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A subset of registered charities have requested approval from the regulator to file “group” returns instead of individual charity returns.
There are several reasons why grouped charities are an interesting subset to study. Here are some questions that arose before this analysis began:
· Which charities have actually used the grouping provisions?
· What benefit does grouping achieve for these charities?
· Grouping rules for charities are quite different to the accounting rules for grouping and consolidating entities. What issues arise from these different rules?
· There are differences between grouping rules in NZ and Australia Australia
· When should the NZ regulator refuse a grouping application?
Summary
There are 108 groups on the NZ charities register which represent 1,241 separate entities. Some groups are very large, such as St John University of Canterbury Trust Funds
The NZ charities regulator permits two types of groups – a full consolidation where the group files one set of consolidated accounts and no individual member accounts are provided, and a non-consolidated group where members simply file their individual accounts but these are linked to a group entity.
Many iwi groups have made use of the grouping provisions, including Tainui and Ngai Tahu. Ngati Porou had used the grouping provisions before it deregistered and transferred its assets to a non-charitable post settlement governance entity.
Registered charities must be “affiliated or closely related” in order to qualify for grouping. The Hunt Foundation Group demonstrates that the regulator is prepared to group charities and permit them to file consolidated accounts even if they do not have common control.
Officially, the regulator has stated that 'convenience' is the main reason for applying as a group, particularly in terms of managing administration and compliance obligations. However in practice, filing consolidated returns can also reduce transparency and prevent the public from understanding what financial activities are being undertaken by group members.
Some large groups have consolidated and others have not. When a large group does not consolidate, the register totals can be significantly misleading, because inter-company transactions and balances are not eliminated. In the case of Tainui this appears to cause an asset overstatement of $400m-$500m.
The new Australian rules for grouping charities appear to be wider than NZ. For example, in Australia Australia
Conclusion
Overall it is surprising that more NZ charities haven’t taken advantage of the grouping provisions. Grouping can reduce some compliance costs especially if accounts are consolidated. They can also be an alternative way of reducing the extent of detail available to the public, especially if the regulator has not agreed to withhold information.
When very large charities apply to form a group, they can choose whether to consolidate. This can be misleading for the public because it is hard to compare one charity that did consolidate and another that did not. Ideally it would be useful to see the consolidated figures and have them recorded in the aggregate totals on the register, but to also have access to individual charity financial information.
The ability to group and consolidate charities which are “like minded”, for example if they have similar religious purposes but completely different shareholders, seems odd and a loophole which might be exploited. It may be useful for the regulator to explain in a policy statement how the “fit and proper” test is applied to the grouping provision.
Finally, it will be interesting to see how the simple format reporting standards, currently being developed by the External Reporting Board (XRB), will impact on groups of registered charities. Charities which are not publicly accountable and have expenses of $2m or below will be able to elect to use simple format reports under the proposed standards. There are currently 26 registered groups and 573 group members with expenses below $2m. When entities elect to group together for the purposes of the Charities Act grouping provisions, will the regulator accept simple format reports for group members if their individual expenditure is below $2m but the group’s total expenditure exceeds $2m?
Analysis
What is a NZ charitable group?
Charities can voluntarily request the Charities Regulator to treat two or more charities as one group charity. They can only do this if they are affiliated or closely related, are all registered charities, and it is fit and proper to do so (refer to section 44 of the Charities Act 2005).
The Charities Regulator has published an information sheet about group registration:
A more detailed summary of the legislation and a brief comparison with Australian law is in the Appendix.
Aggregate totals on the Charities Register
There are 108 groups on the NZ charities register which represent 1,241 separate entities. The entities include 254 trusts, 224 limited liability companies and 185 incorporated associations. The balance is a mixture of unincorporated associations, legacies, parishes, assemblies, boards, funds, memorial prizes and scholarships, playcentres, special Olympics organisations, committees, societies and fellowships.
In terms of volume of members, the biggest groups are:
1. St John
2. University of Canterbury
3. Roman Catholic Diocese of Auckland Group (77)
4. Special Olympics New Zealand Group (44)
5. Ngai Tahu Charitable Group (42)
6. The Baha'i Community of New Zealand
7. Roman Catholic Diocese of Dunedin Group (39)
8. Roman Catholic Bishop Of The Diocese Of Hamilton Group (37)
9. Riding For The Disabled New Zealand
10. Society of St Vincent de Paul (28)
11. Counties Manukau Kindergarten Association (27)
The main charitable sectors the 107 groups operate in are:
1. Education / training / research (33)
2. Religious activities (15)
3. Health (11)
4. Social services (8)
5. Economic development (7)
6. People with disabilities (5)
7. Emergency / disaster relief (4)
8. Accommodation / housing (3)
9. Arts / culture / heritage (2)
10. Employment (2)
11. Fund-raising (2)
12. Sport / recreation (2)
13. Environment / conservation (1)
14. Other (12)
Approximately 565 entities filed financial accounts with assets totalling $7.3b, accumulated funds of $5.3b and a net surplus in the most recent year of $198m.
Type 1 groups (full consolidation)
The NZ charities regulator permits three types of registered groups. Type 1 groups provide one set of fully consolidated accounts under the ‘group’ entity on the register. There is no breakdown of financial information for individual members either as attached accounts or as data in question 25.
There are 45 type 1 groups which are made up of 638 individual charities. 190 charities are trusts, 156 are limited liability companies and 33 are incorporated associations. Consolidated assets for this group total $4.1b and accumulated funds total $3.2b. In the most recent financial year they reported a net surplus of $114m.
Type 1 groups are made up of the following notable charities:
- 10 iwi groups, including Ngai Tahu, Ngati Awa, and Ngati Whatua
- 10 education groups, including University of Canterbury
- 9 religious groups, including the Seventh Day Adventists, the Hunt Foundation Group (Brethren), the Salvation Army, the NZ Catholic Bishops Conference and The Baha'i Community
The biggest type 1 groups by assets are:
GroupName Year Assets
Roman Catholic Diocese of Auckland 31/12/2011 $846m
Ngai Tahu Charitable Group 30/06/2011 $669m
The Salvation Army New Zealand Group 30/06/2011 $475m
Ngati Whatua O Orakei Maori Trust Board Group 30/06/2011 $403m
The Selwyn Foundation Group 31/12/2011 $281m
The ownership structures and approaches to financial reporting within the Tier 1 groups vary. Here are four examples:
(a) Registered charity (trust)
↓
Registered charity (company)
This is a simple structure used by groups such as the Braemar Charitable Trust Group, with assets of $47.6m. The Braemar Charitable Trust owns the Braemar Hospital Ltd and both make up the consolidated group for the charity regulator.
In this case no audit report was filed however accounts were prepared in accordance with NZ Generally Accepted Accounting Practice and differential reporting concessions were applied. Related party disclosures include director fees and surgeon fees paid to directors.
(b) Private individuals
↓
For profit entity (company)
↓
Multiple registered charities (companies and trusts)
This is a more complex structure used by groups such as the Trevor Wilson Charitable Trust Group with assets of $10m. Three individuals are 100% shareholders of Wilson Bulk Transport Ltd, a for-profit company. Wilson Bulk Transport Ltd is the 100% shareholder of two registered charities that are companies and is one of the trustees of two charitable trusts. Consolidated accounts are filed for the four registered charities. The group runs a transport business in Ashburton and also makes investments. The charitable purpose is to apply a portion of annual income to the Order of St John
In this case no audit report was filed, accounts were special purpose and not GAAP compliant. Related party disclosures include loans and payments for freight and machinery hire to a transport partnership.
(c) Grouping by activity
Some groups have formed as a result of activities or affiliation rather than direct control.
For example, the Seventh Day Adventists have split their charities into two separate Type 1 groups based on activities:
· Seventh Day Adventist Church New Zealand
· Seventh Day Adventist Church New Zealand
(d) Grouping by affiliation
An example of grouping based on affiliation is the Hunt Foundation Group which is a Type 1 consolidated group that represents brethren charities. It has five members, four of which are trading or investment companies:
· M K Hunt Foundation Limited: the shareholders are six individuals (L Brewerton, E Yeoman, G Yeoman, P Yeoman, V Hunt, R Burt). The objects include carrying on business for the Stewards’ Trust of NZ Inc, a registered charity that is part of the Christian Brethren Church of NZ.
· Archers Auto Springs Limited: the shareholder is the MK Hunt Foundation Ltd. The objects include to assist the spread of the Gospel of God.
· Transportect Limited: the shareholder is the MK Hunt Foundation Ltd. The objects include carrying on business for the Stewards’ Trust of NZ Inc.
· On Call Support Limited: the shareholder is the MK Hunt Foundation Ltd. The objects include carrying on business for the Stewards’ Trust of NZ Inc.
· Sawdust Charity Ltd: the shareholders are two individuals (M Taylor and E Taylor ) and the objects include to spread the christian faith in NZ.
As acknowledged in the notes to the unaudited, special purpose financial accounts for the year ended March 2012, “the Group is not a legal group in terms of the Companies Act but a group of like minded charities.” By being able to consolidate entities that have completely separate owners (eg Sawdust Charity Ltd) into a charitable group on the basis that they are “like minded”, this is an example of how widely the charity regulator has interpreted the terms “affiliated or closely related” which is the legal requirement for groups to be approved. Type 1 consolidation prevents the public from seeing financial information relating to individual members.
Type 2 groups
In general, type 2 groups do not file any consolidated accounts. The individual members file unconsolidated accounts and unconsolidated data in question 25, and the group entity provides a list of group members but no consolidated financial information.
There are exceptions to this rule. For example, Tainui group members provide unconsolidated data in question 25 but also attach summary consolidated financial accounts for themselves along with formal consolidated financial accounts for the group holding company.
There are 50 type 2 groups which are made up of 511 individual charities. 51 charities are trusts, 60 are limited liability companies and 99 are incorporated associations. Consolidated assets for this group total $2.9b and accumulated funds total $1.9b. In the most recent financial year they reported a net surplus of $71.5m.
Type 2 groups are made up of the following notable charities:
- 7 playcentre groups
- 3 groups with very high membership - St John
- 6 iwi groups - Tainui Group, Ngati Rarua Iwi Trust Group, Te Runanga O Ngati Whatua Group, Te Kotahitanga o Te Arawa Waka Fisheries Group, Ngati Mutunga o Wharekauri Iwi Trust Group, Te Runanga O Ngati Ruanui Trust Group
The biggest type 2 groups by assets are:
GroupName Year Assets
Tainui Group Holdings Limited (Tainui) 31/03/2012 $381m
The Priory In New Zealand
of the Hospital of St John Jerusalem 30/06/2011 $300m
The Base Limited (Tainui) 31/03/2012 $254m
Waikato Raupatu Lands Trust (Tainui) 31/03/2011 $199m
Tainui Corporation Limited (Tainui) 31/03/2012 $177m
IHC New Zealand Incorporated 30/06/2011 $169m
The Order of St John 30/06/2011 $126m
Tainui Group charities dominate the financial totals for Type 2 groups. Tainui Group has 10 members which reported a total of $1.1b assets, $545m accumulated funds and $41m net surplus. Oddly, the group entity, Waikato Raupatu Lands Trust and Group, is recorded as a Type 4 group (the only entity on the register that is Type 4) and it also reports financial figures - $61m assets, $9m accumulated funds, $13m net surplus.
Tainui Group is an example of a problem that occurs when a register captures unconsolidated totals. On a consolidated basis the Waikato Raupatu Lands Trust has assets of only $775m, and that includes a number of subsidiaries that do not have charitable status, so the consolidated charitable asset total will be much smaller (refer to note 3 of their financial accounts). However the unconsolidated totals on the register can be aggregated to mislead users into believing the Tainui charity subsidiaries have assets exceeding $1.1b. In fact the register totals are overstated because inter-company transactions and balances are not eliminated. By allowing such a significant entity to choose not to consolidate makes it impossible to compare their charitable size and activity with, say, Ngai Tahu, which reported $669m charitable assets on a consolidated basis. On the other hand, by choosing not to consolidate, Tainui has at least given users an insight into the financial activity for each of its individual charity subsidiaries.
Type 3 groups
There appears to be very little difference between Type 3 and Type 2 groups. The individual members file unconsolidated accounts and unconsolidated data in question 25, and the group entity provides a list of group members but no consolidated financial information.
There are 12 type 3 groups which are made up of 92 individual charities. 9 charities are trusts, 7 are limited liability companies and 53 are incorporated associations. Consolidated assets for this group total $117m and accumulated funds total $100m. In the most recent financial year they reported a net surplus of $13m.
Type 3 groups are made up of the following notable charities:
- 1 group with very high membership – Riding for the disabled
- 3 iwi groups - Te Runanga O Ngati Porou Group (NB the entire Ngati Porou group, the country’s second-biggest iwi, voluntarily deregistered in 2012; the charity regulator’s 2011 annual report explained that it transferred its assets to non-charitable post settlement governance entities), Maniapoto Iwi Group, Nga Kakano Group.
The biggest type 3 groups by assets are:
GroupName Year Assets
Te Runanga O Ngati Porou Group 30/06/2011 $36m
The Theosophical Society In New Zealand 30/09/2011 $18m
Maniapoto Iwi Group 30/09/2011 $11m
Maniapoto Iwi Group 30/09/2011 $7m
Te Runanga O Ngati Porou Group 30/06/2011 $7m
The Prema Group 31/12/2011 $5m
Te Runanga O Ngati Porou Group 30/06/2011 $4m
APPENDIX
What is a NZ charitable group?
Charities can voluntarily request the Charities Regulator to treat two or more charities as one group charity. They can only do this if they are affiliated or closely related, are all registered charities, and it is fit and proper to do so. [Section 44 of the Charities Act]
The Charities Regulator has published an information sheet about group registration:
Points to note from this sheet are:
· You must have similar charitable purposes to the other organisations in the group.
· When two or more organisations wish to register together as a group, they must first agree on which one of them will become the parent. The parent has responsibilities and powers after the Charities Regulator has registered the group.
· A group has its own unique name and registration number.
There is no indication in the sheet about what is considered to be ‘fit and proper’.
There are special group forms such as:
· A group member information form
· Form 5: group application for registration
· Form 7: group annual return
· Group notification of changes
http://www.charities.govt.nz/forms/group-notification-of-changes/
How do the new Australian grouping rules compare?
There are differences between the NZ and Australian rules. Here are extracts from the new 2012 Australia
Subdivision 60-G—Collective and joint reporting
Joint reporting
(1) The Commissioner may allow 2 or more registered entities ( reporting group ) to prepare and lodge a single information statement, or a single information statement and a single financial report, in relation to the reporting group for a financial year.
Collective reporting
(2) The Commissioner may allow a reporting group to prepare and lodge one or more information statements, or one or more single information statements and one or more single financial reports, in relation to the reporting group for a financial year on a basis other than an entity-by-entity basis.
Example: The Commissioner may allow a reporting group of affiliated registered entities that advance religion and relieve poverty to prepare and lodge 2 financial reports, one report in relation to the reporting group’s religious functions and one in relation to the reporting group’s welfare functions.
In deciding whether to allow 2 or more registered entities to form a reporting group, the Commissioner must consider the following:
how the public interest in the transparency and accountability of the registered entities is best served, including the possible effect on:
(i) the public’s understanding of the activities of the registered entities and the information provided in the information statement or financial report; and
(ii) the public’s ability to rely upon the information provided in the information statement or financial report;
the degree of affiliation, control and proximity of registered entities proposed to be included in the reporting group;
The Commissioner may impose conditions on a decision under subsection 60-95(1) or (2) to allow 2 or more registered entities to form a reporting group.
[Section 60-95(2)]
The ACNC Commissioner may refuse to grant this request if allowing the entities to form a reporting group might allow the registered entities to reduce transparency and accountability, particularly in relation to public understanding of the activities of the entities.
Depending on the circumstances, joint and collective reporting may diverge from particular accounting standards, such as accounting standard AASB 10 Consolidated Financial Statements. In such cases, the regulations may require registered entities to apply all relevant accounting standards, except for those which are inconsistent with this type of reporting.
The ACNC Commissioner may impose a condition that certain items be separately identified or explained in the financial reports and notes to the financial reports.
The ACNC Commissioner may also impose conditions relating to the structure of financial reports.
For example, the ACNC Commissioner may require certain matters, such as the donations received by a DGR which is a member of the reporting group, to be separately reported.
