Laws you may need to know about
Note: Tax is a complex area that changes frequently. You should get advice from a tax specialist about your organisation’s specific tax obligations.
Tax obligations for different types of organisations
This section explains the tax obligations that apply to different types of organisations, if they aren’t exempted (for information about exemptions, see “Tax exemptions available to community organisations” below).
Incorporated societies and charitable trust boards
Incorporated societies and charitable trust boards are liable for tax on all income unless they come within a specific exemption (see “Tax exemptions available to community organisations” below).
The tax rate that generally applies to these organisations is 28 percent.
A company is taxed at 28 percent on all taxable income, unless it comes within a specific exemption (see “Tax exemptions available to community organisations” below).
A number of complex rules apply to the taxation of companies. The “dividend imputation” regime allows New Zealand companies to attach tax credits to dividends paid to shareholders. This prevents company profits being taxed twice, at both the company and shareholder levels.
Companies can also take advantage of rules that allow them to group and carry forward losses. For these rules to apply, the company must meet certain requirements about shareholder continuity. (For more information, consult a tax adviser.)
The income of a trust that is not tax-exempt as a charity is separated into two parts for tax purposes: beneficiary income and trustee income. The tax on these two parts is then worked out separately, to arrive at the total tax payable on the trust’s income.
“Beneficiary income” is all income derived by a trustee of the trust during any income year that either:
- vests absolutely in the beneficiaries during that income year, or
- is paid or applied for the benefit of the beneficiaries within six months after the end of that income year.
“Trustee income” is all income the trust earns in its income year that:
- doesn’t vest absolutely in the beneficiaries during that income year, or
- is not paid or applied for the benefit of the beneficiaries within six months after the end of that income year.
Trustee income is taxed at 33 per cent. Beneficiaries (if they’re not resident in New Zealand) pay tax on beneficiary income at their personal tax rate.
These general rules only apply to “qualifying trusts” – that is, where all trustee income derived by the trustee has been subject to New Zealand income tax and the trustees have satisfied their New Zealand tax obligations. Most New Zealand trusts are qualifying trusts. The rules for non-qualifying trusts are less advantageous.
Tax exemptions available to community organisations
Income tax exemptions for charitable organisations
Depending on the nature and scope of a charitable organisation, the following exemptions may be available to it if the Inland Revenue Department (IRD) grants it tax-exempt status:
- an exemption for non-business income derived by an organisation established exclusively for charitable purposes or by the trustees of a charitable trust
- an exemption for income from businesses carried on in New Zealand by an organisation established exclusively for charitable purposes or by the trustees of a charitable trust.
Income tax exemptions for non-charitable, non-profit organisations
If a non-charitable organisation does not carry on business for the profit of any member and its rules prohibit it from making distributions to members, a deduction of up to $1,000 a year may be available.
Amateur sports exemption
Your group’s income will be tax-exempt if its main purpose is promoting an amateur game or sport for the recreation or entertainment of the general public, and if none of the group’s funds are used for the private profit of any member of the group.
Applying for tax exemptions
Tax exemptions aren’t automatic. You’ll need to apply to Inland Revenue in writing (unless you have charitable status, in which case Charities Services at the Department of Internal Affairs will automatically notify IRD), and you’ll need to include with your application a copy of the certificate of incorporation or trust deed (where appropriate) and a copy of the group’s rules and constitution.
Other tax obligations not affected
The exemptions for charitable and other non-profit organisations described above apply only to income tax. Your organisation may still be liable for other taxes, such as PAYE, goods and services tax (GST), fringe benefit tax (FBT), and a tax on net assets for deregistered charities (see “Your tax obligations as an employer” below).
Your tax obligations as an employer
Organisations that employ staff must register with Inland Revenue as an employer, and must establish whether their staff are employees or independent contractors, as these two categories are treated differently for tax purposes (see “Your people: Volunteers, employees and contractors” below).
Employers must make the following deductions from payments made to employees (but not independent contractors):
- ACC earners levy (included as part of PAYE)
- fringe benefit tax (FBT).
Employers may also be required to deduct:
- student loan repayments
- child support payments
- KiwiSaver contributions.
Organisations employing independent contractors may need to deduct “scheduler payments” (previously called “withholding payments”), but this will depend on the contractor’s particular status. Employers aren’t required to deduct ACC levies, KiwiSaver or student loan repayments from payments made to contractors.
Employees can also ask their employer to make donations to charitable organisations directly from their pay. Called “payroll giving”, this scheme allows the employer to deduct the amount of the donation from the employee’s wage or salary, and to calculate the tax credit for the donation and deduct this from the employee’s PAYE. However, employers don’t have to offer this service to employees. Further, this scheme is only available to employers who file their monthly schedules (IR348s) and employer deductions (IR345s) electronically. (For more information visit: www.ird.govt.nz)
Fringe benefit tax (FBT)
Charitable organisations are exempt from paying FBT on any benefits provided to employees while they’re carrying out the organisation’s charitable activities. (See Inland Revenue’s booklet “Fringe Benefit Tax Guide” (IR409), available at www.ird.govt.nz)
Other tax issues
If IRD considers an organisation to be a “donee organisation” for tax purposes, then individuals and public companies who donate money to the organisation qualify for a tax credit.
To be a donee organisation, your organisation’s funds must be applied wholly or mainly to charitable, benevolent, philanthropic or cultural purposes within New Zealand (there are some exceptions to this). This means the organisation’s aims or purposes should be carried out in New Zealand, even if this results in paying money overseas to achieve these purposes. Organisations don’t have to be registered on the Charities Register to get donee status.
Goods and services tax (GST)
Any organisation carrying out a “taxable activity” with an actual or likely turnover of more than $60,000 in any 12-month period must register with Inland Revenue for GST. Any organisation conducting taxable activities may register voluntarily. (See IRD‘s “GST Guide” (IR375), available at www.ird.govt.nz)
Gaming machine duty
This is a levy on profits that an organisation makes from its gaming machines. A duty of 20 percent on gaming machine profits must be paid each month to IRD.
Income from gaming machines is exempt from income tax if the organisation is licensed under the Gambling Act 2003 and complies with the requirements for applying and distributing gaming proceeds.
Honorariums and reimbursements for volunteers
Community organisations frequently make two types of payments to their volunteers, and these are treated differently for tax purposes:
- Honorariums paid to volunteers are treated as “schedular payments” (payments made to a person who is not an employee) and are taxed at 33 percent.
- Reimbursement payments made to volunteers for expenses incurred in the course of their work are treated as tax-exempt income, provided they’re based on either actual expenditure or a reasonable estimate of the likely cost of the expense.
If a payment is part reimbursement and part honorarium, only the part that is honorarium will be taxed. However, if the two parts can’t be clearly identified, the whole payment will be treated as an honorarium and will therefore be taxed.
Honorariums paid to members of school Boards of Trustees for attending board meetings are treated as a reimbursement of expenditure for tax purposes.
KiwiSaver is a voluntary long-term saving initiative, set up by government through private scheme providers. KiwiSaver is open to anyone who normally lives in New Zealand, is a New Zealand citizen (or entitled to stay here indefinitely) and is under 65 years old.
Through PAYE and existing payroll systems, employers are required to:
- automatically enrol all new eligible employees (who have the right to opt out)
- deduct KiwiSaver contributions from gross salary or wages for those who join the scheme, at the rate (3%, 4% or 8%) set by the employee
- make employer contributions at 3% of the gross salary or wage.
(For more information, visit: www.ird.govt.nz/kiwisaver)