Defining a Not-for-Profit Society

The Conundrum

With over 25,000 incorporated societies in New Zealand, and probably a similar number of unincorporated societies, one might think we know what a “society” (not-for-profit) is. The website of the Registrar of Incorporated Societies:

  • Tells us that “An incorporated society is a group or organisation that has been registered under the Incorporated Societies Act 1908 and, when incorporated, is authorised by law to run its affairs as though it were an individual person,”
  • Advises on the consequences of registration, and
  • Also notes that “There are a wide range of groups and organisations that have become incorporated societies. These include sports clubs, social clubs, music and cultural groups, special interest and activist organisations.”

The sheer range of groups and organisations that can become incorporated societies and the number that have are, in themselves, clues to the inherent problems of definition.

Evolution of Societies

As a means of connecting people with common interests, societies have existed for millennia, at least as social and political organisations. In the last few centuries they have, perhaps, been more often associated with recreational activities, with partnerships and companies mainly fulfilling the need for business-related co-operation. As a result of greater leisure time (has Alvin Toffler’s 1970 Future Shock prediction come true?), the number of purely recreational activities and associated societies has grown. The coverage is wide-ranging, and societies are associated with sports and games, cultural activities, arts, crafts, and other recreational and occupational activities.

In recent articles I discussed “The ‘Pecuniary Gain’ Conundrum in Society Law” (Issue 197, 16-11-2012) and “What is a non-profit organisation?” (Issue 195, 5-10-2012). However, a charitable entity (therefore quintessentially a “not-for-profit”) can earn income from running a business, as illustrated by the Sanitarium organisation in New Zealand, a business conducted using a charitable structure established by a religious and charitable organisation. Other examples include a drapery, furnishing, and warehousing business (Commissioner of Inland Revenue v Carey’s (Petone and Miramar) Ltd [1963] NZLR 450 (CA)), a construction business (Calder Construction Co Ltd v Commissioner of Inland Revenue [1963] NZLR 921), an automobile and engineering parts business (Commissioner of Inland Revenue v NTN Bearing-Saeco (NZ) Ltd (1985) 9 TRNZ 121; (1985) 8 NZTC 5,039), and a statutorily-established community trust running a stadium on commercial principles (Commissioner of Inland Revenue v Wellington Regional Stadium Trust [2006] 1 NZLR 617 (CA)).

Societies and professional sport

Section 5(2A), Charities Act 2005, provides that “The promotion of amateur sport may be a charitable purpose if it is the means by which a charitable purpose referred to in subsection (1) is pursued,” i.e. “the relief of poverty, the advancement of education or religion, or any other matter beneficial to the community.”

Sections 4 and 5 of the Incorporated Societies Act make it clear that a society may be formed “for any lawful purpose but not for pecuniary gain,” noting that “Persons shall not be deemed to be associated for pecuniary gain merely by reason of any of the following circumstances, namely: (a) That the society itself makes a pecuniary gain, unless that gain or some part thereof is divided among or received by the members or some of them: … (d) That any member of the society derives pecuniary gain from the society by way of salary as the servant or officer of the society: (e) That any member of the society derives from the society any pecuniary gain to which he would be equally entitled if he were not a member of the society: …” I acknowledge, immediately, that by virtue of section 5, a society promoting amateur sport may lawfully make a pecuniary gain by being involved in professional sport, but the general public might find it surprising of a “not-for-profit.”

The era of professional sport, therefore, raises interesting philosophical questions as to whether a sports body encompassing both amateur and professional sport should be a society under the Incorporated Societies Act. By raising this question I am not espousing any particular point of view, but rather highlighting what I see as a tension between the common perception of a not-for-profit society and a society that controls sport, both amateur and professional. In the available space I cannot examine a wide range of sports, so I have chosen just two prominent New Zealand sports.

New Zealand Cricket

New Zealand Cricket Inc. is incorporated under the Incorporated Societies Act, but not registered under the Charities Act (although associated entities are). According to the accounts of NZ Cricket to 31 July 2011 (the latest available on the www.societies.govt.nz website at the time of writing this article):

  • “New Zealand Cricket Inc is exempt from income tax as a promoter of amateur sport under section CW 46 of the Income Tax Act 2007,”
  •  In that year, of total income of $44,642,798 the society received $41,140,135 in “Commercial Revenue,” $1,078,000” in “Government Grants,” $1,200,000 from “Major Association Professional Revenue,” and $1,194,340” in “ICC Donations.” Including “Other Income” the total was $44,920,082 (the previous year $42,998,625),
  • In that year, total expenditure was $27,709,320 (the previous year $32,985,218), and
  • During that year “a subsidiary company, Cricket Promotions FZ-LLC, was formally deregistered in Dubai …” while on 6 January 2011 “a new subsidiary company, NZ Cricket USA Corporation, was incorporated in the USA” … “to support New Zealand Cricket Inc.’s joint venture investment in Cricket Holdings America.”

New Zealand Rugby Union

The New Zealand Rugby Union Incorporated is incorporated under the Incorporated Societies Act, but not registered under the Charities Act (although associated entities are). According to the accounts of the NZRU to 31 December 2011 (the latest available on the www.societies.govt.nz website at the time of writing this article):

  • The society “is exempt from income tax under section CW 46 of the Income Tax Act 2007,”
  • In that year, of total income of $101,492,000 (the previous year $93,231,000) the society received $79,948,000 in “Commercial Income” and $4,395,000” in “Fixtures and Tours Income,” and
  • In that year, total expenditure was $104,519,000 (the previous year $96,227,000).

Professional sport and not-for-profit societies

Neither NZ Cricket nor the NZ Rugby Union are registered as charities, and that seems consonant with s 5(2A), Charities Act, as their purposes appear to extend beyond merely promoting “amateur sport.” Both societies have, however, obtained exemption from income tax under section CW 46, Income Tax Act, as being “established mainly to promote an amateur game or sport,” that “the game or sport is conducted for the recreation or entertainment of the general public,” and that “no part of the funds of the … association is used or is available to be used for the private pecuniary profit of a member, proprietor, shareholder, or associate of any of them.”

Given their involvement in professional sport and their apparently healthy financial positions, the accounts of both the NZ Cricket and the NZ Rugby Union challenge at least my perception of what should reasonably be regarded as a not-for-profit society.

This is one of a series of articles on societies and charitable trusts (originally published in the NZ Lawyer magazine) by Mark von Dadelszen, a Hastings lawyer and author of Law of Societies, 3rd Edition, 2013. If any reader has examples of issues that have arisen or questions about societies or charitable trusts that might be a suitable subject for one of these articles please contact Mark at mark.vondadelszen@bvond.co.nz.