Winding up a charity – make sure you don’t get caught out

A trust board, which was a registered charity, had found that the trust had been receiving less and less funding, and that it had been overtaken by other charities providing similar services.  The board therefore resolved to wind up the trust and did so without taking any advice.

A few months later, a creditor of the trust came forward and sought to recover money owing to it.  This created major issues for the trust as the assets of the trust had already been distributed.  The trust board had to urgently try to claw back funds it had distributed.

If you have made the decision to wind up your charity (whether that be a charitable trust, incorporated society or other registered charitable entity), there are a number of procedures that you must follow to ensure that you wind up correctly.

Here are some tips to ensure that you don’t get caught out:

1. Comply with the ‘wind up clause’ in your Rules

A charity’s rules will almost always contain a ‘wind-up clause’ that will specify the procedure to be followed once the decision to wind-up has been made.  Such a clause is a requirement in order for a charity to be registered with Charities Services (who maintain the register of all registered charities in New Zealand).  It is vital that the prescribed wind-up process is followed

The rules will often provide for what is to happen to the charity’s assets upon wind-up, which will generally include a requirement that such assets are to be used for exclusively charitable purposes.  There may be further restrictions depending on the individual charity’s rules.

2. Ensure all finances are settled

Upon wind-up, the charity must also ensure that all of its finances are settled. This involves not only paying all debts owed by the charity to its various creditors, but also collecting any outstanding money owed to the charity.

3. Notify and deregister with Charities Services and/or the Registrar

Charities Services

Charities Services must be notified of your intention to wind-up your charity so that it can be removed from the Charities Register.  This can be done on the Charities Services website. However, it is important to be aware of the ramifications of deregistration, which may include the following:

• Liability for income tax, unless the charity qualifies for another tax exemption; and
• A potential requirement to pay a one-off tax on the deregistered charity’s accumulated assets that are held at the date of deregistration, depending on whether you have distributed the charity’s assets to another registered charity or not within a certain time frame.

We suggest that you take accounting advice in order to ascertain any likely tax liability that the charity may incur, to make sure you don’t get caught out in this regard.

Register of Incorporated Societies and Charitable Trusts (the Companies Office)

If your charity is also incorporated either as a Charitable Trust, Incorporated Society or as a Company, you must notify the Registrar of Incorporated Societies and Charitable Trusts/the Companies Office that the entity is no longer carrying on its operations and request that it be dissolved/wound up and removed from the register.

There are slightly different forms and processes for each type of entity, so you should take advice about the correct process for your individual entity from your legal adviser to ensure you get this right.

Claire Tyler
Commercial Lawyer
Wellington