Monday 13 August 2012

5. NZ charities with overseas purposes


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Introduction

Two of the most common ways that registered charities benefit from the tax system  are through income tax concessions (ie not being required to pay tax on their income) and through donee status (ie people or companies can make donations to the registered charity and claim 1/3rd back from the Government, capped at their own taxable income level).  However these benefits may not always apply if a charity has overseas charitable purposes. 

The income tax concessions will not apply to the charity’s business income to the extent that there are overseas purposes. 

The donee status will not be granted to charities that do not spend their funds wholly or mainly on NZ charitable purposes.  There are exceptions to this rule.  The charity may maintain a separate fund to demonstrate NZ donations are spent exclusively on NZ purposes, or it may obtain specific approval from Parliament and be listed on “schedule 32” of the Income Tax Act. To qualify for a schedule 32 listing, it must demonstrate that it is robust in terms of its internal management and potential longevity, has adequate checks and balances in place for its project management and financial systems, and that it complies with the relevant law in New Zealand and the recipient countries.  In the case of religious charities, the Government has stated that it will not approve them to be listed on schedule 32 under any circumstances.  For more information see: http://taxpolicy.ird.govt.nz/news/2009-12-09-guidelines-schedule-32-inclusion

The objective of the following analysis is to examine the extent to which registered charities have overseas purposes, to review the charities with overseas purposes that have deregistered (in case they have subsequently sent all of their accumulated NZ funds overseas), and to review religious charities within this dataset.

Summary

Approximately 11% (2,797/25,279) of charities that are currently on the register have some overseas charitable purposes.  This means either they have recorded a percentage of NZ-sourced income spent overseas, or they have recorded grants paid overseas, or they have indicated at least one of their areas of operation is overseas.

These charities paid $142m grants overseas in their most recent financial year for which a return is filed.  They received donations of $556m, government grants of $874m, total gross income of $4.3b and recorded a net surplus of $305m.  Their total equity is $8b and total assets are $11b.

Oceania (Australia and the pacific islands) is the most common overseas area of operation, with 36% of the 2,797 charities recording this in their most recent annual return.  It is followed by Asia (33%), Africa (18%), North America (14%), Europe (14%), South America (12%) and Antarctica (1%).

Approximately 60% (1,676/2,797) of charities that have some overseas charitable purposes are involved with religion. 

Since 2007 over 10% of the subset of charities with overseas purposes have deregistered (302/2797).  The largest of these are research charities and they appear to have continued to operate after deregistration.  However, if the voluntarily deregistered charities decided to send their funds overseas, the accumulated funds available for overseas transfer would have been at least $8m.

Four of the top five charities which pay the most money overseas have donee status approved by the Government and are listed on schedule 32.

Charities which pay the highest proportion of their funds overseas tend to be religious charities, especially at the top end where gross income exceeds $500k.  Unusually, many of these have IRD approved donee status, despite operating mainly overseas and having religious purposes.  However it is possible that IRD has verified that they are maintaining separate funds and are using NZ donation income exclusively for NZ purposes.

Curiously, NZ does not appear to have the same concerns Australia does about tracing where funds are ultimately spent.  So it is quite possible for conduit charities to exist here.  For example, you could legitimately donate to (and claim a tax credit for) a charity with approved donee status, and that charity could then pass funds on to another NZ charity that does not have donee status, which will ultimately send the money overseas.

The key lesson from this analysis is to keep an eye out for NZ charities that have overseas purposes or for NZ charities that have NZ purposes but which donate some of their funds to NZ charities that have overseas purposes.   With 11% of NZ charities falling in the former category, and an unknown amount falling into the latter category, they are relatively common. Donors, as well as the taxpaying public, might be surprised to find out where their money is really going. 

The Details

Area of operation

Charities can record multiple areas of operation in the regulator return.  The number of times each continent was recorded is as follows: Oceania 1006 (36%), Asia 921 (33%), Africa 496 (18%), North America 390 (14%), Europe 380 (14%), South America 340 (12%) and Antartica 37 (1%).

Deregistrations

Since 2007, 302 charities with some overseas purposes have been deregistered.  Just over half of these were voluntary deregistrations initiated by the charities themselves (169) and the remaining charities were removed because they failed to file returns (some of the latter group may have subsequently re-registered so I haven’t analysed them further).

Charities that deregister and disappear from the public spotlight have the potential to distribute funds inappropriately (for example, to benefit private individuals) and the public are unlikely to know.  They may also wind-up and distribute some of all of their accumulated funds overseas.

Based on the last returns of the charities that had some overseas purposes and who voluntarily deregistered, they had total equity (accumulated funds not yet distributed) of $8m.  What happened to those funds and how much went overseas?  Unfortunately, because charities do not have to provide financial accounts at the date of deregistration, and no agency monitors them after deregistration, we don’t know.   

However, to give some insight into the types of charities being deregistered, we do know that the largest final equity amounts were recorded by the following charities:

·         Equine Trust:  This is a research charity with a profit of $240k and equity of $5m as at December 2009; 0% was spent overseas in its last return with the regulator, but it indicated the areas of operation were NZ and North America; the financial accounts it filed were for the Massey University Foundation.  It is still listed as an approved donee organisation by IRD today so it appears to be an active but non-registered charity. 
·         Estendart Limited: This is also a research charity with a profit of $167k and equity of $491k as at December 2010; 1% was spent overseas in its last return with the regulator, but the area of operation unknown.  The company appears to be still active on the companies register and is owned by A&A Alexander and H Padman.
·         Morris Trust for animal and human health:  This is also a research charity with profit of $30k and equity of $433k as at December 2009; 0% was spent overseas in its last regulator return, but it indicated the areas of operation were NZ, Asia and Europe.  It is still listed as an approved donee organisation by IRD today so it also appears to be an active but non-registered charity.
·         Ecpat NZ Incorporated: This is a children’s charity with a $68k loss and equity of $108k as at March 2009; 0% was spent overseas in its last regulator return, but it indicated the areas of operation were in NZ and Asia.  IRD ceased it as a donee organisation in 2010 so it is possible that it no longer exists.
·         Get smart charitable trust: This is a religious charity with profit of $23k and equity of $104k as at March 2009; 0% was spent overseas in its last regulator return, but it indicated the areas of operation were in NZ and Oceania.  IRD ceased it as a donee organisation in 2010 so it is possible that it no longer exists.

Highest amount of funds paid overseas

1,063 charities paid grants overseas in the most recent financial year. The grants totalled $142m. The largest payers were:
·         World Vision of NZ Trust Board ($39m)
·         ChildFund NZ Ltd ($12m)
·         The Evangelical Alliance Relief Fund (TEAR fund) ($8m)
·         Save the Children New Zealand ($5m)
·         The Salvation Army New Zealand Group ($3.4m)

The first four charities have donee status which has been approved under schedule 32 of the Income Tax Act.  They must be listed in schedule 32 to be eligible for donee status if their funds are not paid wholly or mainly to charitable purposes in NZ. 


The Salvation Army has donee status but is not listed in schedule 32.  In its case it doesn’t need to be because funds are paid mainly to charitable purposes in NZ (its total expenditure is $134m so $3.4m is only a small proportion of what it spends its money on). 

Highest percentages of funds spent overseas

Excluding charities approved under schedule 32 (which are subject to higher scrutiny by Government, see above) and some of the charities which appear to have recorded an overseas percentage incorrectly (because their areas of operation are all in NZ) there appear to be 10 charities with overseas percentages of 70% or more and gross income over $500k:

·         Derek Prince Ministries Overseas Ministries Trust: This religious sector charity makes grants to schools and orphanages.  100% of its funds were spent in Asia/Oceania in 2010.  It recorded 2010 gross income of $634k and accumulated funds of $477k.  It does have NZ donee status but recorded no donation income.
·         The Atawhai Trust: This religious sector charity provides services (eg care/counselling).   100% of its funds were spent in Oceania in 2011.  It recorded 2011 gross income of $592k and accumulated funds of $584k.  It does have NZ donee status and recorded $33k donation income.
·         World Outreach NZ Trust and World Outreach International incorporated:  These religious sector charities provide services.  94% and 93% of their respective funds were sent to Africa, Asia, Europe and Oceania in 2010.  They recorded 2010 gross income of $944k and $834k and accumulated funds of $103k and $1.3m.  The Trust has donee status and recorded donation income of $907k; the incorporated society does not have donee status and recorded donation income of $834k.
·         NZ Association Of Jehovah's Witnesses: This religious sector charity provides religious services.  99% of its funds were spent in Asia, Europe, North America and Oceania in 2011.  It recorded gross income of $889k and accumulated funds of $144k.  It does not have donee status and donation income was $854k.
·         Leadership Development International:  This religious sector charity makes grants to Christian training agencies.  90% of its funds were spent in Africa, Asia, Europe, Oceania and South America in 2011. It recorded gross income of $630k and accumulated funds of (only) $10.  It does have donee status and donation income was $630k.
·         Edudev Services:  This community development charity acts as an umbrella body and makes grants to organisations.  90% of its funds were spent in Africa, Asia, Oceania and South America in 2011.  It recorded gross income of $607k and accumulated funds of (only) $95.  It does not have donee status and donation income was $607k.
·         Woolf Fisher Trust: This education/research charity benefits teachers and students.  80% of its funds were spent in Europe and North America in 2011.  It recorded gross income of $1.9m and accumulated funds of $38m.  It does not have donee status and donation income was $0.
·         GFA (Gospel for Asia) NZ Trust: This religious sector charity provides human resources to the socially disadvantaged in India. 85% of its funds were spent in Asia in 2011.  It recorded gross income of $1.3m and accumulated funds of (only) $64k.  It does not have donee status and donation income was $1.2m.
·         Pontifical Mission Aid Societies: This religious sector charity provides facilities and religious services. 80% of its funds were spent in Africa, Asia, Oceania and South America in 2011.  It recorded gross income of $690k and accumulated funds of $1.2m (NB this is taken from the financials – the return was completed incorrectly).  It does not have donee status and donation income was $552k.
·         Arrowmight International Limited: This research charity, owned by the Aotearoa Institute Te Kuratini o Nga Waka Trust Board (itself a registered charity with equity of $20m, being related to Te Wananga o Aotearoa, the Maori tertiary education institution), operates in the education area.  70% of its funds were spent in North America in 2010.  It recorded gross income of $613k and accumulated funds of negative $2.5m.  It does not have donee status and donation income was $0 (income is from its subsidiary, Arrowmight Canada Ltd).

Religious charities with overseas purposes

About 60% (1,676/2,797) of charities that have some overseas charitable purposes are involved with religion.  In other words, 60% have recorded “religion” as at least one of their sectors, activities or beneficiaries.

These 1,676 charities paid $91m grants overseas, received donations of $346m, received government grants of $110m, received total gross income of $1b and recorded a net surplus of $120m.  Their total equity is $4b and total assets are $5b.

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