29th September 2017

Early in September, David Seymour, New Zealand’s ACT Party leader urged the country to fix the tax loopholes allowed to commercial businesses run by charitable organisations. Because of their registration as charitable or not-for-profit trusts, these commercial companies have been exempted from paying income tax.

A Church behind a cereal maker

Weet-bix, a favorite breakfast cereal of New Zealanders, which is produced by Sanitarium Health and Wellbeing Company, was originally established in 1898 by the Seventh-day Adventist Church. Its main purposes back then was to produce and promote healthy foods made from plants.

As the company has grown, they have never paid income tax. The reason behind this is that, legally, all of Sanitarium’s shares are owned by the New Zealand Conference Association, a registered charitable trust created by the church. In New Zealand, the church is exempted from paying income tax due to its charitable mission.

"I don’t know what their [Sanitarium's] purpose is. They would argue they do charitable stuff to the same value as what they would have paid in tax," Mr. Seymour said following the statement from a Sanitarium Spokesperson.

The company raised the point that if its tax condition were to be reviewed, the discussion should cover all non-profit and charitable organisations, i.e. Maori trusts, unions, lobby groups, environmental groups, and sporting clubs.


Giant holding company for charity

Apart from Weet-bix, there is also Ngāi Tahu Holdings whose main interests are in tourism, fisheries, property, and forestry. The company’s sole shareholder is Ngāi Tahu Charitable Trust, which is also registered as a charitable organisation and is therefore exempted from paying income tax.

In 2016 the holding company earned $210 million in net profit. However, only $4 million was distributed to the trust. It stated that the rest of the profit was used as a reinvestment into Ngāi Tahu Holdings Corporation.

Meanwhile, Seymour noted that it was the charitable tax loophole that enables Ngāi Tahu’s Go Bus business to have an advantage when bidding for the Auckland Transport bus contract.


Spilt business from charity

While Britain fixed the same kind of charitable tax loophole in the 1920’s, the ACT Party leader wishes that New Zealand does the same.

"People should be able to get a tax exemption for donating to charity, but when you’ve got those companies that are kind of like charity, kind of like a business, then it would make sense to split them," he said. He suggested that by splitting the organisations, a commercial side can then donate to its charitable side. And the commercial side can even claim the 33.33% tax credit as usually applied to all charitable donations.

To regulate part of the issue, New Zealand has passed laws that deal with companies trying to achieve charitable status, and around 527 groups have been rejected since 2014. One opinion from Dr. Michael Gousemett, of University of Canterbury, suggested that the loophole creates an issue when there is a business competition between a for-profit company and a charitable company with income tax exemption. The latter one always has a fiscal advantage, especially if that company is already running a successful commercial business.