Tax Updates: 12 February 2024

Welcome to this week’s review of tax issues where Richard comments on what’s been happening in the world of tax over the past week. If you have a question or would like a second opinion on any national or international tax issues, please contact Richard via email at richard@gilshep.co.nz.

Charities business income exemption IS

Inland Revenue (IR) has released for comment PUB00465: ‘Charities – business income exemption’, which is an interpretation statement that considers the extent to which business income a charitable entity derives is exempt from tax under section CW 42 of the Income Tax Act 2007.

For those of you who have assisted tax charities with preparing their income tax returns, you will appreciate that there are two key income exemption provisions within the Act that require consideration, although potentially only section CW 41 if the tax charity solely derives non-business income.

So, a tax charity that derives business income must apply section CW 42 to establish the extent to which the income may be exempt from tax, and the main difference between section CW 41 and section CW 42, is that the latter is subject to additional restrictions compared to the former:

• If a tax charity’s charitable purposes are not limited to New Zealand, income derived from the business in the relevant annual period must be split reasonably between its charitable purposes in New Zealand and those outside New Zealand. Only the New Zealand portion is exempt income (referred to as the “territorial restriction”).

• The business income is not exempt if a person with some control over the business is able to direct or divert an amount derived from the business to the benefit or advantage of a person other than the charity (or charities) for whose benefit the business is carried on, except for a purpose of the charity (or charities) (referred to as the “control restriction”). If a tax charity breaches the control restriction, all the business income it derives is taxable.

A tax charity is a charity that is a registered charity or a non-resident entity the Commissioner approves as a tax charity, with a registered charity being an entity registered as a charitable entity under the Charities Act 2005.

The 46-page IS consists of three parts – the first looks to determine what income is subject to section CW 42. The second sets out the requirements for business income to be exempt, and the third provides commentary that is focused on the application of the territorial restriction and common methodologies used to split the income between exempt and taxable. PUB00465 is accompanied by a five-page fact sheet, the most useful component being the flow chart on page two, which illustrates how section CW 42 applies. Should you wish to make a comment on the draft interpretation statement, the deadline is 15^th March 2024

This article was originally published through the ‘A Week In Review’ newsletter. If you would like to receive Richard’s tax updates every Monday morning, you can subscribe here.