Charities getting million of dollars in tax breaks need to be more open about what they do with our money, says a former insider

Photo / File
Photo / File

It is tempting to describe Dr Michael Gousmett as that rare beast - a poacher-turned-gamekeeper. But in the game of shadows that is the charities sector even that description begs clarification.

Gousmett has been involved with charities for a quarter of a century since first working for the Pacific Leprosy Foundation. That got him interested in the history of charity, the value to society of volunteerism and altruism; what The Economist termed "the glue of society". And that curiosity led to university, a Phd (on tax and charity) and to become something of a de facto inspector-general of charities.

He is dogged in his research and resolute in his call for stronger regulation to provide a leap in accountability for a sector that is worth $14.7 billion and benefits from tax exemptions of up to $400 million plus $200 million in rebates on donations.

It's not that he thinks all charities may be gaming the system - he told theHerald, for example, that good community work is done by many elite private schools that claim the tax break, and described the Royal Foundation for the Blind as "the gold standard" in terms of cost of operation and benefit to the community.

His beef is that you just can't tell, so opaque is the business of giving.

Gousmett's second bone of contention is that it shouldn't take a complex forensic exercise to check whether the 26,000 registered charities deliver value for what is effectively a taxpayer-funded subsidy. The tax exemption should come with an obligation to account in a meaningful way that is still not there, he says.

An epiphany of sorts came during the year before the Charities Act 2005 saw a Charities Commission set up to oversee the sector. When he asked to see the accounts of Dunedin's only private surgical hospital, Mercy, he was refused because he was "not a member". The same year a church minister told him that the last thing they wanted was for the Crown to know how wealthy they were. "That was an initial alarm bell," says Gousmett.

It seemed many charities, once they received money, thought it was nobody else's business. Gousmett has since become something of a sharpshooter, going beyond the basic information held by the commission to organisations' own reports and firing off tricky questions.

It is generally accepted that gifts and bequests as well as any income from businesses within the charity is income. "The question then becomes, how much flows out on charitable activity and what is left? And if you have money left, let's ask how much you might be paying if you were paying tax? Then you get a number and that's when I start saying well, hang on a minute, is that a good deal for society?"

He cites the complex structures of some charities, asks why it is necessary and wonders whether it could be "a Penny Hooper-type tax avoidance arrangement", a reference to a court decision that ruled illegal an arrangement by two surgeons to reduce tax liability.

Gousmett has asked why St George's Hospital, with its charitable objective of altruistic nursing, reported payment to philanthropic causes of what amounted to 0.2 per cent of total income. So it treated 100 patients at subsidised rates and gave 50 mattresses away to the earthquake appeal, he says. "Well whoop-dee-do, their income last year was $44 million, so how generous was that?"

What about the owner of New Zealand's oldest winery, Mission Estate, which last year paid dividends of $1.5 million to a trust that in turn donated $210,000, while spending almost four times as much on religious personnel and living expenses.

Or the small limited liability recycled timber company with the expressed objective of advancing religion, which last year appears to have donated $12,000 while its tax concession was about $60,000.

Or Ngai Tahu with its 38 limited liability companies, complex accounts and salaries of more than $100,000 paid to 67 employees with the top three earners paid $1.7 million? (Gousmett gives Ngai Tahu credit for declaring all this.) The iwi interests include landbanking, construction and tourism. It is building hundreds of houses as part of Christchurch's redevelopment, while it delights tourists with its whale watching and Shotover Jet businesses. It pays a small amount of tax as a Maori authority and for its Australian operations but is otherwise exempt. The amount paid out to runanga compared to the iwi's total wealth appears minimal, Gousmett says.

A law amendment in 2004 allowed entities whose beneficiaries had blood ties to meet the charitable status test, bringing iwi organisations into the charitable frame.

When the owner of Christchurch Cathedral - Church Properties Trustees - professed in an article about the cathedral rebuild that it was "not wealthy", Gousmett told North & South that according to its accounts it has assets of $180 million with a further $40 million to come from insurance and other expected income.

Food giant Sanitarium - maker of Kiwi staples Weetbix and Skippy Cornflakes - is wholly owned by the Seventh-Day Adventist Church and is exempt from paying company tax because of its religious and charitable activities.

Last year it made a surplus of $17 million, of which $4 million went to aid activities in the Pacific, $3 million to a home for the elderly and $10 million went back into the church - to be spent, says Gousmett, on who knows what. He asked his local branch of the church which has 12,000 members in New Zealand and had added only 600 in the past decade, how the $10 million was spent but got no reply. The usual response, he says, is to quote case law: because the purpose is to advance religion, there is no debate. The tax concession on that surplus was about $5 million. "I say there is a debate (to be had) because if we are subsidising this entity, surely we have a right to understand what it is they actually do in the community. Most large charities don't want to have a debate. It's a bloody great hole."

It was the job of the Charities Commission (and now that of a new Charities Service within the Department of Internal Affairs) to check that organisations are set up for charitable purpose and not for the benefit of any individual. It requires they file an annual return but the problem is it is a standard template which sheds little light on how much was spent on charity and what it entailed. For example, an organisation providing nursing to the disabled may spend all of its income on the cost of service and so not appear charitable on the figures.

Another problem is in the word "purpose". The definition dates to 1601 and includes "the relief of poverty, the advancement of education or religion, or any other matter beneficial to the community" but under current law, churches, fee-charging hospitals, private schools, food giants, Maori conglomerates and other charities have the benefit of tax exemptions without a legal obligation to donate even $1.

The sector has long been an administrative headache. The idea of a charities commission to oversee it was first raised the 1870s, a Commission of Inquiry followed in the 1890s and in 1987 Finance Minister Roger Douglas proposed including charitable activities - but not donations - in the tax base "to limit the scope for charities to be used for tax avoidance".

Trevor Garrett, head of the Charities Commission until it was disbanded, says the public has a right to know whether it is getting value.

"It's a fair question. It's a question I would ask. In asking, it's not saying do away with it but rather asking is there a way where you can at least get the value of the tax exemption back into the community."

The commission hadn't existed long enough to get a picture but Garrett said there was previously no set accounting standards for the sector. "Some of it was awful - almost like something written on the back of an envelope."

Despite the $600 million tax concession and questionable transparency, the Government last year decided not to go ahead with a plan to review charities law. The reason given was "fiscal fears", shorthand for concern more organisations might have expected to be eligible for charitable status with the hit on the tax base that implies. They were perhaps spooked by the removal by Labour - supported by United Future - in 2008 of the cap of $1890 that could be claimed back on charitable donations. The change saw the donations rebates balloon from an average of $98 million a year to $193 million. "That's what the National Government is worried about," says Gousmett.

Even though he was in opposition, John Key described that change as a "bold charity tax policy" that would support private giving by allowing a one-third rebate up to an individual's total net income. Now in power, his government appears spooked by the risk of another hit on the tax base.

Labour's sector spokeswoman Louisa Wall claimed pulling the review was a sop to big business, that "big commercial enterprises are able to channel tax benefits into private hands, while small community-based groups ... are being refused registration."

Community and Voluntary Sector Minister Jo Goodhew sought to reassure saying there was a robust system that ensured charities can't be registered unless their "purpose" is charitable. But how do we know the purpose is fulfilled? There is no legal minimum percentage of income or assets that must be applied. Unlike the United States Government, we don't measure the value of what a charity provides against its tax concession and where there is a huge gap that cannot be explained move to deregister.

Gousmett wants New Zealand to follow Britain and require a plain language report from charities explaining exactly what it is they provide by way of public benefit and setting out its plans and why it is holding money in reserve. "Then you (can) have a level of confidence in what the organisation is doing. We have no idea why they are holding funds and what the money is actually being spent on and where the difference is being made in our community.

"The idea is, that if you don't pay income tax you then can retain those funds and grow your organisation and use the (resulting wealth) for a charitable purpose. What we've got, I think instead, is a situation where charities are accumulating wealth, not paying income tax and not undertaking (enough) charitable activity." If they are retaining wealth for its own sake, then they should pay tax, he says. "Where do we draw the line between wealth retention and charitable activity."

Although a review of the Charities Act is off, the Ministry of Business, Innovation and Employment is working to improve the quality of reporting for bigger registered charities. Submissions closed last month. Inland Revenue declined to comment on its submission, deeming it inappropriate when the matter was under consideration by cabinet, but said it was "increasingly" working with the DIA-Charities Services to identify people misusing the exemption to gain tax advantages.

There is nothing wrong with accumulating profits to build an asset that can be used for charitable purpose, says Garrett, but questions should be asked if that continued for years without a clear plan being declared. British regulators have the power to prevent that money being lost to charitable causes but Garrett says there appears to be a gap in New Zealand law. "That is something that I would have wanted to pursue." He couldn't say whether there had been abuses here because once a charity deregistered, authorities had no power to request up-to-date information.

"(If you had suspicions), the best you could do was advise Inland Revenue although their powers would relate solely to the tax issue."

"We were only just starting to get a picture of the types of organisations. And when you start to see the types and you see the stories of things that have happened overseas you think, could that happen here?" An example was a research organisation in Australia, which accumulated assets of about A$75 million ($89 million) while over some years the number of members reduced until two remained. It deregistered as a charity and turned itself into a private company. "So suddenly these two people had $75 million between them."

Though Garrett doesn't go along with all Gousmett says, on this he agrees. "We need the debate."

SuperCity rates free ride

Local governors also have trouble with the rationale for some exemptions, with a panel reviewing rates in 2007 commenting that the rationale for certain exemptions was unclear.

The top sectors dollar-wise receiving rates exemptions are (from highest value): education (kindergartens, schools, universities), Auckland Council (parks, reserves, and community facilities), religion (places of worship and religious institutions), health (hospitals, public and private claiming charitable purpose), transport (railways, ports, airports), land used for charitable purposes, sports (sports grounds), national reserves and parks, defence, utilities, Maori customary land and marae.

The rates exemptions are provided for in the Local Government Rating Act 2002 for certain religious, charitable and Crown organisations. On the justification, the 2007 rates inquiry noted the Crown exemption may reflect the view that the Crown should not be bound by a lower level of government "and that religious and charitable exemptions presumably reflect some concept of community benefit".

It says, "But overall the rationale for these ratings exemptions is unclear. The Panel considers that land should not be exempt from full rates unless there is a clear justification. For example, it is difficult to see the justification for major university buildings located in downtown city areas not paying rates on the same basis as adjacent office buildings used for business purposes."