits a charity from operating to profit an individual. Case law clarifies that charities may only operate businesses if all profit is applied exclusively to charitable purposes. Beyond these requirements, charitable businesses remain largely unregulated in New Zealand.

Those in favour of the status quo will argue that without the charitable business contribution to the economy, the government and taxpayer would need to step in to replace a large part of that contribution. The majority of charities contribute to, and arguably subsidise, many areas of interest to the government (such as health, social services and housing).

Those who promote law reform of charitable business say that charities have an unjustifiable competitive advantage with tax breaks and that business activities of charities create unnecessary risk to the asset base and reserves of charities. There is also a call for more reporting transparency for charitable businesses.

Possible reform options

We anticipate that there are likely to be three reform options considered by the Department of Internal Affairs:

Whether unrelated businesses should be entitled to charitable status at all (a North American model); Whether an assessment of risk of an unrelated business is required (an England and Wales model); Whether financial reporting reform is required for increased...

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