23. Deregistered charities: life after death

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Introduction

New charities attract everyone’s attention - like new born babies, they are full of hope and promise for the future.  But what causes them to lose their registered charity status?  Does deregistration really mean the end of the road, or do some flourish without the oversight of a charity regulator?  And - perhaps most importantly - will the new deregistration tax result in more resurrections than ever before?  I looked at the NZ charity data and discovered there really is life after death in the charitable sector.

Summary

During the year ending 31 March 2015 (FY 3/15) there were 1,017 new charities registered in NZ – that’s 21 charities registered each week.  Australia registers an average of 49 charities a week, so on a per-capita basis NZ charities are more prolific.  But that picture changes when you realise the NZ regulator deregistered 1,330 charities the same year – averaging 26 deregistrations a week.  The result was a net reduction of 313 charities on the register for FY 3/15.

 

Deregistration means there is no longer public transparency over the charitable assets or activities of many of these organisations.  Incorporated societies are the exception – they must continue filing financial reports with the Companies Office which are publicly available.  Companies will also file annually with the Companies Office and charitable trusts will lodge basic information with the Companies Office, but financial information will no longer be publicly available for most of these entities.  Deregistered charities must also start to file annual tax returns with Inland Revenue.  Tax exemption will generally be lost unless they are exempt under other provisions of the Income Tax Act (such as amateur sports bodies); donee status (which enables donors to claim tax credits for their donations) will not necessarily be lost – they may continue to qualify under section LD 3(2) of the Income Tax Act 2007 (ie if the organisation is not carried on for the private pecuniary profit of an individual and its funds are applied wholly or mainly to charitable, benevolent, philanthropic or cultural purposes within NZ).

 

Information on the charities register shows there are four reasons why charities are deregistered:

 

  i.    Failing to file a return: The regulator will deregister charities if they have two or more overdue Annual Returns.  In FY 3/15, 61% (812) of all deregistrations were due to failure to file returns.  Out of these, 575 had lodged at least one return before the deregistration, so we know that the 575 controlled charitable assets totalling $112.8m.  The balance of 237 had never filed a return with the regulator so neither the public nor the regulator know what charitable assets they controlled.  The sector with the most deregistrations for failing to file returns was “education / training / research” (19% of return deregistrations) followed closely by “religious activities” (17%).  If a charity is deregistered for not filing returns, the average delay between their last public disclosure and deregistration is 3 years and six months. Deregistered charities can re-register, and many do.  However the regulator does not seem to require them all to file overdue returns as a prerequisite to re-registration.  Many others continue operating post-deregistration without seeking to re-register.  

 

ii.    Voluntary deregistrations:  The number of voluntary deregistration requests over time is fairly consistent, with 400-500 requests lodged per annum over the last five years.  In FY 3/15, 38% (511) of all deregistrations were voluntary.  Most of these charities have wound up or merged with another charity.  However, some (194 in FY 3/15) tell the regulator they no longer need charitable status and many of these organisations continue to operate without it.  On the rare occasion a charity may voluntarily deregister during, or as a result of, a regulator investigation (as reported for The Glenn Family Foundation Charitable Trust).   The sector with the most charity voluntarily deregistrations in FY 3/15 was “education / training / research” (25% of voluntary deregistrations were by charities in this sector).

 

iii.    Regulator investigations uncover serious wrongdoing: The regulator has deregistered seven charities for serious wrongdoing since 2008.  The most common reason for serious wrongdoing involved charities providing private benefits to their officers or related parties.  For example, when a charity pays private expenses and makes undocumented or non-arms’-length loans.   In three cases the regulator made orders under section 31(4) to prevent an application for re-registration for a specified period and it disqualified people from being an officer of another charity for a specified period.  Despite the charities being deregistered, five of the seven appear to still exist, two still have active IRD donee status, and officers of five of the seven deregistered charities appear to be involved with other registered charities today.  None of the deregistered charities successfully applied to re-register as a charity.

 

iv.    Regulator review determines that the organisation’s purposes are not charitable:  Once a charity is registered, the regulator may decide to initiate a review of its charitable purposes.  According to the charity register there have been 41 such reviews that resulted in charities being deregistered.  A number of charities were deregistered because they failed to meet the public benefit test.  For example, they only provided benefits to a closed group or membership, or they focused on sportspeople at an elite level.

Other charities were deregistered because they had a charitable purpose and a non-charitable purpose (and the latter was more than ancillary).  For example, in addition to having a charitable purpose some organisations had a purpose of providing recreation or entertainment for private benefit (which is not charitable); they had a purpose of promoting the private interests of a specific group (which is not charitable); they had a purpose of promoting a point of view (which is not charitable); and they had a purpose of promoting a change in public policy (which is not charitable).

 

Based on the analysis that follows in this paper, here some helpful tips for charities involved with deregistration:

 

  i.    If you want to voluntarily deregister: If you want to voluntarily deregister because you are winding up, just letting the charity regulator know may not be enough.  If you are a charitable trust, incorporated society or company, inform the Companies Office at the same time.  If your charity is going to continue to exist after voluntary deregistration, make sure you know what the tax implications are, especially how the new deregistration tax affects your charity if you voluntarily deregister after 14 April 2014.  You should also make sure you know whether you will need to continue to report to the Companies Office instead of the charities regulator.   DIA has a helpful guide for voluntary deregistrations on its website. 

ii.    If you don’t file your annual returns:  If your charity is not meeting its return filing obligations, expect to be deregistered once you have two returns overdue.  If you are deregistered and you want to continue as a charity (and retain your tax exemptions) then reapply to the charity regulator as soon as possible (definitely within 12 months of deregistration or you will be subject to the new deregistration tax). It is worth thinking about the pros and cons of re-registration – up to now, many deregistered charities continue to operate after being deregistered and just switch their reporting to meet the Companies Office requirements.  Because losing registration doesn’t mean you necessarily lose IRD donee status, donations to your organisation may still be eligible for a tax credit.  But a word of caution – the past is not a good predictor of the future.  Everything changed from 1 April 2015 with the new deregistration tax, which may apply if you are deregistered by the regulator after this date.

iii.    If you want to avoid being deregistered for serious wrongdoing:  Make sure you have good governance and good record keeping.  Simple.

iv.    If you want to avoid being deregistered because you no longer qualify as a charity: Keep an eye on the deregistration decisions being published by the regulator.  If you have doubts about whether your charity meets the public benefit test, or your charity has a non-charitable purpose that starts to become a main purpose rather than an ancillary purpose, you may want to get legal advice.

 

Finally, once your charity is deregistered, make sure you update your charity’s website and documentation to make it clear it is no longer a registered charity.  If you miss this step and you continue to refer to your deregistered organisation as a registered charity, you are committing a “holding out” offence under section 37 of the Charities Act and could be liable on conviction to a fine of up to $30,000. 

 

In conclusion, there may be life after death for deregistered charities.  But the charity regulator will still keep an eye on you in case you “hold out” as a registered charity, and the taxman will be keen to see whether he can assess you with a deregistration tax.

_________________________________________

 

The details

 

1. Deregistration trends: reasons for deregistration

 

Graph A shows the trend in the volume of deregistrations, and the reason for them, from 2009 to 2015.  The NZ regulator began to regulate in 2008 and all charities were required to apply for registration at that time, resulting in about 20,000 applications (the register contains 27,197 charities today).  Using this one-off mass registration approach is why there were few deregistrations until 2011 - when some of the new charities failed to lodge their annual returns for the first time.  The NZ approach was quite different to Australia’s, where 56,000 charity records were automatically transferred from the Tax Office to the new regulator in 2012 and the charities did not have to complete any application forms.  Consequently the Australian regulator’s task in its first two years was to deregister those charities that no longer existed and obtain current details from those that did exist.

 

Although the volume of voluntary requests to deregister has remained relatively consistent from 2011, the volume of deregistrations for failing to file an annual return has fluctuated dramatically.  This is largely driven by the deregistration policy of the regulator.  For example, it initially made the decision to deregister charities with just one overdue return, however from 2013/2014 it made the decision to only deregister charities if they had two overdue returns.  This is why there were almost no overdue return deregistrations in the year ending 31/3/14 (the catch-up year) and a higher volume in 31/3/15 to address the growing number of delinquent charities.

 

Graph A

 

The volume of charities deregistered as a result of compliance activities (for serious wrongdoing or failing to respond to information requests) and as a result of reviewing whether they qualify as a charity, has always been relatively low.  Based on the register data, only seven charities have been deregistered for serious wrongdoing since 2009 and 41 have been deregistered because they did not qualify as a charity.  The detail for these deregistrations is explained later in this paper and the NZ regulator publishes reasons for decisions on its website.  However, the numbers on the graph may not be exact because they rely on system codes to be correct.   In addition, many organisations apply to register as charities and have their applications declined – those decline decisions are not reflected in this graph.

 

2. Deregistration trends: charities that never reported to the regulator

 

There have been 6,519 charity deregistrations between 2008 and October 2015.  Out of the 6,519 deregistrations, only 4,254 charities had filed one or more returns with the regulator before deregistration.  That means approximately 2,265 charities did not publicly report on their charitable activities, despite being registered charities (a small number of these may have filed reports but the regulator agreed to withhold them from public view, as explained in its Restricting Information policy).

 

Graph B shows the total number of deregistrations since 2009 compared to the number of deregistrations where at least one return had been filed.  The difference between the two lines represents the number of deregistered charities that never filed a return whilst they were registered. The deregistrations from 1 April 2015 to 31 October 2015 have been rounded to a 12 month period and included as a forecast figure for the year ended March 2016.

 

Graph B

 

3. Voluntary deregistrations

 

The NZ regulator does not have a specific deregistration form; charities simply send an email or letter to the regulator requesting deregistration. Out of the 511 charities that requested voluntarily deregistration between 1/4/14-31/3/15, 446 had lodged at least one return.  The top five sectors they operated in (for those charities which filed a return) were education / training / research 25% (110), health 13% (57), religious activities 12% (54), social services 9% (41), and arts / culture / heritage 8% (34).

 

The voluntary deregistration reasons, categorised by the regulator, were as follows:

 

        i.          “No longer requires charitable status” was the category used by 38% (194) of charities. 147 of these had filed at least one return, the most recent showing total assets of $36m and total equity of $31m.  The top four sectors these charities operated in were education/training/research (42), health (22), arts/culture/heritage (13) and social services (13). Details of the top five charities ranked by assets are shown below.  None of the five had IRD donee status.  It is likely that all five are still active even though they have deregistered.

·  Tuhoe Waikaremoana Maori Trust Board: Main sector – education/training/research; 31/3/14 assets - $10.6m.   The board appears to still be active and making grants.

·  The John Mitchell McLachlan Charitable Trust: Main sector – social services; 31/8/13 assets - $6.0m.  The trust appears to still be active and making grants.

·  Stratford Charitable Trust: Main sector – emergency/disaster relief; 31/3/14 assets - $2.9m.  The trust is still registered as a charitable trust with the Companies Office.

·  Te Utuhina Manaakitanga Trust: Main sector – health; 30/6/13 assets - $2.1m. The trust is still registered as a charitable trust with the Companies Office.

·  The Glenn Family Foundation Charitable Trust: Main sector – “other-evenly spread”; 31/3/14 assets - $2.4m (equity - $2.3m).  This trust voluntarily deregistered on 1/12/14.  It was reported to have done so after Internal Affairs abandoned an investigation into alleged irregular payments for a thoroughbred racehorse made by this charity (to Bloodstocks Ltd and Own Glenn’s account in Sydney), see “Glenn charity probe dumped” 14/12/2014, Bevan Hurley, Herald on Sunday. Glenn is reported to have said “I pulled out my Foundation from New Zealand” but it is unlikely the trust subsequently distributed its net assets because the objectives in the trust deed always had a focus on both NZ and India (and more recently the Pacific Islands) and the trust is still active on the Companies Office charitable trusts register.  In its financial statements for the year ended March 2014 the trust recorded donation income of $3.9m from Corona Trust, incurred $742k on “Glenn Inquiry expenses” and made donations of $1.2m to “Otara” and “Other”.  Related party advances of $1.0m were made to Go Bloodstock Ltd and a note explains these funds were repaid during the year with interest at 5% per annum.  The Corona Trust is a family trust set up in the Caribbean tax haven of Nevis and there have been media reports of a court battle for control of its $400m funds, see “Daughter helps dad fight for fortune” 25/5/14, Bevan Hurley, Herald on Sunday.  This charity is also discussed in Blog 6: “NBR rich-listers and charities”. When I wrote that blog in 2012 the charity had not filed any returns but in its application to be a charity it had indicated that 50% of its charitable activities would be carried out in Asia. 

 

The 47 charities that deregistered under this category but had never filed a public return included seven Tait Communications companies (they filed returns which were withheld and recorded as “restricted” on the register) and 17 English Language Partners charities (the did not file returns because they were part of a group). 

 

      ii.          “Wound up and distributed assets” was the category used by 31% (157) of charities.  149 of these had filed at least one return, the most recent showing total assets of $87m and total equity of $64m.  The top four sectors these charities operated in were education/training/research (35), health (17), religious activities (17) and social services (17). Details of the top five charities ranked by assets are shown below. 

·  Central North Island Kindergarten Association: Main sector – education/training/research; 31/3/12 assets - $22.6m.  Ceased as IRD donee 1/1/13 and struck off the incorporated societies register managed by the Companies Office.

·  St James Theatre Charitable Trust (Wellington): Main sector – arts/culture/heritage; 30/6/11 assets - $18.7m.  Still an IRD donee.  Media suggests this trust was integrated with the Wellington Convention Centre to form Positively Wellington Venues in 2011. The trust has been struck off the charitable trusts register managed by the Companies Office.

·  Watch Tower Bible and Tract Society of NZ (charitable trust): Main sector – religious activities; 31/8/12 assets - $7.9m.  Ceased as an IRD donee but is still registered on the charitable trust register managed by the Companies Office.

·  Lakes Leisure Ltd: Main sector: sport / recreation; 30/6/11 assets - $4.7m. Ceased as an IRD donee and struck off Companies Office register.   This was a council controlled organisation.

·  The Methodist Church of NZ (New Plymouth): Main sector – religious activities; 30/6/10 assets - $4.4m. Not recorded as an IRD donee organisation.

 

     iii.          “No longer carrying on their operations” was the category used by 24% (125) of charities.  116 of these had filed at least one return, the most recent showing total assets of $96.0m and total equity of $75.9m.  Details of the top five charities ranked by assets are shown below. 

·  The North Shore Domain and North Harbour Stadium: Main sector – sport/recreation; 30/6/13 assets - $261.2m.  This entity never had IRD donee status.  Although the stadium is still operating, it is difficult to ascertain the structure currently being used.

·  Access Homehealth Ltd: Main sector – health; 30/6/13 assets - $16.9m. IRD donee status ceased 30/11/14. The company is still registered with the Companies Office, annual returns are being filed (23/9/15) and it is trading – see its website.  The company was sold by Rural Women NZ (a charity) to Green Cross Health Ltd, a for-profit company listed on the NZ stock exchange, in November 2014.  Green Cross Health is a pharmacy retail group with approximately 300 pharmacies.  

·  The Unification Church of NZ Trust Board: Main sector – religious activities; 31/3/13 assets - $4.7m. IRD donee status ceased 28/9/14. The purpose of this charity was to promote adherence to the Divine Principle defined by the Reverend Sun Meung Moon – it is a religion commonly referred to as the “Moonies” and is linked to the still-registered Universal Peace Federation charity.

·  Taranaki PHO Ltd: Main sector – health; 30/6/11 assets - $3.1m. Not recorded as an IRD donee organisation.

·  Bruce Mason Centre Board: Main sector – arts / culture / heritage; 30/6/13 assets - $1.5m.  Not recorded as an IRD donee organisation.  Stuck off the Charitable trusts register 30/6/14.

 

     iv.          “Merged with another charity” was the category used by 4% (19) of charities. 18 of these had filed at least one return, the most recent showing total assets of $9.9m and total equity of $6.9m.  Details of the top two charities ranked by assets are shown below. 

·  Tipu Ora Charitable Trust: 30/6/13 assets - $4.5m.  This primary health organisation never had IRD donee status and was struck off the Charitable trusts register on 10/10/14.  Its website explains it combined with the Te Utuhina Manaakitanga Trust to form Manaaki Ora Trust.

·  South Taranaki Free Kindergarten Association Inc: 31/12/12 assets - $2.2m.  IRD donee status ceased 25/2/15 and it was struck off the Incorporated Societies register on 26/2/14.  Its website explains that in March 2014 this charity joined North Taranaki Free Kindergarten Association to create a single organisation.

 

      v.          No reason for deregistration was the category used by 2% (10) of charities.

 

     vi.          “No longer qualified as a registered charity” was the category used by 1% (6) of charities.  Five of these had filed at least one return, the most recent showing total assets of $856k and total equity of $661k.  Details of the six charities ranked by assets are shown below. 

·      Estate of Gladys Valentine Howey: Main sector – care/protection of animals; 30/9/12 assets - $653k.  This Estate did not have IRD donee status.

·      The Eleazar Family Support Trust: Main sector – social services; 31/3/14 assets - $146k.  IRD donee status ceased 27/2/15.

·      Riparian Support Trust: Main sector – sport/recreation; 31/3/13 assets - $10k. IRD donee status ceased 9/2/15.

·      Tasman Trespasser Charitable Trust: Main sector – sport/recreation; 31/3/13 assets - $7k. IRD donee status ceased 25/9/15.

·      Help2save: Main sector – religious activities; 31/3/13 assets - $0. This organisation did not have IRD donee status.

·      Bereaved Whanau Suicide Support trust. IRD donee status ceased 17/2/15.

 

4. Deregistered by regulator – failure to file returns

 

Unlike charities that voluntarily deregister, charities that are deregistered by the regulator for not filing returns are seriously non-compliant.  They did not engage with the regulator and they did not disclose their recent financial information to the regulator or the public, despite receiving tax and other benefits.

 

The NZ regulator has the authority to deregister a charity that has “significantly and persistently” failed to comply with the Charities Act (refer to section 32(1)(b) of the Charities Act 2005).  Its current policy is to deregister charities if they have two or more overdue Annual Returns, because that triggers the “significantly and persistently failed to comply” criteria.  More information is contained in the February 2015 Charities Update newsletter.  There is nothing to stop a deregistered charity from submitting a new application and there is no charge for re-registering.  Although you would expect all overdue returns must be filed first, analysis in Table 1 below indicates this may not always be the case.  The Australian regulator has a similar policy of deregistering charities that have not filed for two years, however they must file overdue returns before re-registration is considered.    

 

Out of the 812 charities that were deregistered between 1/4/14-31/3/15 for failing to file two or more returns, 575 had lodged at least one return and 237 had never filed a return with the regulator.  The top five sectors they operated in were education / training / research 19% (158), religious activities 17% (134), arts / culture / heritage 11% (88), social services 7% (58) and sport / recreation 6% (52).  Based on the most recent return filed by the 575 charities that had filed a return, these charities received a total of $7.0m donations, $57.4m gross income, controlled $112.8m assets and had $57.5m equity. 

 

Graph C shows the delay that occurs between the time of the last charity disclosure and the deregistration date (for the 812 charities deregistered between 1/4/14 and 31/3/15).  For example, if a charity filed its last return for the year ending 31/3/11 and was deregistered in January 2015, it will have been 3 years and 10 months from the date of their most recently reported financial information to deregistration.  A charity will fall in the same category if it was registered on 31/3/11, never filed a return and was deregistered in January 2015.  This gap is important, because it highlights the period when an organisation can continue to benefit from tax exemption and credibility as a registered charity, despite not informing the public or the regulator about its charitable activities.  If this gap cannot be reduced by the regulator, at the very least it would be useful to the public if the charities’ filing non-compliance is highlighted through a warning on the register prior to deregistration (as is done in Australia, using a statement in red to indicate how long returns are overdue). 

 

[Charities with returns filed within one year of the deregistration date are generally anomalies, for example they filed returns after being deregistered, such as the Rotary Club of Alfriston Incorporated Charitable Trust, which was deregistered on 30/7/14 but lodged its 2014 return on 25/8/14.]

 

Graph C

 

Table 1 shows 10 charities with the largest value of donation income in their most recently filed return before deregistration.  There are two notable points from this list:

·        Three charities subsequently re-registered but they were not required by the charity regulator to lodge the outstanding returns which caused their deregistration.

·        Inland Revenue did not remove donee status for four deregistered charities, despite their significant and persistent breach of the Charities Act (the worst case had not filed any returns since March 2011).

 

Table 1: Charities with largest donation income that were deregistered 1/4/14-31/3/15 for not filing returns

	Charity legal name	Last return	Dereg Date	Donation Inc	Total Assets	Re-registered	IRD donee status
1	Free Wesleyan Church of Tonga in New Zealand Trust Board	31/12/13	11/2/15	$1,015,385	$16,958,323	Yes-28/5/15 (but 12/14 return not filed)	Yes
2	Blenheim Baptist Church	31/7/11	8/1/15	$332,072	$1,971,440	Yes-5/1/15 (but 7/12, 7/13, 7/14 returns not filed)	Yes
3	Mizpah Church Charitable Trust Board	31/3/11	27/1/15	$306,566	$1,768,584	No	No – ceased 14/4/15
4	Hillary House Leadership Centre Trust	31/12/11	11/2/15	$297,924	$350,750	Yes-13/4/15 (but 12/12, 12/13, 12/14 returns not filed)	Yes
5	Waimea Plains Railway Trust	31/3/14	3/2/15	$275,652	341,454	Yes-12/2/15 (3/15 return IS filed)	Yes
6	Papakura Samoan Assembly of God	31/3/12	9/12/14	$190,790	$1,296,738	No	No
7	Missionaries of Faith Trust	31/12/11	10/2/15	$184,601	$923,427	No	Yes
8	Ahmadiyya Anjuman Isha’at-I-Islam Lahore (New Zealand) Trust	31/3/12	17/2/15	$179,350	$177,498	No	Yes
9	METHODIST CHURCH SAMOA (NEW ZEALAND HENDERSON PARISH)	31/3/12	17/2/15	$178,500	$2,667,032	No	Yes
10	The Waitaki Valley Medical Trust	31/3/11	2/2/15	$164,100	$298,035	No	Yes

 

Table 2 shows 10 charities with the longest duration between registration and being deregistered and who never filed a return with the regulator.  There are three notable points from this list:

·        The first issue highlighted in Table 1 applies here, where one charity re-registered but was not required by the charity regulator to lodge the (five) overdue returns which caused its deregistration.

·        The second issue highlighted in Table 1 also applies here, where Inland Revenue did not remove donee status for three deregistered charities, despite their significant and persistent breach of the Charities Act.

·        Better co-ordination between MBIE (Companies Office), IRD and DIA Charities is likely to help reduce red tape for charities and align information so that registers are more accurate.  For example, one charity was stuck off by the Companies Office as an incorporated society in 2010 and IRD removed its donee status in 2010, but the charity regulator did not remove it until 2014; another was struck off by the Companies Office as a charitable trust in 2011 but was not deregistered by the charity regulator until 2014 and did not have its IRD donee status removed until 2015.  One registered charity continued filing returns on the incorporated society register and never filed with the charity regulator for 5 years.

 

Table 2: Non-filing charities with the longest duration between registration and deregistration (that were deregistered between 1/4/14-31/3/15)

	Charity legal name	Main sector	Last known Chairperson / Trustees	Reg. Date	Dereg. Date	Re-registered	Still active?	IRD donee status
1	Community Events Trust NZ	Arts / culture / heritage	Sharon Lingham	18/03/2008	30/07/2014	No	No – S Lingam passed away in 2010	No
2	Asia Pacific Arts and Cultural Trust	Arts / culture / heritage	Thakur Ranjit Singh, Ami Chand, Binesh Kumar Sumer	3/02/2009	21/01/2015	No	Likely – still registered as a charitable trust	Yes
3	Mamaku Community Youth And Family Incorporated	Community development	Aneta McMeeking	22/01/2009	18/12/2014	No	No – struck off as Inc Society 27/9/10	No-ceased 27/10/10
4	Hawkes Bay Song and Opera Workshop Incorporated	Arts / culture / heritage	Anita Louise Davies	25/01/2009	16/12/2014	No	Highly likely – still registered as a charitable trust; presented awards in 2013	Yes
5	Blackball Volunteer Fire Brigade	Emergency / disaster relief	Mark Boere	20/04/2009	5/12/2014	Yes – 18/5/15 -5 o’due returns not filed	Yes	No
6	Tokomairiro Youth Advantage Trust	Other - PROMOTION OF WELL-BEING OF YOUTH	Jill Christine Mcintosh, Andrew Robert McIntosh, 7 others	6/01/2009	30/07/2014	No	No – struck off as a charitable trust 1/8/11	No – ceased 27/2/15
7	Kumeroa-Hopelands Playgroup	Education / training / research	Carolanne Sixtus	19/01/2009	30/07/2014	No	Yes – referred to in 2015 school newsletter	Yes
8	Rotary Club of Pahiatua Charitable Trust	Education / training / research	Alan Holdaway, Robin Whiteman, 3 others	1/02/2009	30/07/2014	No	Likely. Settled by the Rotary Club of Pahiatua Inc, but not under the Charitable Trusts Act 1957 so no other reporting.	No-ceased 9/7/15
9	Lake Brunner Emergency Services Society Incorporated	Emergency / disaster relief (linked to Moana Vol Fire Brigade)	Anthony David Larkin	16/02/2009	30/07/2014	No	Likley.  Still a registered incorporated society.	No-ceased 25/2/15
10	Southland Mangaia Club Incorporated	Arts / culture / heritage	Alexander Marie	16/07/2009	16/12/2014	No	Highly likely. Still a registered incorporated society, filed returns to 2012.	No-ceased 10/4/14

 

5. Deregistered by regulator – investigation findings of serious wrongdoing

 

The charities register shows there have been seven charities deregistered for serious wrongdoing under s.32(1)(e) of the Charities Act from the time the Charities Commission commenced to October 2015.  The details of each charity deregistered, the reasons for deregistration and the current state of the deregistered charity, are shown in Table 3.  Here are my observations:

 

·      Four of the deregistered charities were charitable trusts, which are all still registered with the Companies Office today.  Two were incorporated societies, of which one has been liquidated and the other is still registered with the Companies Office.  The remaining charity appears to have been unincorporated and it is unlikely to exist but this is not certain.

·      Officers of five of the seven deregistered charities are still involved with other registered charities today.

·      Despite being deregistered for serious wrongdoing, two still have active IRD donee status, one donee status was removed 10 months after deregistration and one was removed 11 months after deregistration.  There is only one case when donee status was removed on the same day as deregistration.

·      In its early years, the charity regulator published its formal decision analysis papers on the charities register decisions page.  However, out of the four serious wrongdoing deregistrations that occurred in 2014 and 2015, only one had its decision analysis published. For the remaining three deregistrations, the media reported the reasons for two deregistrations and one deregistration was not explained or mentioned by the regulator or the media.

·      In its early years, if the charity regulator identified serious wrongdoing it would deregister the charity and make orders under section 31(4) to prevent an application for re-registration for a specified period and disqualifying an officer of the entity from being an officer of a charitable entity for a specified period up to five years.  However the regulator has not made any orders under section 31(4) for the four most recent deregistrations in 2014 and 2015. 

 

Table 3

 

	Charity legal name	Dereg Date	Media / regulator explanation	Current state of deregistered charity
1	Ranui Boys Incorporated   Location: Henderson, Auckland Main sector: Education Chairperson: Donald Too	27/07/2015	·   The register states this charity was removed for serious wrongdoing under section 32(1)(e) of the Charities Act 2005. ·   Tens of thousands of dollars were allegedly gambled away at casinos or spent on a motel in Samoa and the manager, Siaifoi Lisa Palmer, transferred money to her personal account. She claimed this was the repayment of a loan but did not have records to verify this claim.  Palmer had a prior dishonesty conviction and was disqualified from being a charity officer.  See: “Govt investigates West Akld charity” 7/11/15 Radio NZ.	·  The organisation still has IRD donee status and is still a registered incorporated society with the Companies Office. ·  Chairperson Donald Too is currently an officer of registered charity Transformed-Youth Ministry.
2	The Southern Cross Charitable Trust   Location: Hamilton Main sector: Education Trustee: Southern Cross Trustee Ltd	27/05/2015	·  The register states this charity was removed under section 32(1)(a) and section 32(1)(e) of the Charities Act 2005. ·  The published regulator decision states a person associated with the trust (Robert Wickham, the sole shareholder of the trustee company and a property developer) engaged in serious wrongdoing and the trust no longer qualifies for registration as it has an independent purpose to advance the private pecuniary profit of the trustees through conferring private benefits on related parties.  The private benefits involve 45 loans exceeding $25m to investment projects in which Wickham had an interest, which either ended in losses or returns at below market rates.	·  The organisation never had IRD donee status, however it is still a registered charitable trust with the Companies Office. ·  Southern Cross Trustee Ltd is still a registered company with Robert Bryan Lathan Wickham the sole shareholder and director.  It filed its annual return with the Companies Office on 16/10/15.
3	Youth Aflame International   Location: Carterton, Wairarapa Main sector: Community development Chairperson: Henry Phillip Jacobs	30/06/2015	·  The register states this charity was removed for Serious Wrongdoing, section 32(1)(e) Charities Act 2005 ·  I could not find any further detail on the regulator’s website or in the media about this deregistration.	·  The organisation still has IRD donee status. ·  This appears to be a Baptist charity linked to Youth Aflame, an international organisation.  However the nature of the legal entity is unclear – it is not listed as a charitable trust or incorporated society so it is possible that it no longer exists. ·  Two charity officers, Henry Phillip Jacobs and Carol Joy Jacobs are still / have been officers for registered charity Koinonia Christian Fellowship in Masterton.
4	The Wellington Foodbank Service Incorporated   Location: Wellington Main sector: Social services Chairperson: Marcelle Philpott	28/02/2014	·  The register states this charity was removed under section 32(1)(a) and section 32(1)(e) of the Charities Act 2005. ·  Media reported the bulk of donations appear to have disappeared – spent on junk food, booze and electronics by founder Michael Hawkins. Only 4% of $770,000 donations went to the needy. See “Wellington foodbank probed for fraud” 28/2/14, Stuff, Ben Heather.	·  IRD donee status was ceased on 16/12/14. ·  The incorporated society is ‘in liquidation’ with the Companies Office from 9/12/13. ·  It was reported another company was subsequently set up called Wellington Food Angels Ltd but this went into liquidation on 19/12/13. ·  Chairperson Marcelle Philpott is still the officer of registered charity Capital Performing Arts Incorporated.
5	Freedomsway Foundation Trust Aotearoa   Location: Hamilton Main sector: Social services Initial trustees: Aaron Wineera Elkington and Phyllis Millward Elkington	25/05/2011	·  The register states this charity was removed pursuant to section 32(1)(e) of the Charities Act 2005, based upon the Commission’s finding of serious wrongdoing committed by the entity, with effect from 25 May 2011. Orders were made under section 31(4) to disqualify officers Aaron Elkington and Phyllis Elkington until 25 May 2014, and disqualify Jonathan Clary until 25 November 2011, and prevent re-registration of this entity before 25 May 2014. ·  The published regulator decision states funds for the trust were mixed with personal funds of the trustees and spent on purchases at restaurants, cinemas, a television, etc.	·  IRD donee status was ceased on 9/4/12 however it is still a registered charitable trust with the Companies Office. ·  None of the three disqualified individuals are currently involved with registered charities.
6	Disabled Children's Trust   Location: Christchurch Main sector: People with disabilities Initial trustees: David Charles Williamson and Anne Crawford Wadsworth	9/07/2010	·  The register states this charity was removed by the Charities Commission under section 32(1) of the Charities Act 2005 with effect from 9 July 2010. Orders were made under section 31(4) to disqualify the officer David Williamson until 9 July 2013 and prevent re-registration of this entity before 9 July 2013. ·  The published regulator decision states the trust deed required a minimum of two trustees but only had one for some time and did not notify the regulator of changes; the trust made payments for private expenses and a $4,000 loan to its trustee in contravention of its deed; there was no documentation for the $4,000 loan; the trust could not provide documentation to support the bank balance in its financial statements; the trust could not verify who its $2,000 grant payment went to (inmates).	·  The organisation has not re-registered as a charity. ·  The organisation never had IRD donee status, however it is still a registered charitable trust with the Companies Office. ·  David Williamson is an officer of the currently registered Canterbury Ice Hockey Association Inc.
7	Hope for Children Charitable Foundation Board   Location: Christchurch Main sector: Fundraising Initial trustees: David Charles Williamson and David Francis Williamson	9/07/2010	·   The register states this charity was removed from the Charities Register by the Charities Commission under section 32(1) of the Charities Act 2005 with effect from 9 July 2010. Orders were made under section 31(4) to disqualify the officer David Williamson until 9 July 2013 and prevent re-registration of this entity before 9 July 2013. ·   The published regulator decision states there were discrepancies in the accounts; the trustee said he made a $4,000 loan to the charity and reimbursed himself but there was no documentation of the loan; the trust paid for private electricity and telecommunications costs; the trust claimed in its fundraising to be raising money for child cancer organisations, Lions and Rotary but in fact it provided cash to young offenders and families in need; the trust deed required a minimum of two trustees but only had one for some time and did not notify the regulator of changes.	·  The organisation has not re-registered ·  IRD donee status was ceased on 9/7/10 however it is still a registered charitable trust with the Companies Office. ·  David Williamson is an officer of the currently registered Canterbury Ice Hockey Association Inc.

 

6. Deregistered by regulator – review of charitable purposes

 

The regulator will always review an organisation’s purposes before approving its application to be a registered charity.  However, once a charity is registered, the regulator may decide to initiate another review of its charitable purposes.  It may do this, for example, if the charity lodges amended governing documents, or if the regulator receives a concern from an individual or agency.  According to the charity register there have been 41 reviews that resulted in charities being deregistered.  The deregistration occurs under section 32(1)(a) on the grounds that the organisation no longer qualifies as a charity.

 

The details of the most recent 20 deregistration decisions are shown in Table 4.  Here are my observations:

·      A number of charities were deregistered because they failed to meet the public benefit test.  For example, they only provided benefits to a closed group or membership, or they focused on sportspeople at an elite level

·      A number of charities were deregistered because they had a charitable purpose and a non-charitable purpose (and the latter was more than ancillary).  For example, in addition to having a charitable purpose some organisations had a purpose of providing recreation or entertainment for private benefit (which is not charitable); they had a purpose of promoting the private interests of a specific group (which is not charitable); they had a purpose of promoting a point of view (which is not charitable); and they had a purpose of promoting a change in public policy (which is not charitable).

 

Table 4

 

	Charity legal name	Dereg Date	Reason for deregistration (published on the regulator “view the decisions” site)
1	New Zealand Global Women	9/10/2015	The regulator determined that the Trust provides private benefits to a closed group, so does not provide significant public benefit.
2	New Zealand Rowing Association Incorporated	9/10/2015	The regulator determined that the purposes of the organisation are to promote rowing itself and to promote success in rowing at an elite level.  These purposes are not charitable. (NB: The organisation’s website still refers to it being a “registered charity”)
3	The Cellar Club Incorporated	27/01/2015	The Society promoted understanding and appreciation of wine through wine tastings and vineyard visits.  The regulator determined that the Society is maintained for recreational purposes for the private benefit of members and its non-charitable purposes are not ancillary to charitable purposes.
4	Swimming New Zealand Incorporated	30/10/2014	The regulator determined that the purposes are to promote success in competitive swimming at an elite level.  Developing and supporting elite athletes and promoting a particular sport is not charitable.
5	New Zealand Affordable Art Trust	27/03/2014	The Trust promotes NZ artists.  The regulator determined that the Trust’s primary purpose is to promote the private interests of artists, which is more than incidental to any charitable purposes.
6	Awanui-Waipapakauri Pony Club	19/02/2014	Decision not published
7	Hawera Cinema 2 Trust	30/10/2013	The Trust submitted that it advances education, relieves poverty, and is beneficial to the community by enhancing the district and sponsoring charitable organisations. The regulator determined that the Trust’s dominant purpose is to provide a movie cinema for entertainment. Entertainment/recreation is outside the scope of charity unless it advances another charitable purpose.
8	Kind Mothers Project	29/08/2013	Decision not published
9	Move 2 New Zealand Trust (Christchurch)	4/07/2013	Decision not published
10	The Opera House Trust	15/04/2013	Decision not published
11	Loyal Orange Institution of New Zealand Incorporated	30/11/2012	Decision not published
12	Association of Local Government Engineering New Zealand Incorporated	19/11/2012	The Society’s purposes include upholding the status of engineering and management of public assets in NZ.  The regulator determined that a main purpose of the Society is to promote the profession for the benefit of members of that profession, which is not a charitable purpose but a private benefit to members of the profession.
13	QLCHT Developments Limited	5/11/2012	The regulator determined that the company’s purpose is to further the purposes of the Queenstown Lakes Community Housing Trust, which has been found not to be charitable.  It follows that this company cannot be considered charitable.
14	The Immunisation Awareness Society Incorporated	19/10/2012	While the stated purposes of the Society are to advance education, the regulator determined that its main purpose is to promote a point of view (that vaccination is ineffective and dangerous).  The promotion of a point of view lies outside the legal definition of a charitable purpose to advance education.  The regulator also determined that it is a purpose of the Society to seek a change in public policy in regard to vaccination.  That non charitable political purpose is not ancillary to any valid charitable purpose.
15	Wakatere Sailing Development Trust	24/11/2011	The purposes of the trust include advancing the education of persons involved in yachting at all levels. In its first three years it provided financial assistance to 17 sailors.  The regulator determined that the main purpose was to provide assistance to elite sailors and therefore there was not sufficient public benefit.
16	The Food and Agribusiness Market Experience Alumni Trust	27/09/2011	The purpose of the trust include advancing education, in particular to fund research related to the agribusiness sector.   The regulator determined that identifying speakers and topics for conferences for 60 alumni members, and arranging networking events, did not amount to objective research available to the public and did not advance education.
17	Rotary International District 9980 Incorporated	27/09/2011	This Society is responsible for overseeing, coordinating and facilitating activities of 30 Rotary Clubs south of the Rangitata River.  The regulator had considered many applications for Rotary clubs and determined they did not have charitable purposes.  However it did register trusts set up by Rotary clubs that are solely focused on carrying out service activities.
18	Queenstown Lakes Community Housing Trust	15/07/2011	High Court judgement.
19	Mokorina Whanau Trust	25/05/2011	The trustees of this Trust were the parents and their three daughters.  The only people to receive benefits were the trustees (assistance to pursue university studies).  The trust would only assist the trustees and their descendants.  The regulator determined that the benefits are only available to a small number of people and therefore does not provide benefits for the general public.
20	The Business In The Community Charitable Trust	14/04/2011	The purposes of this company included promoting businesses and new business opportunities.  Its charitable purposes were advancement of education and other matters beneficial to the community. The regulator determined its primary purpose is to provide business mentoring services to the business community and in particular ‘for-profit’ businesses, which does not advance education or learning.

 

The earlier 21 deregistrations for failing to qualify as a charity were for the following organisations: Business in the community Ltd; Education Christchurch; Harbour Lights Hall Society Trust; Fitness for Kids Trust; Film Central North Island Trust; The William Kennedy Memorial Trust; Film Auckland Incorporated; Kahungatanga New Zealand; Film New Zealand Trust; ICE Funds Limited; The Icehouse Limited; National Council of Women of New Zealand Incorporated; Octagon Market Trust; First Home Ownership Trust; New Zealand Computer Society Incorporated; Enterprise Central Network Incorporated; The Joanne Wilson Medical Trust Board; The Lyttelton Information and Resource Centre Trust; Matakana Information Centre Incorporated; Grey Lynn Farmers' Market Incorporated; Purple Patch (Tauranga) Incorporated.

 

7. The new deregistration tax

 

From April 2014 new tax laws for deregistered charities began to apply, which will soon have a big impact on many deregistered charities across the country.  As a result, NZ charities will need to distribute their “accumulated income and assets” within 12 months of being deregistered, or alternatively they will need to re-register as a charity within 12 months of being deregistered, otherwise they will be subject to the income tax.  There are exceptions, for example if they are entitled to another tax exemption, such as the amateur sports body exemption, they will not be subject to the income tax. 

 

Australia does not have a similar law, but Canada does.  The introduction of the new law in NZ can be linked to the introduction of new reporting standards for registered charities, which apply for all financial years beginning on or after 1 April 2015.  So, for example, if a number of charities decided to voluntarily deregister in order to avoid complying with the new reporting standards, they would be caught by the new tax laws.

 

As explained on Inland Revenue’s “Deregistration of charities” website, the tax change is being introduced over time.  Any charity that voluntarily deregisters from 14 April 2014 and has not distributed its accumulated income and assets within 12 months will be subject to the tax.  However if a charity is deregistered by the regulator, for example because it has failed to lodge two returns, is found to be involved with serious wrongdoing, or is found to no longer qualify as a charity, then the new law applies from 1 April 2015.  So, for example, if a charity is deregistered by the regulator in April 2015, then the charity must either re-register or distribute its accumulated income and assets before April 2016 in order to avoid the tax.

 

The tax liability calculation is not straight forward.  To establish when the 12-month period begins and ends, you must establish the date of “final deregistration decision”, which is generally the later of the date the charity is removed from the Charities Register or the date that all appeals or court proceedings are finalised or exhausted.  However, the date may be earlier if the charity stopped complying with its rules held on the charity register or never complied with its rules held on the charity register. In those cases the entity will either be subject to income tax on the date it stopped complying with its rules, or the date it was registered.

 

Then, to calculate the net income and asset balance at the end of the 12-month period, you must take the organisation’s assets less liabilities at the end of that 12-month period and deduct:

·  The value of any assets received from the Crown to settle a Treaty of Waitangi claim

·  The value of any assets received from the Crown under the Maori Fisheries Act 2004

·  Assets, other than money, gifted or left to the entity when it met the requirements for exempt income.

 

Some charities that voluntarily deregistered from 14 April 2014 will already be subject to this tax.  For example, between 14 April 2014 to 8 November 2014, a total of 250 charities voluntarily deregistered.  If any of these 250 charities have not distributed their “accumulated income and assets” by now, which is at least 12 months after their deregistration, they will be subject to the new tax and must file a tax return for the year ending 31 March 2016 to include their accumulated income and assets as taxable income.  The charities register shows that out of the 250, 227 had filed a past return disclosing total net assets of $119.4m, so the potential amount of tax liability could be significant.  Even this figure does not include net assets of the seven Tait Communication companies which were withheld from the public register.  Their net assets would, presumably, had been very significant and subject to tax if they had not been distributed before 18/9/15.

 

In the eight weeks between now and 31 December 2015, the voluntarily deregistered charities with the biggest potential exposure to the deregistration tax, if they do not reregister or distribute their accumulated income and assets immediately, are:

 

  i.    The Glenn Family Foundation Charitable Trust.  This charity voluntarily deregistered on 1/12/14 so if it does not re-register or distribute accumulated income and assets by 30/11/15 it is likely to be subject to the deregistration tax.  In its final return for the period ending 31/3/14 its net assets were $2,335,250 so the potential tax liability at the trust tax rate of 33%, assuming net assets did not change and no adjustments are required, is $770,633.

ii.    Access Homehealth Ltd. This charity voluntarily deregistered on 1/12/14 so if it does not re-register or distribute accumulated income and assets by 30/11/15 it is likely to be subject to the deregistration tax.  In its final return for the period ending 30/6/13 its net assets were $5,922,946 so the potential tax liability at the company tax rate of 28%, assuming net assets did not change and no adjustments are required, is $1,658,425.

 

Charities most affected by the tax may be those which were deregistered for failing to file their returns.  They make up the largest group of deregistrations and, unlike charities that voluntarily deregister, have not usually turned their minds to their reporting obligations or the tax consequences of being deregistered.  Here is a list of the first charities with potentially the biggest tax liabilities that will be caught in this category, ie the charities that were deregistered between 1 April 2015 - 30 June 2015 for not filing their returns, and which will be subject to the tax if they do not re-register or distribute accumulated income and assets within 12 months (before 31 March 2016 – 29 June 2016). 

 

        i.          The Te Rau Aroha Trust.  This charity was deregistered for failing to file a return on 21/4/15 so if it does not re-register or distribute accumulated income and assets by 20/4/16 it is likely to be subject to the deregistration tax.  In its most recently filed return for the period ending 31/3/11 its net assets were $22,220,158 so the potential tax liability at the trust tax rate of 33%, assuming net assets did not change and no adjustments are required, is $7,332,652.

      ii.          Foundation For The National Hockey Stadium. This charity was deregistered for failing to file a return on 3/6/15 so if it does not re-register or distribute accumulated income and assets by 2/6/16 it is likely to be subject to the deregistration tax.  In its most recently filed return for the period ending 30/9/12 its net assets were $2,805,902 so the potential tax liability at the trust tax rate of 33%, assuming net assets did not change and no adjustments are required, is $925,948.

     iii.          Nukutukulea Aoga Niue Incorporated.  This charity was deregistered for failing to file a return on 17/6/15 so if it does not re-register or distribute accumulated income and assets by 16/6/16 it is likely to be subject to the deregistration tax.  In its most recently filed return for the period ending 30/6/12 its net assets were $930,331 so the potential tax liability at the company tax rate of 28%, assuming net assets did not change and no adjustments are required, is $260,493.

 

Looking across the Tasman

There are several fundamental differences between Australia and NZ in respect of deregistering a charity:

·      In order to deregister a charity the NZ regulator may find that there has been a significant or persistent failure by the entity to meet its obligations or it may find the entity or a person connected with it has engaged in serious wrongdoing.  However, the Australian legislation is more comprehensive.  Across the Tasman, the regulator must take into account the following matters before it deregisters a charity:

(a)  the nature, significance and persistence of any contravention of the ACNC Act or non‑compliance with a governance standard or external conduct standard (or any such contravention or non‑compliance that is more likely than not) by the registered entity;

(b)  what action the Commissioner, the registered entity, or any of the responsible entities of the registered entity, could take or have taken:

        (i)  to address any such contravention or non‑compliance (or prevent any such contravention or non‑compliance that is more likely than not); or

       (ii)  to prevent any similar contravention or non‑compliance;

(c)  the desirability of ensuring that contributions to the registered entity are applied consistently with the not‑for‑profit nature, and the purpose, of the registered entity;

(d)  the objects of any Commonwealth laws that refer to registration under the ACNC Act;

(e)  the extent (if any) to which the registered entity is conducting its affairs in a way that may cause harm to, or jeopardise, the public trust and confidence in the not‑for‑profit sector mentioned in subsection 15‑5(1) (Objects of the ACNC Act);

(f)  the welfare of members of the community (if any) that receive direct benefits from the registered entity;

(g)  any other matter that the Commissioner considers relevant.

·      The Australian regulator’s secrecy provisions prohibit the regulator from publicly explaining in detail the reason for deregistration decisions.  In contrast, the NZ regulator publishes most eligibility decisions in detail and has also published compliance deregistration decisions in detail or released comprehensive detail about compliance deregistration decisions to the media.

·      The Australian regulator publishes a list of charity compliance decisions on one easy-to-find webpage, whereas NZ does not separately identify compliance-related deregistrations (although they can be identified with some effort using the advanced search function).

·      Once a NZ charity has been deregistered the charity officer details remain on the register, however in Australia the charity officer names and positions are removed.

 

The first two years of the ACNC’s operation had a significant focus on ensuring charities on the register were still active, so many deregistrations were the result of a register integrity exercise.  In its 2015 Annual Report the ACNC reported that 10 charities were deregistered as a result of compliance investigations, 1,663 charities requested voluntary revocation, and 5,500 were revoked because they were ‘double defaulters’ and had not filed returns for two consecutive years.  The regulator reported that since the register was launched in 2012, over 9,000 charities have been removed or had their status revoked.

 

At the time of writing this paper, the ACNC has not published any financial information datasets, so it is not possible to analyse the financial statements lodged by deregistered charities.

 

Data references

Data for this paper was extracted from the New Zealand charity register (at www.charities.govt.nz) on 8 November 2015. 

Disclosure

I worked for the New Zealand Charities Commission and the Australian Charities and Not-for-profits Commission from 2011 to August 2015.   The above analysis does not take into account any protected information obtained during my time at the charity regulators.  Any errors and opinions are mine and opinions do not represent the views of my previous employers.

 

Further reference
You are welcome to join my existing 90 CharitywatchAu&NZ twitter followers (I only tweet about charity news and information) at https://twitter.com/StuDonaldsonNZ

 

I first wrote about deregistered charities in Blog No. 9 - Deregistered Charities back in November 2012, so read that blog for an historical snapshot of deregistrations.  Now there is more trend data and a lot has changed, including the regulator’s approach to deregistering after two years instead of one year. 

 

Thanks for reading my blog.  Don’t forget to click on the advertisements for my blog coffee fund! Cheers J