When is a charity not a charity?

A recent high profile case, where a well-known charity was removed from the Charities Register for failing to file its annual return, highlights the need for existing registered charities to meet their compliance obligations under the Charities Act.

Under the Act charities are required to meet their obligations, which include filing annual returns.  If an organisation significantly or persistently fails to comply with its obligations, the Charities Registration Board can remove it from the Charities Register.  This will have the effect of stripping the charity of its tax-exempt status, and could have serious implications for the on-going viability of the organisation.

Therefore, it is crucial that officers of charities know and understand their organisation’s duties under the Act.

If an organisation is a registered charity it must at all times operate in accordance with the Charities Act. Under the Act, charitable entities must, as mentioned above, file an annual return each year. This must include a copy of the organisation’s financial statements.

The information to be provided in the organisation’s financial statements is also governed by the Charities Act.  Under a tiered system, the nature and type of reporting that will be required is dictated by your annual expenses for the previous two financial years.

• Tier 1 applies to charities with over $30 million annual expenses or with public accountability.
• Tier 2 covers those with under $30 million annual expenses and without public accountability.
• Tier 3 relates to charities with under $2 million annual expenses and without public accountability.
• Tier 4 is for those with under $125,000 annual operating payments, again without public accountability.

Charities in Tiers 3 and 4 must file a “performance report”, containing non-financial information to tell the story of the charity for the relevant financial year.  This might include the sorts of activities the charity performs, its trading operations, different branches of the charity, and the nature of bank accounts used by the charity.

Further, a charitable entity’s financial statements will need to be audited or reviewed if its total operating expenditure is more than $500,000.

Non-financial duties

The organisation and its officers have other duties under the Act which include a “duty to assist”, where the Charities Registration Board requests information or documents from the organisation, and a duty to “notify changes” to Charities Services.  These changes include:

• A change to the name or address of the entity;
• A change in officers (removal and appointment);
• A change that disqualifies an officer from being an officer of a charitable entity;
• A change in the entity’s balance date; and
• A change to the entity’s rules or charitable purposes.

What happens if the entity fails to discharge its duties?

As mentioned above, a persistent or significant failure to discharge the above duties could prompt the Charities Registration Board to revoke the organisation’s charitable status.

This could be bad enough news for the former charity due to the loss of tax exemptions on income earned while not registered. However, officers of entities also need to be aware that the Charities Act contains multiple offence provisions where a failure to discharge the duties can also result in conviction and fines of up to $50,000. It pays to know the duties and to ensure they are complied with.

Alan Knowsley
Partner
Wellington