“Ten election policies for charities for 2023 with Sue Barker” – Policy 6: protect charities running businesses

Sue BarkerWhile floods and cost-of-living issues justifiably dominate our focus, behind the scenes, political parties continue to develop their manifestos in the lead-up to this year’s general election. Sue Barker, Director of Sue Barker Charities Law, joins us for a series on 10 election policies for charities for 2023. In the fifth part of the series, Sue shares her insight on protecting charities that run businesses. She will also be presenting in March at the upcoming Charities and Not for Profits Update.


Policy 6: protect charities running businesses

Policies 2 to 5 have focused on allowing more capital to flow to important areas where the impact would be multiplied. In that context, we ask that political parties please resist calls to remove charities’ tax exemption for business income (the spectre of which has been raised by the proposal to require charities to “report the reason for their accumulated funds” in their annual returns,[1] presumably as a precursor to imposing tax on them).

The arguments normally raised in this context appear to be based on an assumption that charities running businesses have a “competitive advantage” over their for-profit counterparts. However, when the issue of competitive advantage is actually analysed, rather than merely assumed, it is found not to exist:[2] the tax exemption for charities’ business income has no practical effect on the competitiveness of for-profit businesses, and instead merely offsets the significant disadvantages charities face in accessing capital.[3]

The disadvantages that charities face in terms of accessing capital primarily arise due to the “non-distribution constraint” (otherwise known as the “destination of funds” principle): all charities must, by definition, be not-for-profit entities, which means that, legally, all their funds must forever be destined for their stated purposes and not for the private pecuniary profit of any individual. It does not appear to be widely understood that the non-distribution constraint prevents charities from paying private returns to investors like for-profit companies can: for-profit companies that perceive the existence of a competitive advantage always have the option of restructuring as charities; however, doing so would mean forever forfeiting their ability to withdraw private returns from the business; it would also mean publicly disclosing their financial and non-financial information on the charities register under the stringent transparency and accountability requirements applicable to registered charities.

Some comparable jurisdictions have given in to pressure from vested commercial interests and introduced rules to tax charities’ unrelated business income (or prevent charities from running unrelated businesses altogether) to address such a perceived competitive advantage. However, their experience demonstrates that the resulting rules are fraught with difficulty: there is no bright line between a “related” or “unrelated” business, and attempts to draw one create a complex set of rules that are expensive to comply with and administer; the significant compliance, administration and litigation costs that follow distract charities from their charitable purposes, forcing them to divert scarce charitable funds into endeavouring to comply with ill-fitting rules that cut across the “destination of funds” principle,[4] all the while producing no additional revenue.[5] The net result is simply to place unnecessary barriers in the way of charities using business methods to raise much-needed funds for their charitable purposes.

Removing the income tax exemption for charities’ business income is not the answer to for-profit companies’ concerns about their profitability. Charities running businesses are by definition social enterprises. In the face of increasing costs and increasing demands for service, yet pressures on volunteers and revenue, we should be encouraging charities to engage in business/social enterprise activity, to help them diversify their income streams, reduce dependency on government funding and donations, and work towards self-sustainability.


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 member of Charities Services’ Sector 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 a number of texts, including Charity Law: Exploring the Concept of Public Benefit (Routledge, 2022) and Regulating Charities: the Inside Story (Routledge, 2017). 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 with charities law issues. In 2019, Sue was awarded the New Zealand Law Foundation International Research Fellowship Te Karahipi Rangahau ā Taiao, New Zealand’s premier legal research award, to undertake research into the question “What does a world-leading framework of charities law look like?”. Her report Focus on purpose was released in April 2022 making 70 recommendations for charities law reform in Aotearoa New Zealand”. More information about Sue and the research can be found at www.charitieslaw.co and www.charitieslawreform.nz
Contact Sue at susan.barker@charitieslaw.co or connect via LinkedIn

[1] Hon Priyanca Radhakrishnan Full list of proposed changes to the Charities Act 2 June 2022: <www.beehive.govt.nz/release/charities-act-changes-benefit-nz-communities>.

[2] A competitive advantage was assumed, but not analysed, by the Tax Working Group and by officials in their the background paper on charities, as well as by the OECD Tax Policy Studies unit in their 2020 Taxation and Philanthropy report. See the discussion in S Barker Focus on purpose – what does a world-leading framework of charities law look like? [2022] NZLFRR chapter 5.

[3] Australia Industry Commission; Australian Productivity Commission Contribution of the Not-for-Profit Sector 11 February 2010; DR K Henry AC, G Smith, Dr J Harmer, H Ridout, Professor J Piggott Australia’s Future Tax System – Final Report 2 May 2010 (Henry Review). See also Ann O’Connell Taxation and the not-for-profit sector globally: common issues, different solutions in M Harding (ed) Research Handbook on Not-for-profit law (Edward Elgar, UK, 2018) 388 at 397.

[4] See, for example, the charitable art museum example: a shirt with a print of an art work held by the museum (related) would be taxed differently from a shirt with a print of an art work held outside the museum (unrelated). Where facilities and staff are used for both related and unrelated purposes, both income and expenses must be allocated, which can be difficult to determine, verify and regulate. See Myles McGregor-Lowndes, Matthew Turnour, Elizabeth Turnour Not for profit income tax exemption: is there a hole in the bucket, dear Henry? 26 Australian Tax Forum 601 at 626, referring to Internal Revenue Service Guidance Tax on Unrelated Business Income of Exempt Organizations (Publication 598 (03/2010), United States Department of the Treasury, March 2010) and Thomas Kelley Rediscovering Vulgar Charity: A Historical Analysis of America’s Tangled Nonprofit Law (2005) 73 Fordham Law Review 2437, 2475 and the citations therein.

[5] The rules are ineffective at generating revenue: see OECD Tax Policy Studies Taxation and Philanthropy (2020) 27 (OECD Publishing, Paris) at 31.