In February 2024 Inland Revenue issued for public consultation a draft interpretation statement and fact sheet on the charities business income exemption rule. While consultation has recently closed, the below highlights a few of the key conclusions drawn in the draft statement, some of which may not align with practice.

General rule

Certain criteria must be satisfied to treat business income derived by a charity as exempt from NZ income tax, including:

• the business must be carried on exclusively for the charitable purposes of one or more charities,
• the entity conducting the business must be a registered charity,
• the income derived must be ‘business income’,
• the charity deriving the business income must carry out charitable purposes in NZ,
• the charity deriving the business income must be a ‘tax charity’ (this includes a registered charity and a charity listed in Schedule 32 of the Income Tax Act 2007).

There is also an overriding criterion relating to control of the business. Briefly, the tax exemption will not apply if a person with some control over the business (e.g. settlor or trustee of the trust or shareholder or director of the company that is carrying on the business) is able to direct or divert the business income to the benefit or advantage of another person.

If the charitable purposes of the charity are not limited to NZ, business income derived must be apportioned reasonably between those purposes in NZ and those outside NZ. Only the amount apportioned to the NZ purposes is exempt from tax.

Points of interest

Below are some conclusions in the draft statement that may differ from current practice:

Whether investment income is business income

In Inland Revenue’s view, notwithstanding a charity is not in the business of investment, investment income derived by a charity will be business income if the investment income is “closely connected” to the charity’s business. The draft interpretation statement illustrates this with an example of a charity that runs a café that deposits the takings into an interest-bearing business on-call account. The bank account is also used to pay for the café’s expenses. Conclusion: the interest earned on the account is business income because the interest is closely connected to the business transactions (café activities). In contrast, a later example concludes interest earned on excess funds in the business on-call account that has been put on term deposit is not business income.

CA ANZ considers the better view is that interest income derived by a charity is not business income unless the charity carries on the business of investment. This approach is simpler, aligns with accounting and commercial practice, and would minimise compliance costs.

Whether charitable purposes are limited to NZ

It will be important to consider not only what a tax charity’s rules say but also what in fact has occurred. For example, a tax charity that donates to charitable purposes outside NZ will be required to apportion its business income (i.e. the charity will be treated by Inland Revenue as a charity that is carrying out charitable purposes outside NZ).