New Zealand Law Society - Is trading by charities charitable?

Is trading by charities charitable?

This article is over 3 years old. More recent information on this subject may exist.

The Charities Register in New Zealand contains over 700 entities with the word “limited” as part of their names.

However, the activities undertaken by these entities range from the provision of social services, such as Idea Services Limited, an arm of IHC, and Holly Lea Village Limited, a retirement home. On the other hand, other activities are purely commercial trading activities emulating those undertaken in the for-profit sector with which they are in competition.

While there are a significant number of limited liability companies whose details can readily be found on the Charities Register, others are not so obvious, having been registered as a group but not as a group of companies as understood under the Companies Act 1993.

In the case of the Ngai Tahu Charitable Group, the group registration disguises the fact that the group consists of 33 limited liability companies, all of which undertake commercial trading activities, as well as some trusts.

Including that group in the list of limited liability entities ranked by total assets, with total assets of $1.148 billion the Ngai Tahu Charitable Group ranks second to Metro Water Limited with total assets of $1.254 billion. However, the net surplus of $11.8 million reported by Metro Water is less than a tenth of that of the Ngai Tahu Charitable Group, at $135 million.

Tax exempt

Being registered charities, these entities are exempt from income tax.

As registered charities are required to file annual returns based on a standard form template, the public now has access to charity sector financial data that was not available before the Charities Act 2005.

However, a close analysis of the annual returns that registered charities file reveals how charities can either intentionally or unknowingly misinform the public of their financial performance and position.

This came to light on undertaking a close analysis of the annual returns filed by the Ngai Tahu Charitable Group. In reconstructing the equity account for the Ngai Tahu Charitable Group between 2009 and 2014 I found that there are unexplained transactions which increase equity by $200 million.

Likewise for another Ngai Tahu related entity, Whale Watch Kaikoura Limited, in which Ngai Tahu Capital Limited has a 43.5% interest, with Ngai Tahu Capital Limited being held entirely by Ngai Tahu Holdings Corporation which in turn is wholly owned by the Ngai Tahu Charitable Trust.

The closing equity reported in the Charities Services annual return for Whale Watch Kaikoura for 2013 was $20,351,000 with a deficit for 2014 reported at $26,946,000. However, the reported equity for 2014 was $21,405,000, which requires an increase of $28 million in the equity account to arrive at that figure.

Whale Watch Kaikoura Limited

Equity at year end 2013


Deficit year ended 2014


Equity at year end 2014


Unexplained increment in equity


Reported equity at year end 2014


Another example of this was found in the annual returns filed by Holly Lea Village Limited, when a reconstruction of the general accumulated funds in equity identified unexplained decrements of $2.5 million in 2013 and $3.6 million in 2014, a total of $6.1 million.

However, the difference between Ngai Tahu’s companies (for the benefit of Ngai Tahu Whanui) and Whale Watch Kaikoura (exclusively for furthering charitable purposes in New Zealand), and Holly Lea, is that the revenue that Ngai Tahu and Whale Watch produced was from trading that is not related to their charitable purposes, whereas the revenue generated by Holly Lea as a retirement home for gentlewomen or women of refinement or education in reduced or straitened circumstances is directly related to its charitable purpose. (That is according to the McLean Institute Act 1930 Act to give effect to the trusts of the will of the founder of Holly Lea, Allan McLean.)

Charitable status

The question that must be asked then, how is it that trading entities are able to claim charitable status therefore exemption from income tax when their trading activities are not related to their charitable purposes?

The market-based fees charged by a charity hospital, such as St George’s Hospital Incorporated in Christchurch, although denying access to those who cannot afford the cost in spite of an altruistic nursing clause in its deed, are at least directly related to the provision of healthcare as a public benefit.

The Royston Hospital Trust Board goes some way towards honouring its deed which states that its purposes as a private hospital are primarily intended for the reception of paying patients but the trustees also have the “right,” rather than an obligation in return for the privilege of being exempt from income tax, to receive a limited number of non-paying patients.

While the $100,000 donated by the Royston Hospital Trust Board to the Hawke’s Bay District Health Board from total charitable donations of $138,809 enabled additional patients on the public waiting list to be treated through Royston Hospital was only 4.4% of its 2014 net surplus of $452,158 from operating income of $490,180, the Board of Royston is at least recognising its charitable obligations not only in a legal but also in a moral sense.

On the other hand, St George’s reported a 2014 operating surplus of $12 million from revenue of $51 million, a 23.5% return while, unlike Royston, reporting no charitable activity or expenditure at all.

Case law argues that such hospitals relieve the government of burden, therefore justifies the exemption from income tax. As Lord Macnaghten said in 1891 in the famous charity case, The Commissioners for the Special Purposes of Income Tax v Pemsel AC 531 [1891] AC 531 at [583]: charity is none the less charity “because incidentally they benefit the rich as well as the poor.”

Would he say the same today, I wonder, given that in some charity hospitals in New Zealand the poor do not benefit at all to any significant degree, let alone incidentally?

While the purposes of the companies in the Ngai Tahu Charitable Group are in support of the Ngai Tahu Charitable Trust, whose purposes are for the benefit of Ngai Tahu Whanui, the trading activities of those companies are not related to those purposes.

How is it, asked Justice Kirby (dissenting) in Commissioner of Taxation of the Commonwealth of Australia v Word Investments Ltd [2008] HCA 55 at [178], that because the ultimate destination of designated profits is to other corporate entities with charitable status, how can those distributions “retrospectively … colour that characterisation” of the distributing entity with income tax exempt charitable status?

Accountability and transparency

A purpose behind the introduction of the Charities Act 2005 was to improve the accountability and transparency of the sector to the public who, after all, subsidise the activities of the sector in that registered charities are exempt under the Income Tax Act 2007 from income tax.

While annual return data compiled from the charities database must be reviewed with a considerable degree of scepticism, given issues such as that described above, nevertheless the advanced search function is a start in order to understand the extent of trading activity being undertaken under the guise of charitable status. In terms of total assets, the top five commercial “charities” with limited liability status are:

Top five commercial “charities”



Net surplus

Total assets

Metro Water Limited




Ngai Tahu Charitable Group




Waikato Raupatu Lands Trust and Group




Tainui Group Holdings Limited




The Base Limited




TGH Fixed Income Limited




TGH Property Limited




TDL No.1 Limited



, 57,124,092

Raukura Moana Seafoods Limited



, 6,579,135

Total Waikato Raupato Lands Trust and Group




Trinity Lands Limited




Pioneer Generation Limited








De facto income tax at 28%




The Waikato Raupatu Lands Trust and Board has registered a further five limited liability companies which have yet to file annual returns: TGH Hotels Limited (CC51493); Ruakura Limited (CC51502); TGH Primary Industries Limited (CC51500); TGH Farms and Forestry Limited (CC51501); and TDL No. 3 Limited, now Tainui Developments Limited (CC51148). One other company in the group, Raukura Whare Limited (CC43074), reported nil income, expenditure and assets in 2014.

Assuming then, as appears to be the case, that these surpluses were created from trading activities, a de facto income tax at the current company rate of 28% suggests that the government has forgone $56 million in revenue with respect to those five “charities” alone.

Review long overdue

Clearly this suggests that the time for a review of this tax policy is long overdue.

However, given that there have been numerous recommendations over the years by tax experts, beginning with the Report of the Taxation Review Committee (Ross Committee) in 1967 and as relatively recently as the McLeod Report in 2001, that trading charities should be liable to income tax, no government has yet taken this issue seriously.

It is no wonder that charities are taking an advantage of a regime that allows income tax exempt trading at a level that I doubt the Members of Parliament who in 1892 introduced this exemption into New Zealand statute law in the Land and Income Assessment Amendment Act 1892, s 3(4) would ever have contemplated.

Further, given that the country which gave us charity law in the first place does not allow large scale trading by charities to be income tax exempt, it is indeed curious that this has been allowed in New Zealand.

I suggest that, in spite of calls in the 19th century for a charities commission based the English model which, for all intents and purposes dates from 1853, and a commission of inquiry into charitable funds also in the 19th century, a lack of oversight by the IRD has also allowed this situation to develop, as it was not until 2005 that a charity sector regulator was created in New Zealand.

Consequently, the public now has ready access to information that was not previously in the public domain. The decision to allow public access to charities’ financial data for analysis, which is unique to New Zealand, has provided the public with an invaluable tool which allows the public to raise questions such as these.

Insufficient information

While the government now includes the fiscal concessions granted to charities as a tax expenditure in its annual budget, the income tax exemption is not quantified, as was explained when tax expenditures were first reported in New Zealand in 1984, because of there being insufficient information on which to base such an estimate.

There was a hiatus until 2010 when tax expenditures were again reported and have been since. For example, the 2015 Tax Expenditure Statement reported that tax credits for donations to IRD sanctioned donee entities are estimated at $236 million, with donations claimed as deductions by companies at $14 million ($3 million in 1984) and donations by Maori Authorities, also claimed as deductions at $0.6 million.

Tax policy

What then is the rationale for exempting charities from income tax in the first place?

The tax expenditure statement in 1984 (Hon R O Douglas, “1984 Budget Part OO: Tables” [8 November 1984] at 20, Table 17: Income Tax Expenditures at 26) stated that the general objective was to assist charitable organisations. There was no explanation as to what was meant by “to assist.”

I have yet to find any rationale in the parliamentary debates in New Zealand or England with respect to the exemption from income tax.

In 1960, on proposing a rebate for donations, Prime Minister Holyoake described the purpose of this concession as being to encourage a greater degree of community self-help and reliance (26 July 1969, vol 322 NZPD at 883).

While that tax policy clearly relates to donations, that rationale does not apply to the large scale trading activities by charities that is now evident.

In 2006 the IRD described the income tax exemption to be a subsidy, but without rationalising as to why that is so (OS 06/02 Interaction of tax and charities rules, covering tax exemption and donee status, (December 2006) at [2]).

Tax expenditure theory as described by Sir Roger Douglas in 1984 provides a simplistic answer: government expenditure made through the tax system by way of tax concessions and reliefs, as opposed to direct government expenditure.

The 2015 tax expenditure statement describes tax expenditures as being individual features of the tax system that reduce an entity’s tax obligation in a way that is designed to give effect to policy other than to raise revenue in the most efficient and economically neutral way.

Where is the tax policy that justifies the exemption from income on profits generated through large scale trading by charities?

Why do governments continue to ignore the 1982 Report of the Task Force on Tax Reform (McCaw Report) and its recommendation that the government should minimise the scope for avoidance and reduce the advantages which accrue to income tax exempt charities which operate in competition with taxable businesses? And the 2001 McLeod Report, which considered that the tax system should tax all activities and classes of activities on a neutral basis, as well as the 2001 report “Tax and Charities” which recognised the competitive advantage that a charity could gain through the ability to accumulate tax-free profits, thus enabling a faster accumulation of funds which would allow it to expand more rapidly than its competitors?

It is time that the unintended consequences that have arisen from this tax concession were addressed, and that large scale trading undertaken by those “charitable” entities whose activities are not related to their charitable purposes paid their fair share.

Dr Michael Gossmett completed his doctoral thesis in 2009, The Charitable Purposes Exemption from Income Tax: Pitt to Pemsel 1798-1891, which is available at Dr Gousmett has since researched and published on the history of charitable fiscal concessions in New Zealand, and is continuing to build on his research as an independent researcher and public historian.

Post-publication note, 22 October 2015

An article entitled “Is trading by charities charitable?” by Dr Michael Gousmett appeared in LawTalk 874 (25 September 2015).

This article quoted various figures as reported in the Charities Services annual returns for a number of entities, including Whale Watch Kaikoura Limited.

Following the appearance of that article on 25 September, on 29 September Whale Watch sent the following message to Charities Services regarding the $28 million unexplained increment in equity that Dr Gousmett had identified in the LawTalk article:

“To whom this may concern
“We wish to report that there is an error in the 2014 Annual Accounts summary and request that the summary be corrected. The Statement of Financial Performance shows:
“Cost of Trading Operations $ 31,787,000. The correct figure is $3,787,000.
“Thank you for attending to this matter.”

Lawyer Listing for Bots