Making Sense of Tax on Your Charity’s Business Income
Specialist Tax & Compliance
Daran Nair
Director | CA, MBA
Making Sense of Tax on Your Charity’s Business Income
Running a business to support your charity is a great way to generate funds. But when it comes to tax, things can get a bit complicated. This guide breaks down the essentials of New Zealand's tax rules for charities, helping you understand when your business income is tax-free and what you need to do to stay compliant.
The Basics: Is Your Charity’s Business Income Tax-Free?
In New Zealand, registered charities can earn business income without paying tax on it, but only if they meet certain conditions. The law that governs this is Section CW 42 of the Income Tax Act 2007.
What Your Charity Needs to Do to Qualify
To be exempt from paying tax on your business income, your charity must meet four key requirements:
Be a Registered Charity: Your organization must be registered under the Charities Act 2005.
Be a “Tax Charity”: You must meet the definition of a “tax charity” under the tax laws.
Use Your Income for Charitable Purposes in New Zealand: The money you earn from your business must be used for charitable purposes within New Zealand.
Prevent Private Benefit: No individual or group in control of your charity can use the income for their own personal gain.
What if Your Charity Works Both in NZ and Overseas?
If your charity operates both in New Zealand and in other countries, you’ll need to figure out how much of your business income is used for your New Zealand-based activities. Only that portion of your income will be tax-exempt. The rest of your business income, which is used for overseas purposes, will be taxed.
How to Apportion Your Income
You need to have a reasonable and consistent method for splitting your income. This is usually based on how you actually spend your money. For example, you could use your expenditure records to calculate the percentage of your funds that are used in New Zealand. It’s crucial to keep good records to support your calculations.
The “All or Nothing” Rule: The Importance of Control
One of the most important rules to be aware of is the “control restriction.” If anyone with control over your charity’s business can divert its income for their own private benefit, then all of your business income becomes taxable. This isn’t just about the money that was diverted; it’s an “all or nothing” rule. Even a small breach can make all of your business income for that year taxable.
What Counts as “Business Income”?
It’s important to know the difference between business income and other types of income your charity might receive. Here’s a simple breakdown:
Business Income (Potentially Taxable) | Non-Business Income (Usually Tax-Exempt) |
|---|---|
Income from trading activities | Donations |
Sales of goods or services | Grants |
Income from commercial operations | Investment income (subject to other rules) |
Running a retail store, café, or similar | Membership fees (if not for services) |
Bequests |
What if Your Business is Part of Your Charitable Purpose?
Sometimes, a charity’s business is an essential part of its charitable work. For example, a hospital that charges patients for its services. Even in these cases, the income is still considered “business income” and needs to be assessed under the same tax exemption rules.
What About Expenses?
If some of your business income is taxable (because it’s used for overseas purposes), you can deduct the expenses you incurred to earn that income. You’ll need to apportion your expenses in the same way you apportion your income, using a reasonable and consistent method.
Recent Changes You Should Know About
Since the 2020-21 income year, any business that is run for the benefit of a charity must be registered with Charities Services for the charity to be eligible for the business income tax exemption.
Key Takeaways for Your Charity
Here are the most important things to remember:
Stay Registered: Make sure your charity’s registration with Charities Services is always up to date.
Know Your Purpose: Be clear about whether your charity’s work is limited to New Zealand.
Track Your Spending: If you work overseas, have a solid system for tracking how your funds are used.
Review Your Rules: Check your charity’s constitution to make sure there are no loopholes that would allow for private benefit.
Identify Your Income: Be clear on what is business income and what isn’t.
Keep Good Records: Document everything to show how your business income is being used for charitable purposes in New Zealand.
Common Mistakes to Avoid
Assuming all income is tax-free: Business income is different and needs to be assessed.
Forgetting to apportion income: If you have overseas activities, you must split your income.
Poor record-keeping: You need to be able to prove how you’re using your money.
Having weak control structures: Make sure your rules prevent anyone from personally profiting from your business.
Confusing business and non-business income: Know the difference to ensure you’re following the right rules.
By understanding these key points, you can ensure your charity’s business activities are not only successful but also fully compliant with New Zealand’s tax laws.
