The Business of Charity

Posted on May 24, 2019 in Commercial (Tags: charitable organisations, not-for-profit organisations, Charities Act, social enterprises) Commercial image.PNG

THE BUSINESS OF CHARITY

Businesses operated by charitable organisations make a significant contribution to our economy.  It is estimated that $2.9 billion is directed towards charitable purposes from the commercial activities operated by charities.

The Department of Internal Affairs is currently consulting on the regulation of the charitable sector in New Zealand and it is important that the significant number of charitable organisations, particularly those who are operating businesses, make their views known before the deadline of 31 May.

What is a typical structure of a charity?

Charities come under the umbrella of not-for-profit organisations.  A not-for-profit organisation is one which does not distribute its profits to its members, owners or shareholders but rather uses them to pursue its stated goals.  It is estimated that there are nearly 100,000 not-for-profit organisations in New Zealand of which approximately one quarter are registered as charities.  Not-for-profit organisations and charities can take the form of a trust, an incorporated society or even a company.  A not-for-profit organisation can also be unincorporated which can pose a number of challenges as it is not an entity but rather a group of members engaged in a collective purpose.

How are charitable businesses regulated?

Despite their major contribution to the economy, the Charities Act provides little guidance to charitable businesses as to how they should operate.  Section 13 sets out minimum requirements, and the case law in this area makes it clear that charities must apply profits exclusively to charitable purposes or they will lose charitable status.  Many of the businesses operated by charities are ancillary to the core charitable purposes, but this is permitted provided the profits are then directed towards meeting the organisations charitable purposes.  One example of this might be a charitable organisation which is established in order to address the welfare needs of the poor operating an op shop selling donated clothing.

One of the questions posed in the discussion document published by the Department of Internal Affairs is whether such unrelated businesses should be relieved from the obligation to pay tax.  In the US, businesses which are unrelated to the charitable purposes cannot register as a charity at all.  The business must be substantially related to the purpose of the charity.  In Canada, charities must operate a business through a separate vehicle which is subject to income tax.

Parties which are in favour of a reform of the law of charitable businesses say that they have a competitive advantage over non-charitable organisations which is unjustified.  There has been much commentary about organisations such as Sanitarium which has significant business interests in Australia and New Zealand and yet is a registered charity as it is owned by the Seventh Day Adventist Church.  Those who believe that the status quo should remain take the view that charitable businesses provide a valuable service to society which would otherwise need to be met by taxpayer-funded programs.

One of the real concerns on the part of those who object to the charitable treatment of unrelated businesses is a lack of transparency over the finances of such organisations.  A charity must file an annual return which includes financial statements.  Where a charity has complex structures that include a number of subsidiaries, they report on the basis of consolidated statements as if they were one entity.  The discussion document suggests that this may reduce transparency.

Where do social enterprises to fit in?

Social enterprises and charities are not necessarily the same thing.  The concept of the social enterprise has sprung up in recent years and is typically an organisation with goals such as social wellbeing or environmental sustainability.  There is no particular form which a social enterprise must take.  Usually it involves the ethos of commercial methods to achieve some form of social good.  A social enterprise which provides for some sort of private benefit or profit will usually prevent it from becoming a registered charity.  It may also be set up with broader purposes than are acceptable for registration as a charity under the Charities Act. 

Irrespective of the purposes of the organisation, it is important to choose the correct structure to provide a balance between charitable status (if relevant) and limitation of risk if a commercial enterprise is being undertaken.  The majority of charitable organisations are either in the form of a charitable trust or an incorporated society.  However there are also a huge number of unincorporated clubs and societies which provide services in the voluntary sector.  From a legal perspective, those unincorporated organisations don’t have legal status in their own right, and their members take on personal liability for any of the activities they undertake.  In the case of incorporated societies, the society itself is a separate legal “person” which can undertake activities in accordance with their rules or constitution, but membership lists are frequently not updated and it can be very difficult to establish who the true “members” are should there need to be any change in the organisation or its rules.  It is possible for a charitable organisation to incorporate a company where a charitable trust owns the shares in the company.  This gives the company freedom to trade and generate profit which profits are channelled back to the charitable trust for it to use in accordance with its purposes. 

Given we have more charities comparative to our population then our Western counterparts such as the UK, Canada, Australia and USA, it is important that the charitable sector engages with the current consultation to ensure that its views are represented.

 

 

 

 

Sally Peart