The existing legislation should be amended to provide that profits from trading derived directly or indirectly by charitable organisations and dividends derived from any company substantially owned by such organisations are assessable for income tax at normal rates.
Taxation Review Committee, 1967
The competitive advantage a charity could gain through the ability to accumulate tax-free profits [enables] a faster accumulation of funds [which would allow it] to expand more rapidly than its competitors. [This was] the real competitive advantage that trading activities owned by charities have over their competitors. Trading operations owned by charities would be subject to tax in the same way as other businesses.
Tax and Charities, IRD, June 2001
Recently TV3’s “Story” ran an item on Waikato-Tainui in which a number of claims were made which need an explanation from the iwi. Those claims were made by the Chairman of Te Arataura o Waikato-Tainui, Rahui Papa. “Expanding is easier to do when you don’t have to pay tax, and getting the charitable tax exemption was part of the Treaty settlement too,” said Mr Papa, according to a transcript of the show. Mr Papa also stated that “in almost every year we distribute more than what we would’ve paid in tax. If it were an income taxpaying business, last year it would have stumped up $5 million. It spent more than $22 million on charity. The year before, tax would have been $6.3 million.” I would like Mr Papa to show me in whatever legislation it is stated that, as part of their Treaty settlement, Waikato-Tainui’s commercial trading activities have been granted the privilege of exemption from income tax. I would also like to know when Parliament started legislating tax policy other than in tax legislation. If this particular fiscal privilege which was granted specifically to Waikato-Tainui is, as claimed by Mr Papa, indeed in our tax legislation, where might it be found?
A close study of Waikato-Tainui’s reporting on the Charities Register only adds more confusion in attempting to understand their financial activities. Apart from various annual returns, which are a standard form template in which charities can “hide” movements of funds due to the lack of a requirement to provide a statement of movement in equity ($200 million in one charity over a number of years, $28 million in another, $6 million in a third), there are three sets of financial statements for Waikato-Tainui for 2014 that need to be studied, but we will begin with the key document. That document is the annual report of Waikato-Tainui for 2014, an impressive document of 100 pages. The parent entity of Waikato-Tainui is the Waikato Raupatu Lands Trust, of which the Trustee and ultimate controlling party is Waikato-Tainui Te Kauhanganui Incorporated. There are also a number of entities that comprise its associates, as well as joint ventures. Of those subsidiaries, 17 are limited liability companies, of which 9 are registered with Charities Services. There are 3 limited partnerships, which by their very nature are secretive and not accountable to the public, and one incorporated society which has ultimate authority over all Waikato-Tainui entities, Waikato-Tainui Te Kauhanganui Incorporated, which is also registered with Charities Services. The one associate was by the end of the financial year a subsidiary company. In addition there are 5 unincorporated joint ventures, of which 2 are limited liability companies, 2 are limited partnerships, and one is a joint venture.
The relevance of this is that the notes to the financial statements declare that as “the Trust” is approved as being charitable under the Income Tax Act 1994, “accordingly no income tax is payable.” The Trust reported a net operating profit of $22.6 million before extraordinary items which then produced a net profit before tax of $69.3 million. Before tax? Yes, before tax. Or at least before a tax credit of $1.6 million which took the net profit for the year to $70.9 million and, after a further adjustment, to total comprehensive income of $73.9 million. The Trust reported profit subject to income tax of $1.2 million (probably due to some subsidiaries and associates entities being taxable but with no explanation as to who they might be) on which company tax at 28% was $342,000 before a tax refund on a bonus issue which produced the income tax credit of $1.6 million. So not only does the tax payer subsidise these business activities, we also provide tax credits. Assuming also that the net operating profit was taxable income in a for-profit company, which would result in an income tax liability of $6.3 million on a net profit of $22.6 million, an amount that agrees with that stated by Mr Papa. It would appear then that he was talking about the Trust’s 2015 financial statements which are yet to be filed with Charities Services. During the 2014 financial year the Trust distributed $6.1 million, almost the same amount as it would have paid in tax for 2014, and retained income tax exempt income of $16.5 million – an indirect income tax subsidy of $4.6 million for 2014 alone.
The second report which needs to be studied is that of Tainui Group Holdings Limited which was filed with Charities Services for all but one of the registered subsidiary companies, but because of a propensity for Waikato-Tainui to change the names of their companies frequently, it is something of an exercise to figure which is which in relation to the list in the Trust’s report! Like the Trust’s report, the TGHL report contains a mix of “charitable” companies and others that are not - yet – registered as charities.
However, this is where the discrepancy between the Trust’s financial statements and those of Tainui Group Holdings Limited, which reported a net profit of $47 million before income tax of $342,000, a difference between the Trust and the Group of some $24 million becomes apparent. If the Group were a for-profit entity it would have an income tax liability of $13.2 million on its net profit of $47 million, compared to the Trust’s income tax of $6.3 million on its net profit of $22.6 million.
What then are the principal activities of the Waikato Raupatu Lands Trust and its subsidiaries? The Trust describes these as being:
- Grant distribution;
- Property investment;
- Property development;
- Fishing; and
What then of grant distributions? We find details of those in the financial statements which reported a grant expense for 2014 of $6.1 million (2013: $7.1 million) which almost equates to the income tax figure stated by Mr Papa. However, that’s a tad short of the $22 million claimed by Mr Papa by about $16 million.
Who then are the subsidiaries that are part of this Trust? The list makes interesting reading:
Registered with Charities Services:
- Raukura Moana Seafoods Limited
- Raukura Whare Limited
- Tainui Corporation Limited
- Tainui Development Limited
- Tainui Group Holdings Limited
- TDL No. 1 Limited
- TDL No. 2 Limited
- Te Rapa 2002 Limited
- The Base LimitedPlus:
- Waikato-Tanui Te Kauhanganui Incorporated.
Not registered with Charities Services:
- Hamilton Riverview Hotel Limited
- Ruakura Fee Simple Limited
- Ruakura Limited
- Tainui Auckland Airport Hotel GP Limited
- TGH No. 1 Limited
- Waikato-Tainui Distributions Limited
- Waikato-Tainui Fisheries Limited
- Waikato-Tainui Koiora Limited
- Tainui Auckland Airport Hotel LP
- Waikato-Tainui Koira Collective LP
- Waikato-Tainui Tribal Authority LPPlus:
- Waikato Raupatu River Trust
It is curious that Waikato-Tainui do not list the River Trust as being charitable, as the rules for the Waikato River Clean-up Trust on the Charities Register consist of an Act of Parliament, the Waikato-Tainui Raupatu Claims (Waikato River) Settlement Act 2010, with Waikato-Tainui being one of 5 iwi listed in the Act as “river iwi.” Reference is made to the River Trust, as well as the Clean-up Trust, in the Waikato-Tainui Annual Report. The annual report for 2014 filed with Charities Services by the Trustee for the Clean-up Trust is that of the Waikato River Authority, being the third report of the three that needs to be studied, in which it was stated that $5.5 million had been allocated to 33 projects from total revenue for 2014 of $914,502.
It is also interesting to see that on 31 March 2015 the Waikato Raupatu Lands Trust and Group had registered 5 more limited liability companies with Charities Services, and a sixth on 8 April 2015: TGH Direct Investments Limited, TGH Hotels Limited, Ruakura Limited, TGH Primary Industries Limited, TGH Farms and Forestry Limited, and TDL No. 3 Limited.
However, the financial performance of the Ngai Tahu Charitable Group of 33 limited liability companies, with their 2014 annual return reporting a total gross income of $408 million and a net surplus of $135 million, far exceeds that of Waikato-Tainui. In particular, with grants of $442,500 being only 0.1 per cent of total gross income, why is the government not investigating the charitable status of the Ngai Tahu Charitable Group? The Ngai Tahu Charitable Group’s net surpluses also exceed those of “Sanitarium” and their net surplus of $21 million before charitable distributions of $18 million leaving $3 million untaxed, a subsidy of $835,000. In comparison to all of these entities, Marist Holdings (Greenmeadows) Limited have yet to file their financial statements for 2014, but in 2013 reported a net surplus of $2.9 million from which a dividend of $1.5 million was paid to its sole shareholder, The Society of Mary General New Zealand Trust, leaving an untaxed surplus of $1.4 million, a subsidy of $384,000.
The question must be asked: Is this what Parliament intended in 1892 when it first granted an exemption from income tax for public charitable institutions carried on for public charitable purposes in our first true income tax Act? Why have the recommendations of tax experts, from the Ross Committee of 1967, to the Tax and Charities discussion document of 2001, and others such as Roger Douglas in 1987, all of which recommended that trading by charities should be subject to income tax, been ignored by successive governments? When is a New Zealand government going to restore equity to our tax legislation by levelling the playing field in the commercial sector between so-called commercial “charities” and their for-profit competitors by stopping what is now becoming at best an abuse of our income tax legislation and at worst a farce? Why has this situation been allowed to develop when in England, the country which is the source of our charity law, taxes large scale trading undertaken by charities that is not an activity directly related to its charitable purposes and has done so since the 1920’s? How is it that in New Zealand because a shareholder has charitable status as the owner of a commercial trading activity, that status colours the trading activities with charitable fiscal privileges as well? This issue is not a failure of charity law; it is a failure of New Zealand’s tax policy.
Dr Michael Gousmett FCIS PhD is an independent researcher and public historian.