For years, Sanitarium Health Food Company, owned by the Seventh-day Adventist Church, has benefited from a tax exemption on the profits it makes from selling its breakfast products, like Weet-Bix. This advantage puts Sanitarium ahead of its competitors in the breakfast food industry. However, this situation could soon change.
Under New Zealand’s current tax laws, charities are allowed to run businesses if the profits are reinvested into their charitable activities and not for personal gain. This has resulted in millions of dollars in tax revenue being lost to the government every year, as charities enjoy tax exemptions on the profits they make. In December, Finance Minister Nicola Willis proposed new rules for charities, and changes to the tax system are expected to be revealed in the upcoming Budget. According to Willis, there was an estimated NZ$2 billion in profit within the charitable sector that wasn’t taxed.
Considering this, my upcoming research, set to be published later this year, will examine the fairness of the current tax framework that grants exemptions to charities while they compete with for-profit businesses. It’s essential to find the right balance between supporting legitimate charitable efforts and preventing tax benefits from being abused, ensuring a fair playing field in the tax system. My findings indicate that New Zealand’s current tax exemption system is neither fair nor equitable. In fact, it’s overdue for a change.
New Zealand’s charity laws are designed to support organizations that operate for the public good, helping to relieve the government of some of its responsibilities, such as providing welfare services and supporting disadvantaged groups. A report by the Tax Working Group, which reviewed New Zealand’s tax system between 2017 and 2019, estimated that around 30% of registered charities were involved in business activities, such as operating second-hand stores. For a charity to qualify for tax exemptions, any profits made from these activities must be reinvested into the organization’s charitable work. Historically, the justification for these tax breaks has been that charities work toward the greater good of society, and these concessions help offset the challenges they face in raising funds.
However, when charitable organizations are allowed to operate in the same space as for-profit businesses, the system risks breaching the principle of horizontal equity. This principle ensures that taxpayers in similar positions are treated equally. When charities focus more on private commercial activities rather than their public purpose, it becomes clear that tax exemptions should be limited. Offering tax exemptions comes at a cost to the government, as it forgoes potential tax revenue. To meet its financial goals, the government may need to raise money from other sources, such as increasing tax rates on non-exempt businesses and individuals.
Looking at international examples, New Zealand can learn from how other countries handle tax exemptions for charities. In the United Kingdom, charities are not allowed to undertake commercial trading activities that are unrelated to their charitable purposes if they want to remain exempt from income tax. This policy ensures that commercial activities are not unfairly advantaged by tax breaks. Similarly, in the United States, income from “unrelated business activities” is taxable, ensuring that tax exemptions align with broader tax and social welfare policies. Meanwhile, in Australia, charities can engage in commercial activities, but the revenue generated must support their charitable purposes.
Charities also need to take more responsibility for their operations. Stricter regulations and compliance measures are essential to prevent misuse of tax exemptions that benefit a select group or individuals. Given that other countries like the UK and Australia have recently redefined the concept of charitable purposes, it is clear that New Zealand’s review of charitable tax exemptions is long overdue. It’s time to ensure that charitable organizations continue to fulfil their public duties without unfairly competing with the for-profit sector. -by Ranjana Gupta, Senior Lecturer at AUT
