Monday, 15 April 2013

14. NZ’s registered charities that have trading operations

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Some charities will have trading operations for the purpose of raising funds.  Sanitarium, for example, is a well known trading operation within the Seventh Day Adventist Church.  Others will have trading operations which actually carry out the charity's objects, such as private hospitals which support public health and retirement villages which support the elderly. 

This blog casts an eye over those charities that conduct trading operations unrelated to their charitable purposes.  The wide range of examples on the charities register suggests that it is common practice for registered charities that are corporations and, to a lesser extent, for registered charities that are trusts. 

In the majority of cases, having a trading income stream to sustain a charity is a good thing.  But is there a line which, if crossed, results in these businesses causing a lack of public confidence in the charitable sector?


Out of the 25,024 charities currently registered in New Zealand, about 3,800 (15%) recorded on their initial registration application that they expected to have “income from trading operations” as a source of future income.  However, based on the most recent returns filed with the regulator, 6,755 (27%) recorded an actual value for “cost of trading operations”.  If nothing else, this shows us that a lot of charities which did not expect to have income from trading operations when they registered, did eventually benefit from trading income.

The 6,755 most recent returns show a total gross income of $4.9b, total “cost of trading operations (excluding salaries and wages)” of $1.4b, total salary expense of $1.7b and net surpluses of $298m (that is, surpluses of $507m less losses of $209m).  These charities have assets of $17b and accumulated funds totaling $12b.  In other words, they make up a significant segment of the charitable sector.  However, it is worth noting that these totals are dominated by some or our biggest charities which have a wide range of income sources in addition to trading, such as the Salvation Army, the Seventh Day Adventist Church and Regional Facilities Auckland.  The recovery from the Christchurch earthquake also boosted totals on a one-off basis for the likes of the New Zealand Local Authority Protection Programme Disaster Fund and The Arts Centre of Christchurch Trust Board.

Unfortunately, when using the information on the charity register, it is not possible to easily distinguish trading operations that are related to the charity’s objects and trading operations that are not.  Nor is it easy to see what the trading activities actually are.  So anyone who would like to find out information about the charitable sector’s unrelated trading operations needs to trawl through a lot of individual financial statements.  At least, that is what I did in preparing to write this blog.

One immediate observation was that charitable corporations and, to a lesser extent, charitable trusts carry out the most trading operations that are unrelated to their charitable purpose.  I could find no examples of incorporated associations which carried out significant trading operations that were unrelated to their charitable purpose.

The range of trading activity conducted by registered charities is incredibly wide.  The examples of charitable corporations with trading activity unrelated to charitable purposes include agriculture and horticultural businesses, wineries, hotels, gyms, lawnmowing businesses, commercial renters, licence holders, furniture manufacturers, walking tour operators, fashionware retailers and commercial copying centres.  There are many more charities that are trading trusts and these include significant businesses, many of which operate in the farming sector.

In previous charitywatchnz blogs I have also come across examples of fishing businesses, transport businesses, providers of life insurance, property investment, orchard businesses, sellers of recycled building materials, joinery businesses, paint suppliers, seat belt manufacturers, nature retailers, car park providers, importing businesses, and even traders in bee balme.   The list goes on. 

Suffice to say, the well-known trading charity examples of Sanitarium, Mission Estate Winery, Iwi trading operations such as Tainui and Ngai Tahu, and Tait Communications, are just the tip of the iceberg.  Even Tana Umaga has set up a foundation which sells water bottles to fund youth scholarships.  And don’t forget that New Zealand’s biggest tax avoidance case, the Trinity scheme with its Douglas fir forests in the South Island, included trading charities which are still on the register today (they have the object of funding the Anglican Church and other charitable organisations).


As noted earlier, there is nothing wrong per se with charities that have trading activities unrelated to their charitable operations.  Having sustainable income streams is to be encouraged. 

However, here are five issues that struck me as having a negative impact on public confidence when I looked through some of the financial statements for the trading charities:

1. Poor / absent financial reporting.  Trading charities can have their financial information withheld from public view if they can convince the regulator that disclosure “may unreasonably prejudice the commercial position of the charity…”  In addition, in the current New Zealand environment where charity financial accounts submitted to the regulator do not have to comply with accounting standards, the quality of disclosure in financial accounts range from very good to very poor.  Both of these scenarios allow charities to avoid being publicly transparent.  They do not even have to disclose the nature of the trading activities they are carrying out.  In my view that is a problem for the reputation of the charitable sector at large, especially when business activity is being conducted.

2. Minimal grants/donations and wealth accumulation. The most egregious examples of poor behaviour, in my view, involve charities which do not conduct charitable activities themselves but instead make grants to other charities.  Their behaviour becomes egregious when they conduct significant business activity ostensibly as a fundraising exercise but make minimal, if any, grants to other charities from one year to the next.  As a result, wealth accumulates within these charities.  It is difficult to see why they should benefit from income tax exemptions or, for that matter, retain their status as a registered charity.

3. Business risks and insolvency disclosures.  Where trading activity involves significant risk to a charity’s assets, there is a real possibility that their donation income, government grants and accumulated reserves may be diverted from funding charitable activities to propping-up the failing business activity.  Alternatively, some trading charities may appear to be insolvent based on information currently disclosed on the register, but in fact they are supported by related party guarantees which are not disclosed.  In both cases, the public may be misled about the financial stability of some trading charities unless disclosure is improved.   

4. Excessive salaries and other apparent private benefits.  Any charity, not just a charity with a trading operation, will erode public trust and confidence if it appears to be providing private benefits to related parties.  Charities conducting trading operations unrelated to any charitable activity may be particularly susceptible to this accusation.  Based on information currently supplied to the regulator, it is relatively easy for a member of the public to calculate the approximate average annual salary paid to charity staff.  When those average salaries start to look excessive, for example where a closely-held charity pays its one or two employees well above industry norms, it would be useful for the charity to be asked to explain why the salaries are so high compared to the expected norm and/or confirm that the employees are not related to the officers of the charities.

5. Excessive complexity and related party transactions.  Several of the charities with trading operations identified for this blog, and in previous blogs, are part of complex structures involving other charities as well as for-profit entities.  One, the Trinity Foundation, has been confirmed in court as being part of a tax avoidance structure.  Some of these structures may be a clue that the controllers of the charities do not have exclusively altruistic motives.  If tax avoidance is a possible motive for any of them then, as was the case in the UK with the recent Cup Trust scheme, the public may legitimately assume that as a tax avoiding charity they are not operating for the public benefit.  In my view the job of the regulator begins with making sure that all charities within such structures fully disclose their related party relationships and transactions.  This transparency will increase public confidence in financial informaton provided by registered charities.

The details

What follows is a discussion of:

1.       Trading definitions and whether trading operations are the same as having a social enterprise
2.       Implications of trading for the charity regulator
3.       Implications of trading for the tax man
4.       Implications of trading for competitors and the public at large
5.       Australia’s “unrelated business income tax” (UBIT) proposals
6.       Statistics for 6,755 charities with “cost of trading operations” in their most recent return
7.       Examples of the charitable trusts with income from trading operations. 
8.       Examples of the charitable corporations with income from trading operations
9.       Examples (or lack thereof) of the incorporated associations with income from trading operations

1. Definitions and social enterprises

The New Zealand regulator does not provide a comprehensive definition of a “trading operation”. Its financial information help sheet refers to trading operation examples such as “a shop or mail order business”.  However it does require all registered charities to state at the time of initial registration whether one future source of funds will be “income from trading operations”, and it requires all registered charities to annually quantify their “cost of trading operations (excluding salaries and wages)” and their “income from service provision / trading operations”.

According to the charity regulator’s recent discussion about social enterprises, just because a charity has trading operations does not mean it is a social enterprise.  In August 2012 the charities regulator sent out a survey to 11,000 charities who indicated they received income from “provision of services and trade”.  The purpose of the survey was to help understand where and how social enterprises are working in NZ and the barriers to their development.  The regulator said it would let the charities decide for themselves if they were “social enterprises”.  However it provided this definition:

“A social enterprise is an organisation that:
-          has a social, cultural or environmental mission, and
-          derives a substantial portion of its income from trade, and
-          reinvests the majority of its profits/surplus in the fulfillment of its mission.”

The regulator did not define what a ‘substantial portion’ means, however it stated that “in Australia the definition of a social enterprise specifies that income from commercial activity is 50% or more (but can be less for newer ventures…).”  Revenue from government contracts was classed as a form of trading income.

The final report, Mapping social enterprises in New Zealand - Results of a 2012 survey (.pdf) was released in January 2013.  There were 421 responses. 

2. Implications of trading for the charity regulator

The charity regulator’s “registration FAQs” explain trading implications as follows:

“How does the Commission view a charity which operates a successful trading company as part of its activities?

A charity which operates a successful trading company is likely to remain charitable, as long as the charity continues to have exclusively charitable purposes and activities, and no profits from the trading company can be distributed to non-charitable shareholders or individuals”

In other words, it doesn’t seem to matter whether a charity operates a trading company or not for the purposes of determining charitable status, as long as the charity remains exclusively charitable.

However, from a charity regulator compliance point of view, presumably trading does matter.  Trading charities:

-          have more opportunity to distribute profits for private benefit, through non-arms length related party transactions
-          are more likely to be involved with complex structures and/or transactions with for-profit entities that could indicate their purposes are not exclusively charitable
-          face more business risks which can put charitable funds in jeopardy.

To deal with the latter point about business risks, the charities regulator for England and Wales has, for example, introduced specific rules where trading (other than trading in pursuit of its charitable objects) involves significant risk to a charity's assets.  In those cases the trading must be undertaken by a trading subsidiary.

3. Implications of trading for the tax man

Inland Revenue’s operational statement 06/02 (December 2006) explains that charities with “business income” are subject to specific tax rules.  For tax purposes, a business is defined as any profession, trade or undertaking carried on for a profit.

If a charity has business income there are two instances where the business income will be taxable. 

Firstly, if there is a person with some control over the business who is able to direct or divert income derived from the business to their benefit or advantage.  In that case, all of the business income is taxable. 

Secondly, there may be a tax liability where the charity’s charitable purpose is not limited to New Zealand.  In that case the business income must be apportioned between those purposes within New Zealand and those outside New Zealand and the latter portion is subject to income tax.

4. Implications of trading for competitors and the public: Not a level playing field

The media and the public at large also have an interest in charities with trading operations.

“Super-rich tribes pay no tax” and “Tainui taxes set for review” were the headlines in the Waikato Times in June 2011.  Journalists asserted that some charitable organisations have amassed huge untaxed reserves, in part due to a tax exempt status, with Tainui's commercial arm compiling a $235m war chest.

Opposition politicians made statements that the law should be changed to avoid charities using their tax advantages to amass untaxed reserves from their trading profits and using them to dominate their competitors.  There were accusations that there was not a level playing field with other businesses which paid income tax.  In response, the Revenue Minister said an upcoming review of charities law would be a chance to see whether taxing the charities' retained profits would see more of the funds put to charitable use. He said such a move would bring New Zealand in line with Australia's tightening of rules around how much tax charities pay.

As recently as last week there was an article published by Dr Michael Gousmett in the New Zealand Centre for Political Research in which he commented on some of the apparent commercial organisations which have charitable and therefore income tax exempt status.  Dr Gousmett argued for the tax authority to have the legislative power to impose an excess surpluses retention tax on those charities that fail to distribute.  He also argued for grant-making charitable trusts to be required to “provide details to the public of the recipients of their largesse”.

5. Australia’s “unrelated business income tax” (UBIT) proposals

The Australian government has proposed that charities pay income tax on profits from activities that are not directed toward their altruistic purpose, but rather on profits which are retained for the organisations’ commercial undertaking. However the application of the draft legislation continually gets delayed. The most recent statement by the government in February was that the rules will be deferred until 1 July 2014.

6. Statistics for 6,755 charities with “cost of trading operations” in their most recent return

The following two tables show the totals for all of the charities who recorded a “cost of trading operations” in their most recent annual return filed with the regulator.  They also show the name and amount reported by the largest charity in each category.  



Financial Performance


Service & trading income
 $        1,864

 $   182
Seventh Day Adventist Church
Government grants/contracts
 $        1,450

 $     70
National Maori PHO Coalition Incorporated
Other income

 $           463

 $     41
The Arts Centre of Christchurch Trust Board

 $           422

 $     27
Red Cross

Other grants and sponsorships
 $           343

 $     47
Regional Facilities Auckland
Other investment income
 $           187

 $     13
Salvation Army


 $           108

 $       9
Medical Council Of New Zealand

 $            57

 $       8
Salvation Army

NZ dividends

 $            27

 $       2
Te Runanga A Iwi O Ngapuhi
Total gross income
 $        4,921

 $   187
Seventh Day Adventist Church

Salary and wages

 $        1,680

 $     63
Salvation Army NZ Group
Cost of trading operations
 $        1,374

 $   144
Seventh Day Adventist Church
Cost of service provision
 $           580

 $     41
Salvation Army NZ Group
Other expenditure

 $           421

 $     21
Auckland Grammar School Combined Trusts
Grants paid inside NZ
 $           242

 $     22
The Methodist Church

 $           218

 $     15
Regional Facilities Auckland
Interest paid

 $            73

 $     12
Tainui Group Holdings Ltd
Grants paid outside NZ
 $            41

 $       9
The Evangelical Alliance Relief Fund
Total expenditure

 $        4,629

 $   187
Seventh Day Adventist Church

Net surplus

 $           298

 $     37
The Arts Centre of Christchurch Trust Board



Financial Position



 $        5,349

 $   597
Regional Facilities Auckland

 $        3,229

 $   234
Saint John's College Trust Board

 $        3,011

 $   379
Roman Catholic Diocese of Auckland Group
Other short term assets
 $        1,856

 $   433
NZ Loc Authority Protection Prog. Disaster Fund
Cash at bank

 $        1,493

 $     58
New Zealand Red Cross Incorporated
Other fixed assets

 $        1,427

 $   351
Regional Facilities Auckland
Computers/office equipment
 $           432

 $   288
Auckland Museum Trust Board

 $           165

 $     15
Seventh Day Adventists
Total assets

 $      16,963

 $ 1,150
Regional Facilities Auckland

Non current liabilities

 $        1,652

 $   173
Regional Facilities Auckland
Current liabilities

 $        2,254

Total liabilities

 $        3,906

 $   434
NZ Loc Authority Protection Prog. Disaster Fund

General purpose funds
 $      10,246

 $   935
Regional Facilities Auckland
Restricted funds

 $           997

 $   148
Salvation Army


 $        1,083

 $   266
Salvation Army

Total equity

 $      12,326

 $   937
Regional Facilities Auckland

Total liabilities and equity
 $      16,232

7. Specific examples of business activity:  Trading Trusts

Out of the 3,570 charities which stated that “income from trading operations” was one source of funds in their registration applications, 1,596 (45%) were trading trusts.  The three largest trading trusts with trading operations (by gross income) are The Order of St John Regional Trust Boards, World Vision of New Zealand Trust Board and Dilworth Trust Board.  The following table shows the detail for 10 trusts with business activity unrelated to their charitable purpose (sorted in descending size of assets).  This gives 10 examples of the types of business activities they conduct compared to their charitable purposes, the average salaries they pay, the amount of donations they make, and other basic financial information. 

Charity name
Business  activity
Charitable purpose
Gross income
Av FTE Salary
Donations made
Net surplus
Total assets
Total equity


The C Alma Baker Trust Group
Farming and investment
Further the science of agriculture/horticulture or  education
S R & B J Williams Charitable Trust Board
Sheep and cattle farm
Waipawa Municipal Theatre and Kairaku Development Society
Matua Charitable Trust
Donate to a wide range of charities (religion, education, health, poverty)
Gallagher Charitable Trust
Commercial rental
Donate to a wide range of charities
Pam Torbett Charitable Trust
Sheep, cattle and deer farm
Donate to a wide range of charities
Shiloh Charitable Trust
Leasing beehives
Religion, education, relief of poverty
Stellar Charitable Trust
Software licencing (StorMan software)
To assist the Seventh Day Adventist Church
The Juffermans Charitable Trust
Forestry / dairy farming
NZCCS, IHC, Royal NZ Blind Foundation
Te Whanau Trust
Piko Wholefoods - vegeterian wholefood store 
Create employment by growing and selling organic food / promote understanding of organic principles
The Tana Umaga Foundation Trust
Water bottle sales
Assist youth education (scholarships)

Here are several issues that these examples raise:

(i) Minimal donations made / wealth accumulation: All of the trusts in this sample are paying grants and donations to charities.  But are the amounts of grant distributions appropriate in the context of the size of some of the businesses? For example, is it sufficient for a charity like the Juffermans Charitable Trust with assets of $2.7m, to be making charitable distributions of just $15,000 and accumulating its surplus of $200,000?
(ii) Excessive salaries: When do salaries start to look excessive?  For example, when they average $160,000 per annum as in the case of the Matua charitable trust?  In these cases should the charity be given the chance to explain why the salaries are so high, or at least be asked to double check whether the paid staff hours they listed on the register are accurate?.
(iii) Undisclosed salary expense: Why do some charities say they have paid staff, but show no salary expense? For example the Juffermans Charitable Trust indicated it had one full time and one part time staff member, but did not disclose any salary expense.
(iv) Poor standard of financial information:  When should the regulator demand better financial accounts from registered charities?  For example the Stellar Charitable Trust financial accounts are at a very low standard for a $5m charity.  There are no notes to the accounts, no narrative explanations and no indication of any audit activity.  They did disclose licencing fee income but only a google search linked this to their software licencing business.
(v) Description of trading activities:  Should the regulator ask charities to describe their trading activities in order to increase transparency about what they do, rather than just allow them to tick the "income from trading operations" box with no further explanation and leaving it to readers to dig further into the financial accounts and other information sources.

8. Specific examples of business activity:  Limited liability companies

Out of the 3,570 charities which stated that “income from trading operations” was one source of funds, 308 (9%) were limited liability companies.  The three largest limited liability companies with trading operations (by gross income) are Idea Services Ltd (part of the IHC group), Auckland UniServices Ltd and Trust House Ltd.  The following table shows the detail for 10 companies with business activity unrelated to their charitable purpose, again sorted in descending size of assets. 

Charity name
Business activity
Charitable purpose
Gross income
Av FTE Salary
Donations made
Net surplus
Total assets
Total equity


Trinity Lands Limited
Agriculture and horticulture: milk 10000 cows on 18 farms; supply gold kiwifruit to Zespri Group
Return all profits to promote the spread of the christian gospel
Marist Holdings (Greenmeadows) Limited
Mission Estate winery: production, marketing and distribution of wines
Roman Catholic Church
Quality Hotel Parnell Limited
Tourist accommodation, restaurant and conference facilities
To support the charitable purposes as set out in the last will and testament of Norman Barry
Horticentre Limited
Distribution of horticulture products (the second largest horticultural merchant in NZ)
Pay dividends to the NZ Horticentre Trust (which promotes research and education in respect of horticulture)
Trok Building Limited
Commercial rent and leasing, fitness business (gym), lawnmowing business
Raise money for charitable shareholder (Te Runanga O Kirikiriroa Charitable Trust)
Trinity Foundation (Services No.1) Limited
Licencing of land or granting Forestry Rights for the purposes of establishing forest estates.
To distribute income to its charitable parent, The Trinity Foundation Ltd (whose charitable purpose is to distribute to charitable organisations)
Pathway Engineering Limited
Furniture manufacturing and distribution (accounts withheld, but 2010 published)
Governing documents withheld: Main beneficiary is other charities.  Part of Pathway Charitable Group which provides social services.
Awhina Experience Limited
Guided walking tours
Raise money for charitable shareholder (Te Putahitanga O Nga Ara Trust) which benefits the Pouakani People.
Custom Copy Limited
Commercial copy centre
Relief of poverty
Babs Limited
Fashionware retailing
Distribute profits to Presbyterian foundation

Here are several issues that these examples raise:

(i) Minimal donations made / wealth accumulation: Unlike the trading trust examples, only three of the companies actually distributed funds for charitable purposes by way of donations and even then the amounts were very small.  The majority either reinvested their surpluses in the business or they made deficits which drained their accumulated funds.  Is this appropriate for a registered charity?
(ii) Poor standard of financial information.  Again, the quality of financial reports varied enormously.  Some – including the largest in the sample, Trinity Lands Ltd – were allowed by the regulator to provide summarised financial statements prepared under FRS 43.  This type of statement gave very little insight into the financial affairs of the charity.
(iii) Insolvency disclosure:  One of the businesses – Awhina Experience Ltd - had negative equity.  It would have been insolvent had their parent companies not provided guarantees. Should an explanation be provided on the register when registered charities appear to be insolvent?
(iv) Disclosure of charities involved with tax avoidance schemes:  Although the financial details of Trinity Foundation Services (No.1 Ltd) look fairly innocuous, it is actually one of several Trinity Foundation charities that were part of NZ’s largest tax avoidance scheme involving Douglas fir forests, 300 investors and up to $3.7 billion in tax revenue.  As recently as November 2012 the Supreme Court upheld Inland Revenue’s appeal in the case.  Should the regulator require charities to disclose their past involvement in such schemes (especially if a court has found that tax avoidance occurred)? 

As an aside, the Trinity tax avoidance scheme was deemed to be tax avoidance because its investors claimed immediate tax deductions on a harvesting fee that was not due until 50 years in the future. In 2004 the High Court was told that the architect of the scheme, tax lawyer Garry Muir, consulted Anglican clergy before creating the Trinity Foundation in 1997 to make donations to causes such as the Anglican City Mission and the Anglican Church Pension Board. The Anglican Church denied it was involved in the scheme.  However today the companies still exist on the charity register because the profits are intended to go to the church and other charitable organisations.

9. Specific examples of business activity:  Incorporated Associations

Out of the 3,570 charities which stated that “income from trading operations” was one source of funds, 1,055 (30%) were incorporated associations.  The three largest incorporated associations with trading operations (by gross income) are Bernados New Zealand Incorporated, IHC New Zealand Incorporated and New Zealand Red Cross Incorporated. 

There are a range of incorporated associations with charitable activities including sports bodies (25 golf courses, 17 bowling clubs, 11 tennis clubs, etc), toy libraries, museum societies/associations, arts, heritage and similar associations. 

Incorporated associations are membership-based organisations and in general their financial statements are at a high standard with independent audited reports.  After a reasonably thorough review I was unable to find any incorporated association which was conducting significant commercial activities unrelated to its charitable purpose. 

Other blog posts with information about charities with business activities:

Several of my previous blogs also discuss charities with trading operations, including:

Corporate charities
Religious charities
Charitable groups
Reducing transparency – Tait Communications vs Sanitarium Health Food Company


This analysis was based on information on the charities register, which is not verified by the charities regulator.  The analysis also relied on information provided in financial accounts filed with the regulator – much of which was not audited or independently verified.

One significant error on the register was corrected for the purpose of this analysis.  All financial information for the Dunedin Hospital Early Childhood Centre Association Incorporated for the year ended 31 March 2012 was overstated by a factor of 1,000.  In other words, its gross income of $1,412,282 was recorded as $1,412,282,000.  This has overstated aggregate income by $1.4 billion and overstated aggregate assets by $1.3 billion on the register.

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