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CW 41: Charities: non-business income
or “Tax-free income for charities that isn't from business activities”
You could also call this:

“Tax rules for charities running businesses”

If you are a charitable organisation registered under the Charities Act 2005, you might not have to pay tax on income from a business you run. This applies if:

  1. You use your charity’s money in New Zealand.
  2. You are what’s called a ‘tax charity’ when you get the money.
  3. No one who controls the business can use the money for their own benefit, except for the charity’s purposes.

There are some exceptions to this rule. For example, if you’re a council-controlled organisation (except for hospitals), or if you’re a local authority getting money from a council-controlled organisation, you might still have to pay tax.

If you rent out a building that someone gave to your charity, and they still have some rights to it, this counts as running a business.

If your charity does work outside New Zealand too, only the part of your income that’s used for New Zealand purposes is tax-free.

The law is quite strict about who counts as having control over the business. It includes people who can decide how money is used, like trustees, shareholders, or directors.

There are also rules about what counts as a benefit. It can be money, but it can also be other things of value. However, if someone lends money to the charity and gets normal interest on it, that’s okay.

If you don’t follow these rules, any money the business makes might be treated as the trustee’s income, which means it could be taxed.

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Next up: CW 42B: Community housing trusts and companies

or “Tax rules for community housing organisations that help people with housing”
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Part C Income
Exempt income

CW 42Charities: business income

  1. Income derived directly or indirectly from a business carried on by, or for, or for the benefit of a trust, society, or institution of a kind referred to in section CW 41(1) is exempt income if—

  2. the entity carrying on the business is, at the time that the income is derived, registered as a charitable entity under the Charities Act 2005; and
    1. the trust, society, or institution carries out its charitable purposes in New Zealand; and
      1. the trustee or trustees of the trust, the society, or the institution is or are, at the time that the income is derived, a tax charity; and
        1. no person with some control over the business is able to direct or divert an amount derived from the business to the benefit or advantage of,—
          1. if subparagraph (ii) does not apply, a person other than the trust, society, or institution except for a purpose of the trust, society, or institution:
            1. if a trust, society, or institution (the operating entity) is carrying on the business for or for the benefit of another trust, society, or institution (the controlling entity), a person other than the operating entity or the controlling entity except for a purpose of the operating entity or the controlling entity.
              2. Subsections (3) to (8) expand on this subsection.

            2. This section does not apply to an amount of income derived by—

            3. a council-controlled organisation, other than a council-controlled organisation operating a hospital as a charitable activity:
              1. a local authority from a council-controlled organisation, other than from a council-controlled organisation operating a hospital as a charitable activity on behalf of the local authority.

                1. For the purposes of subsection (1), a trustee is treated as carrying on a business if—

                2. the trustee derives rents, fines, premiums, or other revenues from an asset of the trust; and
                  1. the asset was disposed of to the trust by a person of a kind described in subsection (5)(b); and
                    1. either—
                      1. the person retains or reserves an interest in the asset; or
                        1. the asset will revert to the person.

                        2. For the purposes of subsection (1)(a), if the charitable purposes of the trust, society, or institution are not limited to New Zealand, income derived from the business in a tax year is apportioned reasonably between those purposes in New Zealand and those outside New Zealand. Only the part apportioned to the New Zealand purposes is exempt income.

                        3. For the purposes of subsection (1)(c) and section CW 42B(2)(c) and (4) for an income year, a person is treated as having some control over the business, and as being able to direct or divert amounts from the business if, in the tax year,—

                        4. they are, in any way, whether directly or indirectly, able to determine, or materially influence the determination of,—
                          1. the nature or extent of a relevant benefit or advantage; or
                            1. the circumstances in which a relevant benefit or advantage is, or is to be, given or received; and
                            2. their ability to determine or influence the benefit or advantage arises because they are—
                              1. a settlor or trustee of the trust by which the business is carried on; or
                                1. a shareholder or director of the company by which the business is carried on; or
                                  1. a settlor or trustee of a trust that is a shareholder of the company by which the business is carried on; or
                                    1. a person associated with a settlor, trustee, shareholder, or director referred to in any of subparagraphs (i) to (iii).

                                    2. For the purposes of subsection (5) and section CW 42B(2)(c) and (4), a person is treated as a settlor of a trust, and as gaining a benefit or advantage in the carrying on of a business of the trust, if—

                                    3. they have disposed of an asset to the trust, and the asset is used by the trust in the carrying on of the business; and
                                      1. they retain or reserve an interest in the asset, or the asset will revert to them.

                                        1. For the purposes of subsection (1)(c) and section CW 42B(2)(c) and (5), a person is not treated as having some control over the business merely because—

                                        2. they provide professional services to the trust or company by which the business is carried on; and
                                          1. their ability to determine, or materially influence the determination of, the nature or extent of a relevent benefit or advantage arises because they—
                                            1. provide the services in the course of and as part of carrying on, as a business, a professional public practice; or
                                              1. are a statutory trustee company; or
                                                1. are Public Trust; or
                                                  1. are the Maori Trustee.

                                                  2. For the purposes of subsection (1)(c) and section CW 42B(2)(c) and (6), a benefit or advantage to a person—

                                                  3. may or may not be something that is convertible into money:
                                                    1. unless excluded under paragraph (d), includes deriving an amount that would be income of the person under 1 or more of the following provisions:
                                                      1. section CA 1(2) (Amounts that are income):
                                                        1. sections CB 1 to CB 23 (which relate to income from business or trade-like activities):
                                                          1. section CB 32 (Property obtained by theft):
                                                            1. sections CC 1 (Land), CC 3 to CC 8 (which relate to income from financial instruments), and CC 9 (Royalties):
                                                              1. section CD 1 (Dividend):
                                                                1. sections CE 1 (Amounts derived in connection with employment) and CE 8 (Attributed income from personal services):
                                                                  1. section CF 1 (Benefits, pensions, compensation, and government grants):
                                                                    1. section CG 3 (Bad debt repayment):
                                                                      1. sections CQ 1 (Attributed controlled foreign company income) and CQ 4 (Foreign investment fund income):
                                                                      2. includes retaining or reserving an interest in an asset in the case described in subsection (3), if the person has disposed of the asset to the trust or the asset will revert to them:
                                                                        1. does not include earning interest on money lent, if the interest is payable at no more than the current commercial rate, given the nature and term of the loan.

                                                                          1. If an amount derived from the carrying on of a business by or for a trust is not exempt income because of a failure to comply with subsection (1)(c), the amount is trustee income.

                                                                          Compare
                                                                          Notes
                                                                          • Section CW 42(1)(aa): inserted, on , by section 141(1) (and see section 141(2) for application) of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 (2019 No 5).
                                                                          • Section CW 42(1)(b): amended, on , by section 21(1) of the Taxation (Personal Tax Cuts, Annual Rates, and Remedial Matters) Act 2008 (2008 No 36).
                                                                          • Section CW 42(1)(c): replaced (with effect on 1 July 2008), on , by section 84(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                                                          • Section CW 42(2): substituted, on , by section 332 of the Taxation (Business Taxation and Remedial Matters) Act 2007 (2007 No 109).
                                                                          • Section CW 42(5): amended (with effect on 1 July 2008), on , by section 84(2) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                                                          • Section CW 42(5): amended (with effect on 14 April 2014), on , by section 31(1) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                                                                          • Section CW 42(6): amended (with effect on 14 April 2014), on , by section 31(2) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                                                                          • Section CW 42(7): amended (with effect on 14 April 2014), on , by section 31(3) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                                                                          • Section CW 42(8): amended (with effect on 14 April 2014), on , by section 31(4) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                                                                          • Section CW 42(9): amended (with effect on 1 April 2008), on , by section 48 of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                                                          • Section CW 42 list of defined terms tax charity: inserted, on , by section 21(2) of the Taxation (Personal Tax Cuts, Annual Rates, and Remedial Matters) Act 2008 (2008 No 36).