Charities Act Review and importance of having input into process - Legalwise Seminars

Sue Barker, the Director of Sue Barker Charities Law and Charities Act Review Core Reference Group member, discusses the review and why it is essential that people participate in the process, in the first of a two-part series for Legalwise News. A discussion document on the review is expected to be released early next year, she writes. 

Those who do not remember history are condemned to repeat it – what is the problem the Charities Act was trying to fix?

Prior to the enactment of the Charities Act 2005, there was no requirement, nor any formal process, for registering charities. Even the Inland Revenue Department (“IRD”) did not have a complete list of entities claiming the charitable income tax exemptions, because the New Zealand tax system operates on a self-assessment basis, which meant it was possible to claim the tax exemptions without IRD’s knowledge.

The reporting requirements for charities were also minimal under the pre-Charities Act regime. IRD could require charities to furnish an income tax on request under section 58 of the Tax Administration Act 1994. However, this power was rarely used and charities were generally not required to file income tax returns.

Charities structured as charitable trusts were not required to file any annual financial statement, even if their trustees were incorporated as a board under the Charitable Trusts Act 1957 (”CTA”). Charities structured as incorporated societies were required to file an annual financial statement with the Registrar of Incorporated Societies under section 23 of the Incorporated Societies Act 1908, setting out basic financial data. However, no accounting standards governed this reporting and a wide variety of practices were used.

As a result of the lack of registration and reporting, there was also very little monitoring of whether charities continued to pursue their charitable purposes over time. Complaints about charities could be made to the Attorney-General, who has power to inquire into charities under section 58 of the CTA. The Attorney-General, or a member of the public, can also commence proceedings to enforce a charitable trust, or to have a scheme formulated under section 60 of the CTA. However, in practice, these mechanisms were not proving effective, because neither the Attorney-General nor members of the public had any means of obtaining information about the operation of existing trusts or indeed any means of ensuring knowledge of their existence. Similarly, although IRD has wide powers of audit, there was generally no information available to IRD on which it could make a decision to conduct an audit. Charitable trusts in particular were considered to be “uniquely free from supervision” (see the 1979 Report of the Property Law and Equity Reform Committee into the Charitable Trusts Act 1957 at page 2, and IRD, Policy Advice Division, Tax and Charities: A government discussion document on taxation issues relating to charities and non-profit bodies, June 2001, paragraphs 7.4 and 7.5).

The lack of registration, reporting and monitoring of charities meant that the public had “no protection against charities in New Zealand”: anyone could seek to raise funds for “almost any appeal one cares to name”; the ordinary citizen had no means of finding out the legitimacy of the appeal, or of what happened to the funds raised (1979 report, page 7).

As a result, the integrity and reputation of the entire charitable sector was vulnerable to the inevitable presence of a small number of rogue charities. By the time the original Charities Bill was introduced into Parliament in 2004, there was overwhelming support within the charitable sector for a Charities Commission to be established to address this concern.

The original Charities Bill

However, despite having been many years, even decades, in gestation, the original Charities Bill that was introduced in 2004 was widely regarded as fundamentally flawed. For example, it was heavily criticised for having been “conceived…in Treasury, and…designed by the Ministry of Economic Development”,[1] and was almost completely rewritten at Select Committee stage in response to hundreds of submissions.[2] However, unfortunately, the rewritten Bill was not subject to proper consultation. Instead, Ministry of Economic Development officials wrote to approximately 25 selected entities to seek their views on the proposed amendments.[3] The final amendments to the Charities Bill (including further minor, but extensive, changes made by Supplementary Order Paper) were passed through under urgency, with all final stages occurring on one day (12 April 2005). The comment was made in Parliament that “we do not really know what we are passing tonight, or what the implications are”:[4]

Concerns that “fast law does not make good law” were appeased by a clear understanding that the Charities Act would be subject to a comprehensive first principles post-implementation review.[5]

A first principles review

That review was announced by then Minister for the Community and Voluntary Sector, Hon Tariana Turia, in November 2010. The Minister expressed her hope that the first principles review “will help us all to determine whether the existing legislation is fit for purpose and reflects the needs and composition of the charitable sector”. The Minister also wanted to see the review expanded to provide for a “simpler, more cohesive regulatory framework for the wider sector”, noting that the Law Commission was expected to carry out a review of the CTA as part of its review of trust law.[6]

However, before the review had really commenced, Hon Tariana Turia was succeeded as Minister for the Community and Voluntary Sector by Hon Jo Goodhew. A year later, only 4 months after the Charities Commission was controversially disestablished, and precisely 21 minutes after the Court of Appeal handed down its decision in Greenpeace,[7] the new Minister controversially, and without consultation, cancelled the promised review of the Charities Act.[8] The review of the CTA also appears to have been removed from the Law Commission’s work programme.

The Charities Act as passed is replete with unintended consequences. Some of the worst offenders include section 5(3), section 18(3), section 20, section 59, and what is now section 3(b), but there are many others.

To make matters worse, in the 13 years since the Charities Act has been passed, the Act has been subject to a series of amendments which have generally been put forward by Statutes Amendment Bill, and/or rushed through under urgency without proper consultation, often against the strong opposition of the charitable sector. Many of these amendments are also replete with unintended consequences, such as section 5(2A), the disestablishment of the Charities Commission in 2012, section 18(3A), and officials’ attempt to remove charities’ rights of appeal by Statute Amendment Bill in 2015/2016.

Fortunately, Labour and Green members of the 2015 Government Administration Committee were instrumental in removing the latter amendment from the relevant Bill. It also then became Labour Party policy to “prioritise the long-promised review of the Charities Act that National abandoned, beginning with a first principles review of the legislation, including examining, updating and widening rather than narrowing the definition of charitable purpose”.[9] It also became Labour Party policy to consult with the community and voluntary sector on whether the disestablishment of the Charities Commissionand transfer of functions back to the Department of Internal Affairs has resulted in effectiveness and improved services and information for the sector.

This policy formed part of the manifesto that led to the election of the current Government in September 2017. A few weeks later, in November 2017, the new Minister announced that a review of the Charities Act would take place.

The terms of reference

Draft terms of reference for the Charities Act review were circulated to the sector user group (“SUG”) in January 2018. The draft terms were very narrow and the SUG, in good faith, collectively provided comments. Unfortunately, in the second draft of the terms of reference, which were circulated to the SUG in February 2018, most of the SUG’s comments had not been taken into account. The SUG collectively responded that they could not support the terms of reference in their current form and requested that their previous comments be taken into consideration. However, that appears not to have occurred, as the terms of reference that were finalised in May 2018 are in more or less the form the SUG said they could not support. The terms of reference for the review of the Charities Act can be found here: https://www.dia.govt.nz/vwluResources/CharitiesReviewTOR/$file/CharitiesReviewTOR.pdf.

The “frequently asked questions” section of the Department of Internal Affairs’ official Charities Act review webpage includes the following comment:[10]

The review will cover substantive issues and not go back to first principles. A first principles review is not currently needed. The fundamental aspects of the Act, such as a registration system and public access to information about charities, are sound. A first principles review would also be costly and time-consuming. [Emphasis added]

Accordingly, it is fair to say that this review is not the first principles review that was promised and has been sought. In addition, the writer understands the Minister wishes to have the review completed within this term of government, including legislation, meaning that all policy work on the review will need to be completed in a few months’ time.

There is concern that, behind the scenes, officials are pushing for a significantly attenuated review, with a view to increasing their regulatory powers, and most likely charging charities for the privilege; there is concern that this process is occurring, as has so often been the case in the past, without due respect or regard for long-standing concerns held within the charitable sector. The terms of reference appear to be based on an assumption that the Act is already fit for purpose. But that begs the question of what the purpose of the Act is, or should be, an important issue that is currently outside the scope of the review. The original intention of the Charities Act was to provide an information and disclosure regime: a mechanism for the registration, reporting, and monitoring of charities so that members of the public can access sufficient information to enable them to make informed decisions about which charities they wish to support. However, in the hands of a government department, an agency even closer to government than the original Crown agency classification for the Charities Commission that was so resoundingly rejected in 2004, concerns that the regime would instead be used as a means to “colonise and control” the charitable sector appear to be coming to pass.[11]

The discussion document

The writer understands that a discussion document is currently with Ministers for consideration, with a view to being publicly released in February 2019.[12] Members of the Core Reference Group have worked very hard to ensure that charities’ concerns are reflected in the discussion document. However, previous experience, particularly with the terms of reference, gives rise to significant concern that that will not be the case. In fact, there is significant risk that the discussion document will simply reinforce Charities Services’ controversially narrow interpretations of how the Charities Act should be administered, and that this will in turn unduly curtail the possibility for meaningful consultation during the consultation period, currently scheduled for March and April 2019.

At one level, the review is the best offer we have had for 13 years and arguably we should try to make the most of it in the limited time available. However, many of the issues involved in this area of law are complex, and it seems highly unlikely that we will be able to create the world-leading framework of charity law that New Zealand is capable of, and which New Zealand and its charities so desperately need, within a timeframe of only a few months.

There is a saying that in a democracy you get the leaders you deserve. Arguably, you also get the legislation you deserve. It is essential that those involved/concerned with New Zealand’s charities get engaged with the review, and that we collectively try to create the best framework of charity law that we can, even if that means pushing Ministers to take the time needed to carry out the review properly. With no disrespect intended to the Department of Internal Affairs policy team, who have been tasked with carrying out the review, a review team that is genuinely independent of Charities Services would also assist significantly with rebuilding trust.

Sue Barker is the director of Sue Barker Charities Law, a boutique law firm based in Wellington, New Zealand, specialising in charities law and public tax law. Since its founding in 2012, the firm has won a number of awards, including Boutique Law Firm of the Year at the New Zealand Law Awards. Sue is a director of the Charity Law Association of Australia and New Zealand, a member of Charities Services’ Sector User Group, and a member of the Core Reference Group for the Review of the Charities Act. Sue is also a co-author of the text, The Law and Practice of Charities in New Zealand (LexisNexis, 2013), and a contributor to Regulating Charities: the Inside Story (Routledge, 2017), Corporate Governance – A Practical Handbook (2ed) (Wolters Kluwer, 2016), and Balancing Work and Life: a Practical Guide for Lawyers (LexisNexis, 2015). In 2016, Sue was made an Honorary National Life Member of the National Council of Women of New Zealand Incorporated for her work assisting the Council to regain their charitable registration. Examples of Sue’s specific experience can be found here.

Contact Sue at susan.barker@charitieslaw.co or connect via LinkedIn or Facebook