Friday, 2 November 2012

9. Deregistered charities

Why look into deregistered charities?

We often focus on the issues that arise when we register a charity.  But what happens at the other end of a registered charity’s life, when it is deregistered? 


On average, over 900 registered charities are removed from the register each year.  About one third of these deregistrations are voluntarily initiated by the charities.  The balance are unceremoniously removed from the register because they have not complied with their obligations.  Usually this is because they have not filed an annual return to show what charitable activities they have undertaken.

Over a four year period since the register began, almost half of these deregistered charities never filed a return with the regulator at all.  So the public was never provided with any information about their actual activities.

Even if a charity did file a return, the time period between the date of the last financial report and the date of deregistration is 25 months on average (based on deregistrations which have occurred in the current calendar year for failure to file the most recent return).  This is quite a long time to continue to receive tax benefits without providing any information about charitable activities.

When charities are deregistered, in most cases their financial information is no longer able to be scrutinised by the public.  Based on the charities which had filed at least one return with the charities regulator before they were deregistered sometime in the last four years, we know that these deregistered charities take with them a significant amount of funds - assets totalling $1.8b and accumulated funds of $1.1b.  

From the date of deregistration we rely on agencies like IRD and MED to ensure they start to pay taxes on their profits, continue to conduct activities that meet eligibility requirements for donee status, and file accounts (if required) with other regulators – which is the case with incorporated associations, for example, which must publish their accounts with the companies office.  However, after deregistration there is no single agency responsible for ensuring that their accumulated funds are eventually distributed for charitable purposes.

So far this calendar year (up to 31 October) there have been 958 deregistrations, of which only 648 (68%) had filed at least one return and the balance of 310 (32%) had never filed a return.

Analysis of the 648 deregistered charities which had filed at least one return shows that 394 (61%) were deregistered for failing to file recent returns and 254 (39%) were voluntary deregistrations.  The most common sectors to have charities deregistered for failing to file returns are the education / training / research sector which has had 66 deregistrations, the religious sector which has had 53 deregistrations, and the arts / culture / heritage sector which has had 38 deregistrations. .  The most common sectors to have charities deregistered voluntarily are the education / training / research sector which has had 49 voluntary deregistrations, the religious sector which has had 33 voluntary deregistrations, and the health sector which has had 31 voluntary deregistrations.

The largest charity to voluntarily deregister so far this year is Ngati Porou Seafoods Ltd, which told the regulator that it no longer requires charitable status.  It had accumulated funds of $32m in its most recently filed return for the year ended 30 June 2011.

Since May 2012 the regulator has published reasons for voluntary deregistrations.  The most common reasons are winding up the charity and distributing assets, deciding that the charity no longer requires charitable status, mergers with another charity, and dissolution/liquidation.  


There is quite a lot of deregistration activity on the register.  Many of the voluntary deregistrations raise interesting questions – for example, why did Ngati Porou Seafoods Ltd decide in 2012 that it no longer required registration despite having $32m in accumulated funds?  What are the 400-500 charities doing which are deregistered each year because they have never filed a return with the regulator?  Why does the education / research / training sector dominate the deregistration statistics?

The deregistration activity also raises broader questions, such as whether deregistration dates should be retrospective if no returns are filed with the regulator; whether there should be more oversight of charity accumulated funds post-deregistration; and whether donee status should be linked to registered charitable status in the same way as income tax exemptions.


Deregistrations to date

A total of 3,886 registered charities have been deregistered between late 2008 and October 2012 (4 years), an average of more than 900 a year.  1,154 (30%) of these charities voluntarily deregistered.  Approximately 21 were deregistered by the regulator under section 31 of the Charities Act because they did not meet the requirements of a charity.  The balance of 2,711 (70%) were deregistered for failing to file returns (some of which may have subsequently re-registered).

2,070 (53%) of charities that were deregistered filed at least one return with the regulator whilst they were a registered charity.  In contrast, 1,816 (47%) never filed any return with the regulator.  The latter group is unusual because there is no reporting evidence to show they conducted any charitable activity whilst on the register.  However, the former group’s most recent returns do give an insight into their financial activities whilst on the register - they had assets totalling $1.8b and accumulated funds of $1.1b.

916 (44%) of the subset of charities which filed at least one return deregistered voluntarily.  It is not surprising that this is a higher percentage than the overall 30% of voluntary registrations – because this subset had a history of engaging with the regulator.  In other words, it was more likely they would proactively request a deregistration instead of disengaging with the regulator and being deregistered for failing to file returns.  

The largest deregistered charities which filed at least one return, ranked by the size of their accumulated funds, were as follows (the dates show the year-end of the most recently filed accounts as well as the deregistration date):
        Name                                                                                               Accumulated funds, deregistration type and date
·         Metro Water Limited                                                                   ($762m @ 6/2009, voluntary, 11/2010)
·         The Order of St John Northern Region (SI) Trust ($46m @ 6/2009, failure to file, 6/2011)
·         Ngati Ruanui Group Management Limited                              ($43m @ 3/2010, voluntary, 8/2011)
·         Te Aute Trust Board Incorporated                                           ($38m @ 1/2010, failure to file, 12/2011)
·         Ngati Porou Seafoods Limited                                                   ($32m @ 6/2010, voluntary, 9/2012)
·         Youthtown Property Trust                                                         ($14m @ 12/2010, voluntary, 7/2012)
·         The Hato Paora Trust Board                                                      ($12m @ 12/2009, failure to file, 11/2011)
·         The Waikato Foundation Trust                                                 ($8m @ 6/2010, voluntary, 1/2012)
·         Te Runanga O Ngati Porou                                                        ($6m @ 6/2011, voluntary, 4/2012)
·         Queenstown Lakes Community Housing Trust                      ($6m @ 3/2010, deregistration, 7/2011)

Deregistration hand-over issues

Deregistration raises questions about how well the hand-over occurs from the charity regulator back to other departments when a charity has been deregistered. 

For example, a number of the charities which deregistered and never filed a return with the charity regulator, still have live donee status from IRD.  It's possible, of course, that the IRD has contacted them to verify that they are still charitable (albeit not a registered charity) or that they fall under the other donee criteria of being cultural, philanthropic or benevolent.  But considering that they have already proven that they will not comply with the charity regulator’s reporting requirements, what guarantee is there that donations to them are being used appropriately?

With donation tax credits of $195m being paid out a year, according to the March 2010 IRD tax statistics report, surely some of those credits are paid out on donations to deregistered charities who are no longer conducting charitable activities.

To solve the problem of donation tax credits being paid out where there is no public reporting responsibility on donee organisations, perhaps donation tax credits, like income tax exemptions, should only be available to charities that are registered with the charities regulator.  That would go a long way to ensure that government support to charities by way of both income tax exemption and donation tax credits is wholly transparent to the public.

Another IRD issue with deregistration, which we have no insight into, is whether deregistered charities that continue to operate will be assessed for income tax on surpluses they generate after deregistration. As not-for-profit entities that are no longer registered charities, their first $1,000 surplus is effectively exempt from income tax.  However they will be liable for income tax on the balance of their surplus.  (Interestingly the Australian situation is different – certain categories of not-for-profit entities are wholly tax exempt.  That means it may be possible for a deregistered Australian charity to self-assess itself as a tax exempt not-for-profit and continue to benefit from a tax-free status).   

A final example of a hand-over issue is whether deregistered charities will comply with ongoing reporting requirements with another regulator.  For example, incorporated associations that are registered charities must file reports to the charities regulator.  However once they are deregistered their reporting obligations transfer to the companies office and their accounts should be published on the public companies office register.  A total of 993 out of the 3,886 deregistered charities were incorporated associations (26%).  Although some incorporated associations do subsequently begin to file annual reports with the companies office, others do not and their actual activities continue to be a mystery.

Officers most commonly involved with deregistered charities

It is possible to search on the register and, from the list of deregistered charities, identify which officers are most commonly involved with charities that are deregistered.  Four officers stand out:

·         Roger Thomas Scott of Hamilton was involved with 20 charities that were deregistered (11 were voluntarily deregistered; 9 through failure to provide information to the regulator)
·         Lyndsay Robert Scott of Hamilton was involved with 19 charities that were deregistered
·         Murray Walter Scott of Hamilton was involved with 11 charities that were deregistered
·         Jane Poa of Flaxmere, Hastings, was involved with 7 charities that were deregistered (all for failure to file their annual returns).

2012 deregistrations

So far this calendar year there have been 958 deregistrations from 1 January 2012 to 31 October 2012, with 300 being voluntary deregistrations and the balance of 658 being for failure to file returns.  Out of this total, only 648 charities (68%) had filed at least one return with the regulator; the balance of 310 had never filed any returns.

Total assets recorded in the last return filed before deregistration by the 648 charities were $185m and total accumulated funds were $114m.

Out of the 648 deregistrations, 394 (61%) were for failing to file returns and 254 (39%) were voluntary deregistrations.

Accumulated Funds (for 394 non-filing charities)

The charities with the most accumulated funds that were deregistered for not filing returns were:

Last return     Accumulated     Name of deregistered charity
6/2010          $3.5m               The Mount Albert Grammar School Community Swimming Pool Trust
3/2010          $2.7m               Waikawa Marae Incorporated                                                                            
6/2010          $2.4m               Ferrymead Trust                                                                                                   
3/2010          $2.4m               The Chartwell Foundation (1976)                                                                       
3/2010          $2.0m               Mahitahi Trust                                                                                                      
Time taken to be deregistered (for 394 non-filing charities)

The average time period from the end of the most recent year for which a return was filed, up to the month of deregistration for not filing returns, was 25 months.  The longest time periods for charities with accumulated funds over $1m were:

Last return     Deregistered      Time period   Accumulated                      Name of deregistered charity
                                               (months)       Funds                                                                                                  
3/2010          6/2012              27                 $2.4m                                 The Chartwell Foundation (1976)       
3/2010          5/2012              26                 $2.7m                                 Waikawa Marae Incorporated            
3/2010          5/2012              26                 $2.0m                                 Mahitahi Trust                                      
3/2010          5/2012              26                 $1.8m                                 Ryder Cheshire Foundation (Waikato)
3/2010          5/2012              26                 $1.4m                                 The Interworld Charitable Trust         

These extensive periods of time between the date of the last financial report and the date of deregistration raises a question about whether deregistration dates should be retrospective.  Although it appears to be standard practice for the charities regulator not to retrospectively deregister a charity, the charity regulator does have the power to deregister a charity retrospectively, ie from the time it ceased to be entitled to be registered. 

There is surely an argument to be made that a charity which does not file returns should have its charitable status withdrawn effective from the date of its most recently filed financial accounts. Then it will not benefit by way of income tax exemptions in the (sometimes 2-3 year period) between the date of the most recently filed accounts and the time the charities regulator finally deregisters them for non-compliance with their filing responsibilities. 

The current approach, which awards non-compliant charities with a “tax exemption with no public accountability” for up to 2-3 years, surely contravenes the policy intent of trading tax exemptions in exchange for public accountability.

Reasons for voluntary deregistration

For voluntary deregistrations that occurred after May 2012, a reason for deregistration is recorded on the register:
·         107 charities have been wound up and assets have been distributed
·         26 charities deregistered because they no longer require charitable status
·         13 charities did not provide a reason for voluntary deregistration
·         8 charities merged with another charitable entity
·         2 charities has been dissolved or put into liquidation

Sector analysis – 2012 voluntary deregistrations (254)

The main sectors (and the largest charity for each sector, ranked by accumulated funds) applicable to the charities that were voluntarily deregistered are shown in the table below.  The time period shows the months from the end of the year when the last return was filed through to the date of deregistration.  The largest voluntary deregistration is Ngati Porou Seafoods Ltd, which told the regulator that it no longer requires charitable status.

Volume         Main Sector                                               Time             Accumulated Name
                                                                                       Period           Funds                                                         
49                 Education / training / research                   9                   $1.4m           The Wellington Girls' College
                                                                                                                                  Charitable Foundation (wound up)                     The entity has been wound up and assets have been distributed.
33                 Religious activities                                    9                   $1.3m           Flagstaff Union Parish                                                                              Uknown reason for deregistration
31                 Health                                                       30                 $588k           The Bay Health Foundation (w.u.)                                                                
17                 Arts / culture / heritage                             20                 $464k           Friends Of Hawke's Bay Cultural
                                                                                                                                  Trust (Incorporated)
15                 Social services                                           19                 $985k           The Social Services Industry
                                                                                                                                  Training Organisation Te Kaiawhina
                                                                                                                                  Ahumahi Incorporated         
11                 Fundraising                                               5                   $8k               Swannanoa School Special Project
                                                                                                                                  Incorporated (w.u.)
10                 People with disabilities                             12                 $2.5m           Living Options Charitable Trust                                                                                                            Unknown reason for deregistration
9                   Sport and recreation                                  19                 $13.7m         Youthtown Property Trust (w.u.)                                                                                       The entity has been wound up and assets have been distributed.
8                   Environment / conservation                      14                 $17k             Metrowater Community Trust                                                                                                            The reasons for the deregistration have not been provided.
7                   Community development                         7                   $36k             The Restorative Community Work
                                                                                                                                  Trust (w.u.)
4                   Accommodation / housing                        17                 $634k           Trinity College of Wellington Trust
                                                                                                                                  Board Incorporated (merged)                                                                      
4                   Employment                                             14                 $155k           Porirua Employment Hub Trust
                                                                                                                                  Board (status not required).
3                   Emergency / disaster relief                        18                 $2k               Invercargill Fire Brigade Volunteer
                                                                                                                                  Fire Police Unit (merged)     
3                   Economic development                          15                 $32m            Ngati Porou Seafoods Limited (no
                                                                                                                                  longer requires charitable status)
1                   Care / protection of animals                      13                 $0                 Wellington SPCA Capital Projects
                                                                                                                                   Trust (w.u.)  
1                   International activities                              10                 $0                 Zimbabwe Democracy Support Trust                                                                                       Unknown reason for deregistration
43                 Other                                                         10                 $6.3m           Te Runanga O Ngati Porou (Iwi
249               Total                                                                                                                                                                                                                                                                                    

Sector analysis – 2012 failure to file returns (394)

The main sectors (and the largest charity for each sector, ranked by accumulated funds) applicable to the charities that were deregistered for not filing returns are shown in the table below. 

Note that the below table just quotes figures from those deregistered charities which have failed to file their return, but which have already filed at least one return with the charities regulator.  We do not know how big the 310 charities were which were deregistered and had never filed any return with the regulator.

Volume         Main Sector                                             Time           Accumulated     Name
                                                                                      Period        Funds                                                                                                                                   
66                 Education / training / research                  26                $496k              Aiga Salevalasi Charitable Trust                                                                                                                                                                           
53                 Religious activities                                   26                $1.4m              The Interworld Charitable Trust                                                                                                                                                                          
38                 Arts / culture / heritage                            23                $2.4m              Ferrymead Trust                                                                                                                                                                                                   
33                 Health                                                      26                $2.0m              Mahitahi Trust                                                                                                                                                                                             
32                 Social services                                          23                $242k              The NZ Maori Wardens Ass Inc                                                                
30                 Community development                        23                $273k              Fiji Community Ass. of Ak. Inc                                                                                      
21                 Emergency / disaster relief
                     (includes 15 voluntary fire brigades)       23                $141k              Far North Coastguard Ra                                                                                                                                                                                                                                                                                               dio Inc                                                                                                                                   
19                 Sport and recreation                                23                $3.5m              The Mt Albert Grammar School
                                                                                                                                  Community Swimming Pool Trust                        
19                 Environment / conservation                     24                $1.7m              Mahoerangi Environmental
                                                                                                                                  Education Trust                                                                                                               
11                 Fundraising                                              27                $828k              Tauranga Table No. 34 Inc                                                                                                                                                               
9                   Marae on reservation land                       26                $2.7m              Waikawa Marae Incorporated                                                                                                                                                                              
6                   People with disabilities                           23                $47k                Anxiety Support Canterbury                                                                                                                                                                               
4                   Accommodation / housing                       26                $1.8m              Ryder Cheshire Foundation
3                   Economic development                           No returns filed                  
1                   Care / protection of animals                    26                $390k              Starlight Foundation                                                                                                                                                                                             
49                 Other                                                       23                $378k              Oraka Aparima Runaka Holdings
                                                                                                                                  Ltd (Maori Community Devlpmnt)                      
394                  Total

Other blogs with deregistration information

Some of my earlier blogs also provide an insight into deregistration statistics.  Have a look at:

- NZ charities with overseas purposes (302 charities with some overseas purposes have been deregistered over the last four years, with approximately one half voluntarily and one half for failure to file returns)
- Gang charities – should we be concerned.

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