Charities Business Income Tax Exemption

Overview – New Zealand Kindergartens

Kindergarten in Aotearoa New Zealand is steeped in the history of pioneers who sought to provide education and care for children within their local communities. Dunedin is the “Home of Kindergarten”, established in 1889. Christchurch followed in 1899, Wellington in 1905, Auckland in 1908, and Invercargill in 1919. By 1975, there were 75 Kindergarten Associations operating 384 Kindergartens.

Our pioneering foremothers/fathers focused their efforts and resources on teacher training, policy and funding. They were pivotal in improving the standards of programmes, staffing, qualifications, and buildings and equipment.

New Zealand Kindergartens (NZK) as we are known today was established as the New Zealand Free Kindergarten Union in 1912/13, and was legally constituted in 1926.

New Zealand Kindergartens is a For-Purpose Charitable Peak Body. It represents nineteen of the twenty six local Kindergarten Associations across Aotearoa. Collectively we have provision to education and care for more than 14,000 tamariki, we employ a minimum of 1,785 registered teachers, and a minimum additional 380 professionals to support our teaching teams.

Our purpose is to support for-purpose trailblazers to thrive in the provision of fit-forpurpose, teacher-led, quality education that enhances social, emotional, economic and environmental impact.

The Importance of Maintaining Tax-Free Status for Legitimate Not-for-Profit Charities, Including Kindergarten Associations

1. Introduction

Legitimate not-for-profit charities, such as Kindergartens, have played a fundamental role in providing essential services to New Zealand communities, particularly remote and rural communities since the late 1800’s. Our Kindergarten Associations exist solely to benefit the public and deliver public good, particularly for vulnerable, at risk, and under-served tamariki. The continuation of tax-free status for our Associations ensures that they can operate effectively, maintain affordability, and reinvest in their services to maximise public benefit. Removing or reducing their tax-exempt status would not only hinder their ability to deliver these services but could also create unintended consequences, including increased costs for families and reduced access to teacher-led, quality early childhood education across Aotearoa, New Zealand.

2. Public Benefit and Essential Services – One of the primary justifications for maintaining tax-exempt status for not-for-profit Kindergartens is the significant public benefit they provide. Our Associations ensure access to teacher-led, quality early childhood education regardless of a family’s financial situation. Research consistently shows that quality early childhood education is crucial in shaping a child’s long-term learning and social development, as well as their productivity as a citizen. By maintaining tax exemptions, the government is supporting an investment in the future generations of New Zealand.

3. Reinforcing Affordability and Accessibility – Kindergartens and other not-for-profit early childhood community-based services operate within tight fiscal constraints, relying heavily on government funding, donations, grants and wider community support. Taxing these organisations would increase operational costs, forcing them to either reduce services, close services, or pass costs on to families. Many families already struggle with the cost of living, and the cost of early childhood education. Introducing new financial barriers would disproportionately impact low-income households, potentially reducing the ability of adults, in particular women, to actively engage in paid employment, and widening educational inequalities.

4. Reinforcing a Non-Competitive Advantage – A key argument for taxing charity business income is that it may provide an unfair competitive advantage over for-profit businesses. However, not-for-profit Kindergarten Associations are not operating to generate profit but to deliver public good. Unlike commercial childcare services, the community is the shareholder of Kindergarten. Kindergarten Associations reinvest the majority of their income into delivering quality teaching by employing one hundred percent qualified teaching teams, providing training and development, providing fit-for-purpose facilities that comply with all regulations, and enhancing educational outcomes for tamariki. Their primary focus is the investment in education and well-being of children, not financial gain. Taxing our Kindergarten Associations would undermine their ability to fulfil this mission.

5. Compliance Costs and Administrative Burden – Introducing tax obligations for not-forprofit Kindergartens would impose significant compliance costs and administrative burdens. The majority of Kindergarten Associations are governed by community volunteer boards. Requiring them to navigate complex tax laws would divert valuable resources away from enhancing educational outcomes for tamariki towards administrative overhead, reducing overall efficiency, effectiveness, and sustainability.

6. Supporting Government Social Policy Objectives – The New Zealand Government has consistently emphasised the importance of quality early childhood education in improving social outcomes. Providing tax exemptions to Kindergartens aligns with broader social policy goals by enabling access to quality education, fostering equity, and reducing long-term government expenditure additional education support and social support services. This is being tested currently with the woeful progress being made in relation to reducing child poverty. Any further move to hinder the tangible support for tamariki like removing the tax-free status, further contradicts these established policy objectives and will undermine government efforts to improve child welfare and social mobility.

7. When Should a Not-for-Profit Entity Be Subject to Tax? – While tax exemptions for notfor-profits serve a crucial public interest and enable the delivery of public good, there are circumstances where taxation may be appropriate. Not-for-profit entities should be subject to tax when they engage in substantial commercial activities that are unrelated to their core charitable mission. If a charity operates a business that competes directly with for-profit enterprises, such as property holdings, subsidiary companies, contracting services, and retains significant earnings without reinvesting them into its charitable purpose, taxation may be warranted to ensure a level playing field. Additionally, donorcontrolled charities that engage in circular transactions or accumulate excessive funds without distribution should face scrutiny to prevent potential tax avoidance.

8. Conclusion

Maintaining tax-free status for not-for-profit charities, including Kindergarten Associations, is essential for sustaining the accessibility, affordability, and quality of early childhood education in New Zealand. The benefits of these institutions extend beyond individual tamariki to families and the broader community, contributing to a stronger, more educated society. Taxing these organisations would introduce unnecessary financial strain, reduce ability to deliver essential services, and ultimately work against the government’s social and educational priorities.

New Zealand Kindergartens strongly urge the Government to continue supporting legitimate not-for-profit charities by preserving their tax-free status to ensure that they can continue to deliver public good and serve their vital public function effectively for decades to come.

Specific Questions – Charities Business Income Tax Exemption and Related Issues

Chapter Two – Charity Business Income Tax Exemption

Q1. What are the most compelling reasons to tax, or not to tax, charity business income? Do the factors described in 2.13 and 2.14 warrant taxing charity business income?

Charitable organisations provide significant public benefits, often filling gaps left by the government and private sectors. Tax exemptions on business income generated by charities ensure that more resources are directed toward their missions. However, taxing unrelated business income could prevent unfair competition with for-profit businesses. The factors described in 2.13 and 2.14 do raise concerns about tax fairness, but the broader social benefits of tax-exempt status should be weighed against these concerns.

Q2. If the tax exemption is removed for charity business income that is unrelated to charitable purposes, what would be the most significant practical implications?

The most significant implications would include:

• Reduced funding for charitable activities.
• Increased administrative burden for charities to separate related and unrelated income.
• Potential reduction in the number of services provided by charities due to decreased financial resources.
• Possible changes in charitable structures, such as setting up for-profit subsidiaries.

Q3. If the tax exemption is removed for charity business income that is unrelated to charitable purposes, what criteria should be used to define an unrelated business?

An unrelated business should be defined as one that:

• Does not directly further the charity’s stated mission.
• Operates in a commercial manner similar to a for-profit entity.
• Competes with taxable businesses in the same market without a charitable purpose.

Q4. If the tax exemption is removed for charity business income that is unrelated to charitable purposes, what would be an appropriate threshold to continue to provide an exemption for small-scale business activities?

An appropriate threshold could be:

• A de minimis exemption, such as a percentage of total income (e.g., 5–10%).
• A fixed dollar threshold (e.g., $50,000–$100,000 annually).
• A phase-out mechanism where tax is applied progressively beyond a certain level.

Q5. If the tax exemption is removed for charity business income that is unrelated to charitable purposes, do you agree that charity business income distributed for charitable purposes should remain tax-exempt? If so, what is the most effective way to achieve this? If not, why not?

Yes, if a charity reinvests business income into its charitable activities, that income should remain tax-exempt. This could be achieved through:

• A reinvestment rule requiring charities to spend a specified percentage of business income on charitable programs within a set period.
• Allowing deductions for charitable distributions before applying tax to the remaining business income.

Q6. If the tax exemption is removed for charity business income that is unrelated to charitable purposes, what policy settings or issues not already mentioned in this paper do you think should be considered?

Additional considerations:

• Clear guidelines on record-keeping and reporting to prevent undue compliance burdens.
• Transitional arrangements to help charities adjust to new tax obligations.
• The impact on donor behaviour if charities have reduced tax-free revenue sources.

Chapter Three – Donor-Controlled Charities

Q7. Should New Zealand make a distinction between donor-controlled charities and other charitable organisations for tax purposes? If so, what criteria should define a donorcontrolled charity? If not, why not?

Yes, distinctions should be made to ensure transparency and prevent tax avoidance. Criteria should include:

• Significant donor influence over governance or resource allocation.
• A high proportion of assets sourced from a single donor or family.

Q8. Should investment restrictions be introduced for donor-controlled charities for tax purposes, to address the risk of tax abuse? If so, what restrictions would be appropriate? If not, why not?

Yes, restrictions should be introduced to prevent undue influence. Suitable restrictions might include:

• Limits on investments in related parties.
• Minimum thresholds for distributions to charitable activities.

Q9. Should donor-controlled charities be required to make a minimum distribution each year? If so, what should the minimum distribution rate be and what exceptions, if any, should there be for the annual minimum distribution? If not, why not?

Yes, a minimum distribution rate (e.g., 5% of assets annually) should be required to ensure funds benefit charitable purposes. Exceptions should be allowed for:

• Start-up charities in their initial years.
• Organisations with substantial long-term endowments.

Chapter Four – Integrity and Simplification

Q10. What policy changes, if any, should be considered to reduce the impact of the Commissioner’s updated view on NFPs, particularly smaller NFPs?

• Increase the small-scale NFP tax deduction to $5,000.
• Simplify income tax return filing requirements for NFPs with revenue under $50,000.
• Modify resident withholding tax exemption rules for small NFPs.

Q11. What are the implications of removing the current tax concessions for friendly societies and credit unions?

• Higher costs for members, potentially reducing financial accessibility.
• Possible consolidation or closure of smaller entities.
• Reduced community financial services for lower-income individuals.

Q12. What are the likely implications if the following exemptions are removed or significantly reduced?

• Local and regional promotional bodies: Reduced tourism and economic promotion.
• Herd improvement bodies: Higher costs for farmers, potentially impacting productivity.
• Veterinary service bodies: Increased veterinary costs, affecting animal welfare.
• Bodies promoting scientific/industrial research: Decline in innovation and R&D.
• Non-resident charity exemption: Potential withdrawal of international charitable aid.

Q13. If the compliance costs are reduced following the current review of FBT settings, what are the likely implications of removing or reducing the exemption for charities?

• Increased financial burden on charities.
• Potential reduction in non-cash benefits for charity employees and volunteers.
• Increased reliance on government grants to cover additional costs.

Q14. What are your views on extending the FENZ simplification as an option for all NFPs? Do you have any other suggestions on how to reduce tax compliance costs for volunteers?

Extending the FENZ simplification could reduce compliance burdens. Additional measures could include:

• A simplified tax return for small charities.
• Exempting volunteer honoraria from income tax up to a reasonable threshold.

Q15. What are your views on the DTC regulatory stewardship review findings and policy initiatives proposed? Do you have any other suggestions on how to improve the current donation tax concession rules?

The review’s findings align with the need for greater transparency. Additional improvements:

• Allowing real-time donation tax credits.
• Streamlining claim processes for donors and charities.