Change Imminent for Income Tax on Business Income - Charities

Although this was no surprise - the coalition government has been signalling the move for some time  – feedback is due by 31 March 2025, leaving a relatively short timeframe for submissions.

It is expected that the Government will make more concrete announcements in the 2025 Budget, to be delivered on 22 May 2025.

Charity business income tax exemption

The issues paper does not put forward any firm proposals but instead is intended to solicit views on topics related to three main areas. Some of the questions for the Church to consider include the following (as paraphrased below):

· What are the most compelling reasons to tax, or not to tax, charity business income?

· If the tax exemption is removed for business income, what are the most significant practical implications?

· How can you define what business income is unrelated to charitable purposes?

· If business income is taxed, what is an appropriate threshold to carve out small-scale business activities?

This is the central part of the issues paper released. From a tax perspective the concepts of “business income”, “taxable activity”, “charitable purpose”, etc. are well documented and defined.

Donor-controlled charities

This section highlights that there are no special tax rules relating to donor-controlled charities and this presents an opportunity for tax avoidance and other similar schemes (such as circular arrangements, inflated prices, or significant lags in charitable activities vis-à-vis receipt of donation tax credits).

Again, there is no specific proposal put forward, with the issues paper asking for feedback on a number of areas, as listed below:

· How do we define a donor-controlled charity?

· Should there be different tax rules for donor-controlled charities, and how should these be defined?

· Should there be any investment restrictions, and if so, what?

· Should there be a requirement for a minimum distribution each year?

On the face of the information provided within the issue paper, this section should not affect the Church but that depends on how any proposed legislation defines “donor-controlled charities”.  MCNZ Church law provides that all funds are under the control of Conference.  So, if the definition includes a rule about controlling more than 50% of the net assets of a charity then all entities under the control of Conference may fall into the definition.

Integrity and simplification

The issues paper covers NFP member transactions, a variety of tax exemptions for different bodies, the fringe benefit tax (FBT) exemption for charities, and possible simplifications for volunteers and donors.

Proposals that may affect the Methodist Church include:

· Removing the FBT exemption for charities; and

· Treating payments of honoraria to volunteers as salary or wages rather than as regular payments.

· Donations tax Credits

In late February information regarding the discussion document and proposed changes to the Income Tax Act was sent to MCNZ entities likely to be affected. If you have queries or wish to discuss the announcement, contact peterv@methodist.org.nz