Did the Charities Act change the law?

In the first High Court decision appealing a determination by the Charities Commission that an entity was not charitable under the Charities Act 2005, the judgment observed that “s 5(1) of the Act codifies the common law and it is in the common law that the answer in this case is to be found” (Travis Trust v Charities Commission, High Court, Wellington Registry, CIV-2008-485-1689, 3 December 2008, para [22]).  That decision therefore suggests that the Charities Act did not change the law on what is or is not a charitable society or trust.

The judgment in Re the Grand Lodge of Antient Free and Accepted Masons of New Zealand, High Court, Wellington Registry, CIV-2009-485-2633, 22 September 2010, another appeal from a Charities Commission ruling, noted that:

“[7] Until recently, a body’s status as a charity was determined by the Commissioner of Inland Revenue.  It was his responsibility because status as a charity had significant taxation benefits.

“[8] The Charities Act 2005, which came into force in July 2008, changed that.  It established a Charities Commission and a charities register.  The advantages available under the taxation legislation were thereafter to be accorded only to bodies that were registered by the Charities Commission as charities.  However, the new Act did not change the tests for determining a charity. It only changed the decision maker.”

Ultimately, of course, it was the Courts that determined whether the Commissioner of Inland Revenue was right or wrong in his determinations, just as is the case under the Charities Act where appeals are heard by the High Court.

Charitable status – recognition and removal of recognition

There are maxims that law or justice are “found in the interstices of procedure,” and the Charities Act changed the procedures both for recognition of a charity, and also for the removal of that recognition.

Prior to the Charities Act, charities sought the revenue law benefits of charitable status by applying to the Inland Revenue Department for acceptance as a charity.  IRD acceptance was almost assured if an organisation’s objects were carefully drafted to conform to the categories of charity under Statute of Elizabeth I (also known as the Charitable Uses Act 1601 or the Poor Relief Act 1601), as interpreted in Income Tax Special Purposes Commissioners v Pemsel [1891] AC 531 at 583; [1891] All ER Rep 28 at 55–56.  Applications were generally assessed by IRD clerical staff, with only more difficult applications being referred to legally qualified staff.  Once charitable status was obtained, it was unlikely to be lost unless, perhaps, the charity was audited by the IRD.

The process for registration with the Charities Commission appears to be more rigorous, with not only the entity’s purposes being examined but also the way in which the purposes are intended to be realised subject to examination.  That information is obtained initially through a “tick the boxes” application form, but the Commission often seeks further information.  Then, once charitable registration with the Commission is obtained, it may be lost as a result of examination of the entity’s annual report lodged with the Commission or after a Commission investigation (which may be undertaken as a result of a complaint or as part of the Commission’s monitoring programme).

Charities Commission registration and deregistration

The Commission may decline to register a charity if not satisfied that its purposes are charitable, or may deregister a registered charity if it concludes it should not have been registered, that its purposes have ceased to be charitable, that there has been a significant or persistent failure to met obligations under the Charities Act, or that it or one of its officers has been guilty of serious wrongdoing in relation to the entity.

The Commission website (in mid-February) listed 20 entities deregistered between August 2009 and September 2010.  This list does not include those deregistered for other reasons such as failure to file annual returns.  A random check of the 20 listed decisions indicates that the decisions vary in length from 7 to 21 pages, and are characterised by a careful analysis of the facts relating to an entity, its purposes and activities, and applicable case law from a wide variety of common law jurisdictions.

Overtly political purposes – charitable?

It has long been accepted that where an entity’s purposes are overtly political it will not be accepted as charitable (for a New Zealand authority, see Re Collier (dec’d) [1998] 1 NZLR 81 at 91-92). The new regime under the Charities Act 2005 was discussed in M Gousmett’s article “Charities and political activity” [2007] NZLJ 63 which was critical of the assumption that advocacy of political change cannot be charitable. The philosophical dilemma facing the Courts is illustrated in Justice Hammond’s judgment in Collier:

“The conventional view in the British Commonwealth is that charitable trusts to change the law itself are invalid. This is because, to use Dixon J’s words, “[a] coherent system of law can scarcely admit that objects which are inconsistent with its own provisions are for the public welfare” (Royal North Shore Hospital of Sydney v The Attorney-General for New South Wales (1938) 60 CLR 396, 426). And see, to similar effect, Molloy v Commissioner of Inland Revenue [1981] 1 NZLR 688 (CA); National Anti-Vivisection Society v IRC [1948] AC 31 (HL).

“That another viewpoint is possible is demonstrated by the American case law. Bogert, The Law of Trusts (5th ed., 1973) suggests that the more modern United States cases “have distinguished between attempts to improve the law and subversion or violation of it, and have held that trusts to secure peaceful and orderly change are in the public interest” (p236). He cites, as one instance, an Illinois appellate case, Garrison v Little (75 Ill App 402) upholding a charitable trust to secure the passage of laws giving women the right to vote.

“It may be that the Dixon thesis is, with respect to the high authority of that Judge, beginning to wear thin. Is it really inappropriate for a Judge to recognise an issue as thoroughly worthy of public debate, even though the outcome of that debate might be to lead to a change in the law? After all, it is commonplace for Judges to make suggestions themselves for changes in the law today, whether in judgments, or extra-curially. …”

National Council of Women – deregistration

The decision to deregister the National Council of Women of New Zealand Incorporated is controversial. Whether one agrees with it or not, the decision demonstrates the Commission’s methodical approach:

  • The factual background sets out the history of the NCWNZ, its constitutional objects, and the course the investigation followed.
  • The issues are defined, and in this instance “the key issue for consideration is whether the Society is established and maintained exclusively for charitable purposes, as required by section 13(1)(b)(i) of the Act. In particular:
    “(a)     Are all of the Society’s purposes charitable?
    “(b)     If any of the Society’s purposes are non-charitable, are those purposes ancillary to a charitable purpose?”
  • The decision then sets out the law on the deregistration of charitable entities by reference to ss 5, 13, 31, 32, 33 and 35, Charities Act.
  • To assess whether the NCWNZ was established and maintained exclusively for charitable purposes, the Commission “considered the Society’s rules, information provided in the Society’s financial statements, information provided by the Society including Canadian and United Kingdom based material, and information available on the Society’s website.” The decision records that:
    “24.    Pursuant to section 50(2) of the Act, the Commission may examine the activities and proposed activities of the charitable entity, the nature, objects, and purposes of the charitable entity, and the results and outcomes achieved by the charitable entity. The Commission has considered these matters in determining whether the Society remains qualified to be registered.
    “25.    Further, case law provides that where an entity’s constitution does not indicate with clarity its main object(s), the objects are to be assessed in tandem with the entity’s activities. As purposes 1 to 4 in Rule II are broadly worded, the Commission considers that the Society’s activities must be taken into consideration. The Commission considers purpose 5 to be ancillary to the preceding purposes.”
  • The NCWNZclaimed that its purposes were charitable because it sought the relief of poverty, the advancement of education, the advancement of religion, and other matters beneficial to the community, so the Commission proceeded to consider whether the NCWNZwas charitable under these four heads of charity. After analysis of available factual material, submissions received, and case law, the Commission’s conclusions were:
    “32.   The Commission does not consider that the ‘natural and probable consequence’ of ‘ensuring the needs and rights of women are represented, and remain a community and government priority’ would be the relief of poverty; therefore, the relationship is too remote.
    “40.    The Commission considers the ‘research’ and ‘discussion’ would not allow the Society to fulfil its stated objects to “to serve women the family and the community at the local, national and international level”,’ but instead are preliminary to the Society’s primary goal of influencing policy. The ‘research’ and ‘discussion’ cannot be considered an educational purpose of the Society.
    “43.    The Commission considers that [the NCWNZ’s] activities do not ensure that a religious faith is passed on to others; therefore, this does not amount to the advancement of religion. However, these activities may be charitable under “other matters beneficial to the community” because they are likely to promote relationships between religious denominations.
    “46.    The Society has stated that, “our methodology supports the work for betterment, and this work does include alleviating poverty, and a multitude of areas which are of other benefit to the community.” However, the Society has not provided any further evidence that supports this statement. Therefore, the Commission has insufficient evidence to conclude that the Society’s purposes are analogous to the spirit and intendment of the purposes set out in the Preamble to the Statute of Elizabeth.”
  • The Commission then considered the political advocacy role of the NCWNZ (“purposes directed at furthering the interests of any political party; or securing or opposing any change in the law or in the policy or decisions of central government, local authorities or other public bodies, whether in New Zealand or abroad.”):
    “75.    The Commission acknowledges that where a Society carries out political advocacy in order to further a charitable purpose, this would be considered ancillary to that charitable purpose, for example, where a Society set up to provide child health care makes presentations to legislative or government committees in order to assist children and families in need.
    “76.    The Society submits that it is involved in political advocacy, but that this is a tool as a means of furthering or supporting its primary purpose of promoting progress for women and not a purpose of the Society.
    “77.    However, information provided on the Society’s website and in its submissions indicates that the Society is ‘urging’ and lobbying the government to change the laws on a wide range of issues that are not restricted to furthering particular charitable purposes, and is not ancillary to any charitable purpose or activity. The Commission is of the view that the object of the society, “to promote political change is so pervasive and predominant as to preclude its severance from other charitable objects.”
    “78.    The Commission therefore considers that a main purpose of the Society is to advocate for changes in the law or the policy or decisions of central government. This purpose is not ancillary to a charitable purpose, and according to the case law cited above, cannot be considered to provide public benefit.”

    “84. Some of the activities undertaken by the Society under Rule II purposes 1 to 4 may be charitable, but the Society also has a main purpose of advocating for changes in the law or the policy or decisions of central government, which is not charitable. The Commission therefore concludes that the Society does not have exclusively charitable purposes.”
  • Finally, the Commission declined to defer deregistration pending a review of the NCWNZ’s constitution, concluding “that it is in the public interest to remove the Society from the register as this will maintain public trust and confidence in the charitable sector” consistent with its s10(1)(a) obligations.

The deregistration decision has attracted wide publicity, and the potential for other organisations to be deregistered or seek changes to the law (for instance, the Sensible Sentencing Trust) which advocate for law changes is likely to provoke further debate. The NCWNZ has apparently requested the Ombudsmen to investigate the Charities Commission deregistration decision, but has apparently (and somewhat surprisingly) not availed itself of the right to appeal the Commission’s decision to the High Court under section 59, Charities Act.

Judicial postscript – 1

While the NCWNZ decision contains no analysis of sections 5(3) and (4), subsequent to that deregistration decision, two New Zealand High Court decisions have confirmed that assessing whether a purpose is “ancillary” under section 5(3) and (4) involves a quantitative and qualitative assessment (Re the Grand Lodge of Antient Free and Accepted Masons of New Zealand, at paragraph [51] and Re Draco Foundation (NZ) Charitable Trust, High Court, Wellington Registry, CIV-2010-485-1275, 2 February 2011, at paragraph [14]).

Judicial postscript – 2

In December 2010 the High Court of Australia issued a decision (AidWatch Inc v Commissioner of Taxation [2010] HCA 42) which, if followed in New Zealand, would call into question the validity of the Commission’s NCWNZ decision.  The purpose of AidWatch is to promote the effectiveness of international aid, particularly by challenging and advocating change to Government aid polices.  The AidWatch decision was made by a 5:2 majority, but will be binding on Austrlaian Courts, and could be highly persuasive in New Zealand.

The majority AidWatch judgment discusses many decisions where it has been held that entities established to advocate changes in the law or government policy are not charitable, summarising the principles ascertainable from those cases:

  • A purpose contrary to the established policy of the law cannot be charitable,
  • Even if a purpose is not contrary to the established policy of the law, that purpose must have the real or imputed intention of contributing to the public welfare,
  • When the main purpose of an entity is “agitation” for legislative or policy changes, with respect to religion, poor relief, or education, it is “difficult” to conclude that such a purpose contributes to the public welfare, and
  • The source of the difficulty is the apparent paradox in a “coherent system of law” of treating as for the public welfare “objects which are inconsistent with [the law’s] own provisions.”

The majority held that under the Constitution of Australia “agitation” for legislative and political changes are a part of the operation of constitutional processes which contributes to the public welfare (contrary to the conclusions in the older cases).  While we have no written constitution, I believe the same arguments can be mounted in any deomocratic country.  The Court majority decided that, by generating public debate about the best ways of relieving poverty through foreign aid, Aid/Watch was charitable because its activities contributed to the public welfare (being a purpose beneficial to the community, the relief of poverty), and that its “political” activities generated public debate concerning the efficiency of foreign aid directed to the relief of poverty.

Judicial postscript – 3

The AidWatch decision was raised in argument in the Draco case, another unsuccessful appeal from a Charities Commission refusal to register a trust, but the Court held (at paragraph [58]) that “contrary to the law of Australia New Zealand does have, as part of its law, a general doctrine which excludes from charitable purposes, political objects.”

Crystal ball-gazing

There are two major impediments to the success of an argument based on the AidWatch decision, excluding political purposes from charitable recognition, andsection 5(3) of the Charities Act, referred to in paragraph 17 of the Commission’s NCWNZ decision “Section 5(3) of the Act provides that any non-charitable purpose must be ancillary to a charitable purpose.”  This sub-section and sub-section (4), both referred to in Draco, read as follows:

“(3)  To avoid doubt, if the purposes of a trust, society, or an institution include a non-charitable purpose (for example, advocacy) that is merely ancillary to a charitable purpose of the trust, society, or institution, the presence of that non-charitable purpose does not prevent the trustees of the trust, the society, or the institution from qualifying for registration as a charitable entity.

“(4)  For the purposes of subsection (3), a non-charitable purpose is ancillary to a charitable purpose of the trust, society, or institution if the non-charitable purpose is—

(a)       ancillary, secondary, subordinate, or incidental to a charitable purpose of the trust, society, or institution; and
(b)       not an independent purpose of the trust, society, or institution.”

The NCWNZ decision and the Grand Lodge and Draco High Court decisions must mute the potential benefits of reference to the AidWatch decision in the New Zealand context.

While the Charities Act did not change the law on what is or is not a charitable purpose, the way the Charities Commission is approaching its functions in registering and deregistering charities has altered perceptions and, arguably, the law.  My next article will examine High Court decisions on appeal from Charities Commission decisions to decline to register entities promoting economic development.  The AidWatch decision, despite section 5(3) and (4) of the Act and the Grand Lodge and Draco High Court decisions, may yet provoke further reconsideration of the philosophical basis for determining what is or is not a charitable purpose.

This is one of a series of articles on societies and charitable trusts 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.