Sunday, July 14, 2013

Mike Butler: Tribal charity review needed



Ngai Tahu chair Mark Solomon tried to deflect criticisms of lack of accountability around businesses posing as charities, of individuals being paid too much, and that too little was being distributed. Since the tax tribal corporations are excused paying is enormous, and since there is an expectation in the public's mind that tribal businesses will pay their fair share and compete on a level playing field, a review of the tax treatment of treaty settlements and tribal charitites is urgently needed.

The criticisms, not specifically directed at Ngai Tahu, appeared in an article titled “Please give carefully” published in the NZ Herald on June 29, 2013, quoting charities expert Dr Michael Gousmett.

Gousmett called for accountability for a sector that is worth $14.7-billion, that the tax exemption should come with an obligation to account. His 25-year involvement with charities got him interested in the history of charity, the value to society of volunteerism and altruism.

He mentioned St George's Hospital, Mission Estate winery, Ngai Tahu, Christchurch Cathedral owner Church Properties Trustees, food giant Sanitarium, and discussed rates exemptions.

Solomon's claim that his corporation only needs to spend 4 percent on charitable work because that is the going rate for intergenerational trusts is simply an argument to justify a low payout rate. Solomon is silent on any sense of responsibility to this generation to pay their share of taxes since it is this generation that funded them.

Solomon rejected a criticism that Ngai Tahu employees were overpaid.

Solomon also argued that “under the Charities Act, the income the iwi earns (from the assets we hold in a charitable trust) must be used for charitable purposes and not for private pecuniary profit”. There is a difference between the dictionary and Inland Revenue definitions of what is charitable.

“Charity”, according to the Concise Oxford Dictionary, means “beneficence, liberality to those in need or distress”, while “charitable” means “generous in giving to the poor”, or “connected with such activity”. Gousmett’s analysis sees the defining characteristics of the charitable sector as “volunteerism and altruism”.

But the Inland Revenue includes in its definition of a charity appertaining to Maori organisations means any organisation that administers a marae situated on a Maori reservation, as long as it uses its funds to administer and maintain the marae's physical structure and land, or for charitable purposes. This tax exemption is detailed in Part 1, Section 5 of the Charities Act 2005.

That little stretch and twist of the law has enabled every tribal organisation to qualify for an income tax exemption as a charity.

Maori authorities have paid less tax for a long time based on the view that it reflected the lower income of members of the authority. The rate was 19.5 percent, reduced to 17.5 percent from the 2012 income year, the second-lowest tax rate.

Solomon had nothing to say about the tax treatment of treaty settlements. Settlement money must go to a post-settlement governance entity which cannot be tax-exempt. This entity is usually a Maori authority that pays tax at 17.5 percent, and tax on the settlement is paid at the 17.5 percent rate.

However, a Maori authority may give or settle money to a charity. Therefore, the remaining 82.5 percent of the settlement may be settled in that tribe’s charitable trust. The charitable trust may claim a refund of the 17.5 percent paid in tax. This means claimants retain 100 percent of the settlement received. No similar tax credit is allowed to an ordinary company, which pays 28 percent tax.

Solomon says his corporation does not rely on donations, but this does not rule out the fact that his corporation receives regular and on-going contributions of unearned income from the government. Ngai Tahu has been in the habit of receiving such on-going unearned income since the Ngai Tahu Claim Settlement Act 1944 awarded ₤300,000, payable at a rate of ₤10,000 a year for 30 years, increased to $20,000 a year in 1973.

Ngai Tahu received a further $170-million in 1998, plus relativity top-ups that started a year ago being a 16.1 percent proportion of all treaty settlements over $1-billion in 1994 dollars, with the first payment believed to be $68.5-million.

These payments are officially described as financial redress for being “dispossessed” of land, although a closer look at Ngai Tahu history shows that a handful of chiefs happily entered into 10 agreements over 16 years to sell the bulk of the South Island for $14,750, or $1.6-million in today’s dollars. The tribe had sold much of the South Island in other deals before 1840 and a commitment to investigate earlier deals that came with the Treaty of Waitangi meant Ngai Tahu could sell the land again.

Not bad business considering the land was undeveloped and the Ngai Tahu inhabitants simply had to claim occupation to assert ownership. The fact that land negotiator Henry Tacy Kemp had accepted that the handful of Ngai Tahu living on the Canterbury coast had ownership of and could sell the 20-million acre Kemp block was one factor in his dismissal.

The various forms of Ngai Tahu’s land complaint have been settled before 1944. In 1868, a further 4930 acres (1995ha) of land was reserved, and in 1906, the South Island Landless Natives Act granted 142,463 acres (57652ha) of land to settle 4063 “landless” Maori.

Also interesting to note that by Solomon’s statement that his corporation's net worth had grown from its 1998 starting point of just over $200-million to $658-million implies that Ngai Tahu was worth $30-million before receiving the 1998 payout of $170-million. The so-called financial redress made a wealthy corporation wealthier.

The scale of the tax-exemption benefit to all charities is substantial. Gousmett noted that in a charitable sector that is worth $14.7-billion, the benefits from tax exemptions amount to $400-million a year plus $200-million in rebates on donations.

Former National Party leader Don Brash suggested one way to make the tax treatment of tribal businesses more equitable would be "to make the payment to the shareholding charity a deductible payment and then have them pay tax, at the same tax rate as any other company would, on what is left," This proposal is similar to charitable tax law reforms planned in Australia.

Former Revenue Minister Peter Dunne has conceded that the tax treatment of tribal businesses created a competitive advantage and noted, in a letter in a letter on May 28, 2012, that a review of the Charities Act 2005, to be completed by 2015, would include a look at how the charitable operations of commercial entities were taxed.

The Brash recommendation would increase tribal charitable distributions instantly.

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