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Significant issues with review of Charities Act 2005

 

Thursday, 10 January 2019

Sue Barker, the Director of Sue Barker Charities Law and Charities Act Review Core Reference Group member, concludes her two-part series on the Review of the Charities Act 2005 and discusses her major concerns with the nature, scope, process, and timeframe of the review, including whether Charities Services is encouraging voluntary deregistrations. Sue presented at the recent Not-For-Profits, Trusts and Charities Law Symposium for Legalwise Seminars. Read her first article here

Sue Baker

As discussed in Charities Act review and importance of having input into the process,[1] a review of the Charities Act 2005 has commenced,[2] but there are significant issues with the nature, scope, process, and timeframe of the review.

There is a saying that in a democracy you get the leaders you deserve. Arguably, you also get the legislation you deserve. The review of the Charities Act has the potential to be a once-in-a-generation opportunity to create a world-leading framework of charity law for New Zealand. However, such a framework will not happen by accident – it is essential that those involved/concerned with New Zealand’s charities get engaged with the review, and that we collectively try to create the best framework of charity law that we can.

Research questionnaire

In that context, and perhaps underscoring some of the concerns held within the charitable sector about the current framework, a consortium of philanthropic trusts has provided funding to undertake some empirical research to feed into the review. With the help of Strategic Grants,[3] a questionnaire has been created to gather data to input into the review.

The link to the questionnaire can be found here: https://www.surveymonkey.com/r/CA2005.

The research is being carried out by Dave Henderson and Sue Barker, who are both members of the Core Reference Group for the review (see: https://www.dia.govt.nz/charitiesreview#CRG). However, this research is being carried out in their private, independent capacities.

Initial consultation meetings for the research, and to help develop the questionnaire, were held in Wellington, Auckland and Christchurch on 18 October, and 2 and 7 November 2018 respectively. Thank you very much to Grant Thornton,[4] RSM Hayes Audit,[5] and Parry Field Lawyers,[6] who very kindly provided venues for the meetings.

Please help – we need your input

Please complete the questionnaire. The more people that complete the questionnaire, the better the data will be. We appreciate that the questionnaire does have a number of questions, but there are a number of issues where it would be helpful to gather data and we really appreciate your time.

If you are connected to more than one group or organisation, you are welcome to complete the questionnaire more than once, giving the information separately for each one.

Practitioners acting on behalf of charities are also welcome to complete the questionnaire more than once, giving the information separately for each charity.

Most importantly, please share the questionnaire with your networks, by email, Facebook, or however. The more data we can gather, the better the case we hope to be able to build for what charity law should look like in New Zealand for the future.

The research is not limited to registered charities

Please note that the survey is not limited to registered charities. The regime needs to work for all charities, and it is important that the voices of all charities are heard. To that end, we would also like to hear from charities that have been denied registration, encouraged to withdraw their application, deregistered, or encouraged to voluntarily deregister.

The following factors perhaps underscore some of the concerns we are hearing in this regard.

Since the charities register commenced in February 2007, approximately 9,315 charities have been deregistered.[7] This figure constitutes more than 1/3 of the 27,166 charities that are currently registered in New Zealand.

Of these, 4,774, or approximately half, were deregistered for failure to file annual returns. In the context of an information and disclosure regime, it is important that charities comply with this key requirement.

However, of the remaining 4,541 charities that have been deregistered, only 6, or 0.0006%, have been deregistered for “serious wrongdoing”, arguably the original rationale for the regime.

Why are so many charities voluntarily deregistering?

Many of the remaining 4,535 charities have deregistered voluntarily: voluntary deregistrations currently account for almost half of all deregistrations. However, while some charities obviously voluntarily deregister because they have ceased operating, or merged with another charity, for most charities no reason whatsoever has been given for their voluntary deregistration: it is not clear why so many charities are voluntarily seeking removal from the register.

In that context, there has been a notable lack of transparency regarding the number of charities that have been deregistered for reasons of jurisprudential interpretation. It is well known that Charities Services adopts a controversially narrow interpretation of the definition of the definition of charitable purpose: key areas of difficulty include charities engaging in advocacy work in furtherance of their charitable purposes, economic development, social housing, sport, charities running start-up businesses to raise funds for their charitable purposes, member organisations, charities that further their charitable purposes by helping individuals, among others.

As at 2014, Inland Revenue Department calculations indicated at least 35 charities had been deregistered on the basis of narrow jurisprudential interpretations of the definition of charitable purpose.[8] Charities Services’ website[9] reveals there have been at least 20 more since then. In addition, the total number of charities that have voluntarily deregistered for this reason is unknown.

These numbers are significant: these charities will not necessarily have done anything “wrong”, but will have been deregistered simply because Charities Services has changed their mind about the interpretation of the definition of charitable purpose.

Deregistration will not only result in denial of all the privileges of registered charitable status, but may also result in historical tax consequences, perhaps dating back to the commencement of the organisation on the basis that the charity’s purposes have never been charitable. These impacts may be disproportionate and particularly unfair, highlighting the importance of adequate checks and balances in the decision-making process.

New Zealand appears to be out of step with other jurisdictions in this context: other jurisdictions do not appear to spend so much resource deregistering good charities in this way. The New Zealand position is particularly notable given that all New Zealand charities had to proactively seek registration in the first place, in the transition to the original regime (unlike, for example, Australia, where charities simply “rolled over”). Why then, are so many New Zealand charities being deregistered?

We would particularly like to hear from charities that have been deregistered, or that have voluntarily deregistered to avoid having a formal deregistration decision published on Charities Services’ website.[10]

Is Charities Services encouraging voluntary deregistrations?

Controversy over deregistration decisions appears to have resulted in a new approach: if a charity might not fit within Charities Services’ interpretation of the definition of charitable purpose, Charities Services now appears to be actively encouraging the charity to deregister voluntarily. A voluntary deregistration avoids Charities Services having to refer the matter to the Charities Registration Board for decision, effectively bypassing what was intended to be an independent check on Charities Services’ decisions. This approach also results in a reduction in transparency, as there will be no written decision published on Charities Services’ website.

Importantly, this approach does not solve the problem of over-deregistration – it simply moves it.

In its December 2018 newsletter, Charities Services made the following comments:

“About 500 charities voluntarily deregistered in the last financial year, following a fairly consistent trend over the last five years. There are a number of reasons why this is the case:

  • The charity is no longer operating (68%)

  • The charity decides that it does not want to be a registered charity but will still continue to operate (13%),

  • The charity decides that it can do greater work collaboratively and merges with another registered charity (8%)

  • Other reasons include merging with a non-charity, consolidating, no longer meets requirements, and 'other' (11%).

The majority of these charities were very small organisations: 82% of these charities had $10,000 or less in assets or income, and 55% had no assets at all.” [Emphasis added]

It can be assumed that the most common reason a charity would be found to “no longer meet requirements” would relate to narrow jurisprudential interpretations of the definition of charitable purpose. This most likely also explains why a charity would no longer “want to be a registered charity”, or would “merge with a non-charity”. It also most likely also explains the “other” category. On that basis, up to ¼ of voluntary deregistrations (13% + 11% = 24%) may have been caused by overly-narrow jurisprudential interpretations of the definition of charitable purpose.

Charities Services states that these statistics follow a “fairly consistent trend over the last 5 years”. It is not clear how this conclusion has been reached, as there has been a consistent lack of information about the reasons for voluntary deregistrations in the past. However, assuming a similar percentage for previous years, this means that as many as 1,135[11] voluntary deregistrations may have occurred because of jurisprudential interpretations of the definition of charitable purpose. Adding to this number the 55 that appear to have been formally deregistered by the Board for this reason, as discussed above, means there may have been 1,200 deregistrations for this reason. This figure represents approximately 26%, or 1 in 4, of the total number of charities deregistered for reasons other than failure to file an annual return. It also represents 5%, or 1 in 20, of the total number of registered charities.

More research would help shed light on why so many charities are being deregistered in New Zealand.

Is Charities Services encouraging withdrawal of registration applications?

The impact of a narrow jurisprudential approach to the definition of charitable purpose is not limited to deregistration decisions. A similar issue arises in the context of applications for registration. Charities Services’ website reveals a large number of charities that have been formally declined registration for jurisprudential reasons.[12] However, controversy over decline decisions appears to have resulted in a new approach: if a charity might not fit within Charities Services’ interpretation of the definition of charitable purpose, Charities Services now appears to be actively encouraging the charity to withdraw its application. The writer understands that approximately 1/3 of all applications for charitable registration are now being withdrawn. A withdrawal of application avoids Charities Services having to refer the matter to the Charities Registration Board for decision, thereby bypassing what was intended to be an independent check on Charities Services’ decisions. It also similarly results in a reduction in transparency, as there will be no written decision published on Charities Services’ website.

More research would help shed light on why so many charities are withdrawing their applications for registration.

The purpose of the regime

The above issues highlight what appears to be a fundamental difference of opinion as to the purpose of the Charities Act regime: was it designed to provide an information and disclosure regime, to enable members of the public to decide for themselves which charities are worthy of their support, or was it instead intended to provide a means for government to “cull” New Zealand’s charities?

Charities can help with every aspect of the government’s proposed “Wellbeing Budget”,[13] most likely more efficiently and effectively than government. The benefits they provide to New Zealand society are likely to exceed many times over any tax privileges gained. Of course, there are opportunities for collaboration and reduction of duplication within the charitable sector, but these decisions are for charities to make in the best interests of their charitable purposes. Conceptually, Charities Services should want charities to be on the register, so that they are subject to the transparency and accountability requirements of the Charities Act.

However, Charities Services appears to consider that New Zealand has “too many charities”,[14] and that interpreting the definition of charitable purpose in accordance with the law as it existed prior to the Charities Act would “open the floodgates” and allow thousands of not-for-profit entities to gain access to the register. With respect, such an argument is specious: no one argues that all not-for-profit entities should be able to register as charities. However, all charities that wish to should be able to access the regime. Further, the Supreme Court has made it clear that the Charities Act 2005 was not intended to change the definition of charitable purpose,[15] raising concerning issues about the rule of law.

It is critical that registration decisions are made correctly and according to law: the support available to charities is increasingly restricted to registered charities only. The support is not limited to tax privileges, which are actually of limited relevance for many charities – charities often seek registration primarily for non-tax reasons, such as the ability to access funding, government contracts, and to attract volunteers. Registration has increasingly become the gateway to survival. There is concern that preventing good charities from accessing the regime is causing an erosion of New Zealand’s social capital. Restricting the definition of charitable purpose to a 19th century Victorian concept of handouts to the poor also discourages innovation and will cause the concept of charity to become increasingly anachronistic.

Responses are anonymous

We understand that many charities are reluctant to criticise the current regime because of the climate of uncertainty it creates. We want to give charities an opportunity to make their views heard without fear of the unknown. This survey is being conducted anonymously. The data will presented in aggregated form and responses will not be attributed to any particular person. The researchers are independent of government and are not subject to the Official Information Act 1982.

If you would like to be added to the mailing list to be kept updated about the progress of the research, please contact Dave Henderson at davehendersonnz@gmail.com. Updates will also be provided at the Charities Act Review 2019 group on Facebook and the NZ Charity Law group on Linkedin.

If you would like to receive an invitation to the seminar series about the review, scheduled for March/April 2019, you are welcome to enter your email address at the end of the survey.

Please note, email addresses will not be linked to your responses to the survey, which will be kept strictly anonymous.

More information

Thank you very much in advance for your input into this important project. If you have any questions, please contact Dave Henderson at davehendersonnz@gmail.com or Sue Barker at susan.barker@charitieslaw.co.

Post-script – 2019 Charity law conference

In terms of getting involved with the review, you might also be interested in the Future prospects for charity law, accounting and regulation conference, to be held at Te Papa in Wellington on 11 and 12 April 2019. The conference is being organised by the Charity Law Association of Australia and New Zealand, in conjunction with Chartered Accountants Australia and New Zealand, and Charities Services. Consultation on the review of the Charities Act will be underway and it is hoped that the conference will help facilitate conversations about what the framework of charity law should look like in the future. For more information, please visit http://www.charitylawassociation.org.au/events. We hope to see you there!

Sue Barker is the director of Sue Barker Charities Law, a boutique law firm based in Wellington, New Zealand, specialising in charities law and public tax law. Since its founding in 2012, the firm has won a number of awards, including Boutique Law Firm of the Year at the New Zealand Law Awards. Sue is a director of the Charity Law Association of Australia and New Zealand, a member of Charities Services' Sector User Group, and a member of the Core Reference Group for the Review of the Charities Act. Sue is also a co-author of the text, The Law and Practice of Charities in New Zealand (LexisNexis, 2013), and a contributor to Regulating Charities: the Inside Story (Routledge, 2017), Corporate Governance - A Practical Handbook (2ed) (Wolters Kluwer, 2016), and Balancing Work and Life: a Practical Guide for Lawyers (LexisNexis, 2015). In 2016, Sue was made an Honorary National Life Member of the National Council of Women of New Zealand Incorporated for her work assisting the Council to regain their charitable registration. Examples of Sue’s specific experience can be found here.

Contact Sue at susan.barker@charitieslaw.co or connect via LinkedIn Linkedin or Facebook Facebook

 

[1] /news/charities-act-review/, last accessed 25 November 2018.
[2] https://www.dia.govt.nz/charitiesreview, last accessed 25 November 2018.
[3] https://www.strategicgrants.co.nz/component/content/?id=14, last accessed 25 November 2018.
[4] http://www.grantthornton.co.nz/.
[5] https://www.rsm.global/newzealand/.
[6] https://www.parryfield.com/.
[7] This figure has been calculated from an “open data” search of the charities register as at August 2018.
[8] See IRD issues paper, Clarifying the tax consequences for deregistered charities, 2013, paragraphs 4.14 to 4.15: https://taxpolicy.ird.govt.nz/sites/default/files/2013-ip-clarifying-tax-consequences-deregistered-charities_0.pdf, last accessed 25 November 2018. “Non-charitable purposes”, “did not meet registration requirements”, and “did not produce evidence of charitable purposes” all appear to be different ways of saying the charity concerned did not meet Charities Services’ narrow paradigm.
[9] https://www.charities.govt.nz/charities-in-new-zealand/legal-decisions/view-the-decisions/, last accessed 25 November 2018.
[10] See: https://www.charities.govt.nz/charities-in-new-zealand/legal-decisions/view-the-decisions/, last accessed 7 January 2019.
[11] This figure is calculated as ¼ of the 4,541 charities deregistered for reasons other than failure to file an annual return.
[12] https://www.charities.govt.nz/charities-in-new-zealand/legal-decisions/view-the-decisions/, last accessed 25 November 2018.
[13] https://www.budget.govt.nz/budget/2018/economic-fiscal-outlook/budget-2019-focus-on-wellbeing.htm, last accessed 26 November 2018.
[14] For a discussion on this topic at the April 2018 Charity Law Association conference, see: http://www.charitylawassociation.org.au/events-nzconf2018, session 2.
[15] Re Greenpeace of New Zealand Inc [2015] 1 NZLR 169 (SC) at [16]-[17].

 

 

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