What is a non-profit organisation?

On the most recent figures available, as at October 2005, there were some 97,000 non-profit organisations in New Zealand.  In contrast, there are currently just over 25,000 charities registered with the Charities Commission. While what constitutes a charity is generally reasonably well-understood, the concept of a non-profit organisation and what benefits there may be in obtaining recognition as a non-profit organisation are generally less clear to most people.

Statistics New Zealand suggests (see http://www.charities.govt.nz/faqs/general/) that a non-profit organisation must be:

• Organised, to the extent that it can be separately identified,
• Not-for-profit and not distribute any surplus that may be generated to those who own or control it,
• Institutionally separate from government (that is, private),
• Self-governing (that is, in control of its own destiny), and
• Non-compulsory (that is, membership and participation are voluntary).

The IRD’s Perspective

The Inland Revenue Department states (at http://www.ird.govt.nz/non-profit/np-glossary/np-glossary.html) that a non-profit organisation is any society, association or organisation (incorporated or not):

• that is not carried on for the profit or gain of any member, and
• whose rules do not allow money, property or any other benefit to be distributed to any of its members.

While these definitions are helpful the concept of a non-profit organisation may actually be best understood by contrasting a non-profit with charitable organisation. The Inland Revenue Department states (at http://www.ird.govt.nz/non-profit/np-glossary/np-glossary.html) that a charity is an organisation (incorporated or not) that carries on charitable activities or exists exclusively for charitable purposes, and notes that some charities may be registered by the Charities Commission.

Under s 5(1), Charities Act 2005, “charitable purposes” include:

• the relief of poverty,
• the advancement of education,
• the advancement of religion, and
• activities for the benefit of the community.

The last category is the least understood, and also the hardest to define.

Discussion

Non-profit organisations do not necessarily fall within the defined charitable purposes and may be unable to meet other requirements under the Charities Act for registration as charities.  Non-profit status does not, therefore, equate to charitable status.  The reverse of this, however, is true: charitable status necessarily equates to non-profit status (see http://www.charities.govt.nz/faqs/general/).

Tax Benefits of Non-Profit Status and Donee Organisations

The main practical difference between a charity and a non-profit organisation is found in tax administration.  While charities registered with the Charities Commission are automatically tax-exempt, non-profit organisations are not.

Non-profit organisations:

• Are partly exempt from income tax, although an application in writing must be made  to obtain this exemption (see table below) (there is no prescribed form, but for details on how to apply, see http://www.ird.govt.nz/non-profit/np-gst/exemption/),
• May qualify for a $1,000 income deduction (meaning the first $1,000 of income is free from income tax) (see http://www.ird.govt.nz/non-profit/np-gst/exemption/),
• Are required to register for GST if they have an annual turnover of more than $60,000 and run a taxable activity (see http://www.ird.govt.nz/non-profit/np-gst/register-gst/),
• May register for GST in other circumstances (see http://www.ird.govt.nz/non-profit/np-gst/register-gst/), and
• If GST registered, may be able to claim input tax credits on expenses that are either liable or not liable for GST (see table below), but not for expenses exempt from GST (see http://www.ird.govt.nz/non-profit/np-gst/liable-gst/).

Donee Organisations

Donee organisation status means (see http://www.ird.govt.nz/resources/8/2/820319004ba3d849841dbd9ef8e4b077/ir255.pdf, pages 27-30.) that:

• Individuals who give cash donations of $5 or more to the organisation may claim a tax credit of 33.33% of the donation,
• Companies may claim a donation deduction for cash donations, and
• Māori authorities may claim deductions for cash donations they make to a Māori organisation or donee organisation.

Without needing to apply to the Inland Revenue Department, a charity registered with the Charities Commission is exempt from income tax and has a gift duty exemption (see http://www.ird.govt.nz/resources/8/2/820319004ba3d849841dbd9ef8e4b077/ir255.pdf, page 29).

Other non-profit organisations may also apply for “donee organisation status” (see http://www.ird.govt.nz/resources/8/2/820319004ba3d849841dbd9ef8e4b077/ir255.pdf, page 30).  To be eligible, such a non-profit organisation must apply its funds wholly or principally for charitable, benevolent, philanthropic or cultural purposes in New Zealand. 

What income is liable for income tax and GST

(see http://www.ird.govt.nz/non-profit/np-gst/liable-gst/)

*  The tax treatment of koha depends on what it is. See the booklet Payments and gifts in the Mäori community (IR278).
** Liable in certain situations.

Clarity?

What is a non-profit entity remains somewhat hard to define, and the absence of an application form to obtain IRD acceptance of an organisation as a non-profit entity does not make life particularly easy.

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.