Charities Bill. Government Bill. As reported from the Social Services Committee. Commentary

Transcription

1 Charities Bill Government Bill As reported from the Social Services Committee Recommendation Commentary The Social Services Committee has examined the Charities Bill and recommends that it be passed with the amendments shown. Introduction The Charities Bill establishes a new Crown entity, the Charities Commission, responsible for running a registration, reporting and monitoring system for charities. Those charities that wish to retain or gain income tax-exempt status will be required to register with the Commission. While charities will be allowed to choose to continue operations without registering with the Commission, any unregistered charities will not be income tax-exempt. The bill also imposes a number of requirements on charitable entities, and is intended to ensure that the sector becomes more accountable and transparent to the donating public, funders, regulators and the government. We received 753 submissions on the bill, mostly from entities operating in the charitable sector, and found that there is general support for the establishment of a Charities Commission. However, submitters expressed considerable concern with the specific provisions contained in the bill, fearing they would impose additional cost and administrative burden while failing to provide the support desired by the sector. We have considered the submissions carefully, and in response to them considered substantial amendments to the bill. In addition, officials have consulted with approximately 30 major charities and sector organisations to seek feedback on the proposed 108 2

2 2 Charities Commentary amendments, before we finally deliberated on the bill. The majority believes that the proposed amendments to the bill address the concerns of submitters, and that the bill will assist the charitable sector in the ongoing provision of important services to the community. In addition, the majority anticipates that confidence in the charitable sector will increase as a result of the activities of the Charities Commission, and hopes that this raised confidence will encourage the Government to consider introducing a more generous tax rebate regime to assist and provide for the sector. Crown entity classification A large number of submitters expressed concern with the Crown entity classification of the Commission as a Crown agent. They were concerned that this classification might allow the Government to interfere with, direct, or control the Commission, and would not reflect the independence from the Government of the charitable sector. Particular concern was expressed at the prospect that the Government might be able to directly or indirectly influence the registration or deregistration of particular charities to reflect government policy. In the light of these concerns, the majority recommends the Commission be classified instead as an autonomous Crown entity, and trusts this will give the Commission sufficient independence to satisfy submitters concerns. The majority also recommends that the bill be amended to incorporate the standard governance provisions relating to autonomous Crown entities. Approved donee regime As a consequence of our recommended change to the Crown entity classification of the Commission, the majority also recommends that the Commission not administer the approved donee regime, and that all references to this function in the bill be omitted. Currently, the bill requires the Commission to operate and maintain a register of approved donee organisations, in addition to the register of charitable entities. The approved donee regime allows individuals to claim an income tax rebate for gifts of money to the donee. The majority considers it would be inappropriate to have an autonomous Crown entity, which is independent and not required to give effect to Government policy, responsible for making decisions that will impact on the revenue base. Under this recommendation, the Inland Revenue Department will continue to administer the approval of donee classification. We

3 Commentary Charities 3 recognise that many in the charitable sector were hoping that the Commission would be able to function as a one-stop shop by administering both registers, thus minimising the need to deal with multiple organisations. In order to address this concern, the majority recommends amending the bill to allow the Commission to transfer to the Inland Revenue Department information contained in the register, or information that the Commission has decided should be withheld from the register. This should ensure that entities that have been registered as charitable entities by the Commission would then be assessed by the Inland Revenue Department for approved donee status without having to take any additional steps. An operational protocol should be developed outlining the interface between the Commission s registration of charities and the Inland Revenue Department s consideration of charitable donee classification. Definition of charitable purpose As one of the requirements for registration as a charitable entity, the entity must be maintained for charitable purposes. The bill defines charitable purpose as including every charitable purpose, whether it relates to the relief of poverty, the advancement of education or religion, or any other matter beneficial to the community. This definition is based largely on the long-established definition of charitable purpose in common law. Submitters were concerned that this definition was too narrow, excluding sporting groups and groups that undertake advocacy work. In considering these concerns, we examined recent proposed amendments to charity law in the United Kingdom and Australia, both of which are considering expanding the number of heads of charity. However, the majority does not believe that expanding the definition of charitable purpose will offer any significant benefit, and therefore does not recommend the definition be amended. The majority is concerned that amending this definition would be interpreted by the Courts as an attempt to widen or narrow the scope of charitable purposes, or change the law in this area, which was not the intent of the bill. Amending the definition would also result in inconsistencies with other legislation that contain definitions of charitable purpose. The majority also suggests that it may be more appropriate for the Commission to initially offer guidance on appropriate charitable purposes, and, once all initial registrations have been completed, perhaps to conduct a review of this definition to consider carefully whether the definition should be changed.

4 4 Charities Commentary Advocacy Many submitters expressed concern that they would be prevented from registering as charities, as they believed the advocacy work they undertake would disqualify them from being classed as a charity. However, in the majority s view there is no cause for concern. The common law has established that organisations must have main purposes that are exclusively charitable, but they are permitted to have non-charitable secondary purposes, provided that those secondary purposes are legitimate ways to achieve the main charitable purpose. While a charity cannot have advocacy as its main purpose, it can have another charitable purpose as its main purpose, and then engage in appropriate advocacy as a secondary purpose to achieve its main charitable purpose. Given the level of concern raised by submitters concerning this issue, the majority does consider that it may be valuable if the legislation includes a provision codifying the common law regarding secondary purposes, in order to ensure clarity on this issue. The majority therefore recommends amending the bill to clarify that an entity with non-charitable secondary purposes undertaken in support of a main charitable purpose will be allowed to register with the Commission, and to confirm that advocacy may be one such non-charitable secondary purpose. Sporting, arts, and cultural organisations, and gaming trusts Under current law, the provision of sporting and recreational activities is not considered to be a charitable purpose in and of itself, despite the public benefits of improved physical fitness, as sporting and social activities are usually undertaken for entertainment or amusement. Amateur sports organisations are provided with a statutory tax exemption separate from that for charities, and this bill does not impact on the application of that exemption. For similar reasons, arts and cultural organisations are also not generally considered charitable. We understand that some sporting and arts and culture organisations may be found to be charitable, but only where their activities are found to be analogous to other established charitable purposes. A significant level of funding for sporting, arts, and cultural organisations is provided from gaming trusts, and we received a number of submissions expressing concern that the bill would affect the funding available from these trusts. Under the tax exemptions available for gaming trusts, the trust must either choose to give its money exclusively to charitable purposes, or give a minority to

5 Commentary Charities 5 charitable purposes and a majority to other approved purposes. If the trust chooses to give its money exclusively to charitable purposes, it will be required to register with the Commission to claim its income tax exemption. If the trust gives only a minority of funding to charity, then it will be able to rely on other available tax exemptions. However, in order to create certainty around this issue and ensure the flow of funds to both charities and sporting bodies, we recommend that the tax status of gaming trusts be clarified by legislation in The majority does not consider that sporting organisations or arts and cultural groups should be concerned that the bill will affect the available funding, as those trusts that provide funding to such groups would not be required to register with the Commission or be subject to this bill. Provided the gaming trust is complying with its current legal obligations, the bill should have no effect. The majority therefore recommends no amendment. Registration Clause 13 details the essential requirements that must be met by a charity before it can be registered by the Commission. The majority does not consider the current wording of subclause (1) to be broad enough to capture all the entities that should qualify for registration. Under the clause as currently drafted, a charitable trust may not be registered if it has not yet derived any income for charitable purposes. This would prevent the registration of new charitable trusts that have recently been established, and the majority considers this result inappropriate. The majority also notes that the bill does not allow the Commission to make reasonable assumptions about the future derivation of an entity s income, which is essential for the successful operation of the registration process. The majority recommends the bill be amended to correct these problems. Clause 13(2) and (3) allow for a binding ruling issued under the Tax Administration Act 1994 to be used as determinative of whether the income of the entity has been derived for charitable purposes. We note that binding rulings are always issued with regard to a specific time period, and the majority recommends the bill be amended to allow for these rulings to be determinative only for the time that the ruling remains valid.

6 6 Charities Commentary Registration test for charitable trusts The majority does not consider the provisions of clause 13 reflect the appropriate registration test for charitable trusts. Clause 13(1)(a) was initially drafted on the basis of the wording contained in section CB 4(1)(c) of the Income Tax Act This provision was interpreted by the Privy Council in the case of Latimer v. The Commissioner of Inland Revenue 1, which held that it is sufficient for the funds of a charitable trust to be applicable for charitable purposes, and that it is not necessary for the trust to have been established for charitable purposes. The drafting of the equivalent provision in the Income Tax Act 2004 more accurately reflects the decision of the Privy Council, and the majority considers the registration test for charitable trusts should be based on that provision. The majority recommends that clause 13(1)(a) be redrafted to reflect the wording contained in section CW 34(1)(a) of the Income Tax Act Registration of umbrella organisations Many submitters expressed concern that the registration requirements did not reflect certain structures common in the charitable sector. Many charitable entities are made up of a number of small entities, usually regionally based, under a larger umbrella organisation. The bill as introduced would have required the umbrella organisation, as well as each local entity, to register and comply with the various requirements of the legislation. In some cases, such as church organisations, this would require the individual registration of over 500 constituent entities. The majority considers this would have been unnecessarily onerous and burdensome on the smaller constituent entities. The majority therefore recommends amending the bill to allow the Commission to provide for umbrella registration, where a central entity and one or more other entities are registered and treated as a single entity. The bill should set out specific criteria for such a registration, such as requiring the entities to be closely related. In addition, the Commission should be able to attach conditions to umbrella registrations, and to vary or revoke it where appropriate. Finally, the bill should detail the effect of treating the various entities as a single entity, and provide options for the filing of annual returns which take into account the circumstances of the charity. 1 Sir Graham Stanley Latimer and others Trustees for the Crown Forestry Rental Trust v. The Commissioner of Inland Revenue [2004] UKPC 13

7 Commentary Charities 7 We note that, in some situations, the particular structure of an umbrella organisation may limit the parent entity s ability to comply with the duties required under this bill with regard to each single entity, particularly the duties to notify the Commission of changes or to prepare an annual return. The majority therefore recommends the bill allow a parent entity, on behalf of a single entity, to make a request to the Commission that a duty under clause 47 or 54 be complied with either by the parent on behalf of all constituent entities, or for each individual entity to comply with the duty. The majority recommends the bill require the Commission to have regard to such a request, but does not believe it should be obliged to comply with the request, as there may be occasions where such a request may be inappropriate. Backdating registration The majority recommends amending the bill to allow the Commission to backdate the effective time of registration. This should ensure that entities are not disadvantaged by any delays in processing a valid application. In making this recommendation, the majority wishes nevertheless to emphasise the importance of ensuring that registration applications are processed in an efficient and timely manner. We recognise that the Commission will receive a significant number of applications in its initial period of operation, and that some delays will naturally arise as a consequence of this. However, in normal operating circumstances, we expect the application process to be smooth and quick. In addition, this amendment would ensure that a gift under the Estate and Gift Duties Act 1968 can be exempt from gift duty by allowing the backdating of the registration of an organisation to the time the gift was made. Time for registration To ensure clarity, the majority recommend the bill be amended to specify that the appropriate time for registering an entity is at the time the amount of income is derived. Deregistration Clause 26 details the grounds on which the Commission may deregister a charitable entity. Some submitters suggested that, under this clause, a grant inadvertently made for a non-charitable purpose

8 8 Charities Commentary might cause the charity to be deregistered, and argued that the clause should require some intent on the part of the charity to breach the grounds listed before deregistration would be incurred. However, the majority does not consider this necessary. The Commission will have a number of enforcement powers available to address any such situations, and in the first instance the Commission is more likely to use one of its lesser enforcement powers or its education function to encourage and help the charitable entity to comply with its obligations. The discretionary power to deregister a charity is likely to be used only in the most extreme circumstances. In addition, any decision to deregister could be subject to judicial review, and the Commission is therefore unlikely to exercise this power lightly. The majority therefore does not recommend amending the clause as submitters propose. However, the majority does recommend amending the bill to specifically require the Commission to follow the rules of natural justice when considering whether to deregister an entity, and to give the entity concerned reasonable opportunity to make submissions on the matter. The majority trusts this will reassure submitters that the Commission will not execute its deregistration function unreasonably. The majority also recommends that clause 26(1)(a) to (e) be consolidated. These paragraphs detail various conditions where an entity may be removed from the register because its registration is no longer valid. The majority considers that they should be consolidated into one paragraph, allowing the Commission to remove an entity from the register if it is not, or is no longer, qualified to be registered as a charitable entity. Clause 27 allows the Commission to backdate the deregistration of a charitable entity if it has been involved in tax avoidance or tax evasion, if it has been party to serious wrongdoing, or if it has been designated a terrorist or associated entity, or convicted of an offence under the Terrorism Suppression Act The majority questions the purpose of allowing for the backdating of deregistration, and consider it unnecessary. The majority therefore recommend that clause 27 be omitted from the bill. Commission functions Education and support function We found that most submitters were concerned that the Commission would operate mainly as a regulator of the charitable sector, where they considered that the Commission should also have an extensive

9 Commentary Charities 9 education and support function. While the Commission would be able to help charities to comply with regulatory requirements, submitters considered that it should also be able to encourage best practice and provide advice on issues such as governance and management. In our view, the Commission should have an important role in informing, educating and supporting charitable organisations, as the effective exercise of this role should help charities to build their capacity and develop capabilities. The majority therefore recommends amending the bill to include, as one of the Commission s key responsibilities, the provision of general advice and assistance on governance and management, and recommendations on best practice. Such advice should be available to all charities, registered or not. We considered the possibility of extending this education and support function to include the provision of financial and legal advice or to allow the Commission to give detailed assistance to individual charities. However, the majority has concluded that such advice might create a conflict of interest between the Commission s regulatory and support roles, and would therefore be inappropriate. The majority therefore recommends no change in this area. The bill allows the Commission to consider, report and make recommendations on any matter relating to charities that has been referred to it by a Minister of the Crown. The majority believes the Commission should be able to consider and make recommendations on other matters affecting the charitable sector without being asked by the Government, and recommends the bill be amended to provide the Commission with this power. This would allow the Commission to respond easily to issues that arise in the sector, and should help increase the confidence of charities in the Commission. We note that the Commission already has the power to stimulate and promote research into any matter relating to charities, and the majority considers the amendment to be a logical extension of this. Promotion of public confidence in charities Clause 10(i)(iii) specifies that one of the functions of the Commission is to make appropriate information available to the public to promote public confidence in the charitable sector. The majority considers that the current position of this provision in the clause fails to reflect the importance of this specific function. The majority

10 10 Charities Commentary recommends that clause 10 be reorganised to list the promotion of public confidence in the charitable sector as a distinct function. The majority also considers that, if the public is to hold any confidence in the charitable sector, entities in that sector must use the resources provided to them in an appropriate manner, and believes the Commission should have a role in ensuring this. The majority therefore recommends that the Commission also be given an additional function of promoting and encouraging the effective use of charitable resources. Disqualification of officers The bill, in clause 15, disqualifies a number of classes of people from serving as an officer of a charity. In particular, it excludes people convicted of an offence punishable by a term of imprisonment of two years or more, or two years or less where the person has been sentenced to imprisonment. Submitters expressed strong opposition to this provision, noting that the specific criminal convictions of an individual may have little bearing on their ability or appropriateness to serve as an officer of a charity. In addition, some charities are specifically established to offer services to assist current and former prisoners, and in such cases the appointment of officers with past experience of prison would be a positive benefit to that entity. In our view, it is important to prevent charities from appointing officers that have a history of dishonesty and may pose a risk to the organisation s assets and income, but the majority sees no reason why people with other criminal convictions should be barred from serving on a charity. The majority therefore recommends amending clause 15(2)(c) and (d) to only disqualify people who have been convicted of a dishonesty offence, such as theft or fraud. For consistency with the provisions of the Criminal Records (Clean Slate) Act 2004, the majority also recommends introducing a seven-year limitation period on this disqualification. The New Zealand First Party supports the intent of the original bill. The majority recommends amending clause 15(1) to remove the requirement for an officer of a charity to be a natural person. There will be some instances where a charitable organisation may be administered by a body corporate, for example where a corporate trustee organisation runs a charitable trust created under the provisions of a will, and the majority considers the legislation should provide for this. As a consequence of this change, the majority also recommends that clause 15 include provisions disqualifying a body

11 Commentary Charities 11 corporate from acting as an officer if the company is in liquidation, receivership or statutory management, or where it has been convicted of a dishonesty offence. Some submitters argued that the age restriction in clause 15(2)(b), which disqualifies people under the age of 16 years, should be omitted from the bill. The majority disagrees, as it is important that officers should be legally accountable for their actions, and as a general rule it will therefore be generally inappropriate to have officers younger than 16 years old. The majority therefore recommends no change to the bill in this respect. We note that clause 15(4) allows the Commission to issue a waiver of a disqualifying factor in specific instances, and the majority considers this would still allow a charity to appoint a younger officer if the specifics of a case meant the appointment was appropriate. As part of a charity s application for registration, clause 16 requires the provision of a document signed by every officer of the entity certifying that they are not disqualified from being an officer under clause 15. We note that an officer who is applying for a waiver of one of the disqualification grounds would not be able to sign this certification. The majority therefore recommends that clause 16 be amended to state that, where an officer has applied for a waiver of a ground for disqualification, that officer is not required to certify that they are not disqualified. Indemnification Under the bill, monetary penalties are imposed on officers or trustees of charities, to prevent beneficiaries from being penalised for the unlawful actions of those administering the charity. Clause 66 prevents charities from indemnifying their officers and administrators against any criminal liability or administrative penalty imposed under the bill, in order to ensure that the organisation spends money on its beneficiaries that might otherwise be used to meet the costs of indemnification. Submitters expressed strong disagreement with this clause, suggesting that people who might otherwise seek to serve as an officer of a charity may be discouraged from doing so by the prospect of being personally subject to penalties. The majority recognises that this is a legitimate concern, especially given the current difficulties experienced by charities in finding volunteers, and consider the consequences of deterring potential volunteers to be more serious than the expense to a charity of providing indemnification. The

12 12 Charities Commentary majority therefore recommends omitting clause 66, in order to allow charities to choose to indemnify or provide insurance for their officers and administrators for any monetary penalties that may imposed. In making this change, we note that insurance against criminal liabilities is unlikely to be available, and that the majority is recommending other changes to this bill that will remove some of the penalties that may be imposed on officers and trustees. Registration number Clause 23(1) requires registered charities to clearly state their registration number in every written communication issued by the charity and on any fundraising materials on display to the public. Submitters considered the provision imposed considerable compliance costs on charities, both in ensuring the number is displayed on all correspondence, and in the size of penalties imposed under clause 24 for any non-compliance. In addition, submitters expressed concern that the clause seemed to go too far, requiring the declaration of the registration number on correspondence unrelated to fundraising activities, and that it appeared uncertain in scope. The majority agrees, and recommend clause 23 be omitted from the bill. However, the Commission will encourage organisations, following registration, to describe themselves as a registered charity, and penalties are introduced for the false use of that status. The majority considers that the provisions in clause 23(2) should be retained as clause 46A, as it is reasonable that people collecting money on the behalf of a charity be required to disclose the charity s registration number if a member of the public requests this information. Retaining this requirement should allow a member of the public to obtain information about a charity if they are invited to make a donation over the phone or on the internet. As clause 24 imposes penalties for the contravention of clause 23, the majority also recommends clause 24 be omitted as a consequential change arising out of the recommended omission of clause 23(1). While clause 24(1)(b) also imposes a penalty relating to contraventions of the former clause 23(2), which the majority is recommending be retained as clause 46A, the Commission has other enforcement measures available, and believe these can be used in response to breaches of that provision. It is therefore unnecessary to retain clause 24.

13 Commentary Charities 13 Duty to notify Commission of changes Clause 47 requires any registered charitable entity to notify the Commission of any change in the name, address, officers, rules or purpose of the entity. This notification must be made within 20 working days of either the effective date of the change or the date when the entity became aware of the change. Many submitters expressed a view that the 20-working-day timeframe was too short, and different submitters proposed a wide variety of alternative time limits. After considering this matter, the majority agrees that the bill should allow more time for charities to notify the Commission of any changes, and recommends amending clause 47(2)(d) to require that notification be provided within 3 months. Administrative penalty Clause 65 imposes an administrative penalty on the officers of a charitable entity for any failure by the charity to notify the Commission of changes to the entity or provide an annual return within the specified times. The majority does not consider that individuals should be liable for the failure of the entity to meet its obligations, and are concerned that the potential liability imposed by this clause may further discourage people from volunteering to act as officers of charities. The majority therefore recommends amending clause 65 to make the charitable entity itself liable for the administrative penalty, rather than individual officers. Appeals against Commission decisions The bill provides a right to appeal to the District Court against decisions of the Commission to refuse to register an entity, or to remove an entity from the register. Clauses 67 to 69 detail the process for appealing a Commission decision. The majority considers that charities should not be limited to appealing decisions relating to registration, and that it should be possible to appeal from all decisions of the Commission that adversely impact on a particular entity. The majority recommends that the bill be amended to achieve this end. The majority also considers that, given the experience of the High Court in considering matters relating to charitable entities, it would be the most appropriate forum for hearing appeals. The majority recommends amending clauses 67, 68, and 69 to give the High Court jurisdiction to consider appeals against Commission decisions, and

14 14 Charities Commentary also recommend amendments to ensure the Court has sufficient powers to appropriately consider these appeals. In addition, the majority recommends that clause 69(6) be omitted. This provision, which made the decision of the Court final, was not appropriate in our view, as the initial appeal to the High Court should not be the final resort for charities. Annual return Under clause 54, every charitable entity must prepare an annual return within 4 months after the balance date, and provide the return to the Commission. Submitters suggested that it may be difficult for charities, particularly smaller entities, to comply with a 4-month time limit, and proposed that the bill allow more time for the preparation of the annual return. The majority agrees, and recommend amending clause 54(1) to require the completion of an entity s annual return within 6 months after each balance date. This was the most common timeframe proposed by submitters. Subclause (3) provides for a default balance date of 31 March each year, but allows charities to choose an alternative balance date to be specified in the register of charitable entities. The bill does not, however, specify any process for an entity to specify an alternative date, and the majority recommends amending clause 54 to detail an appropriate process. A charitable organisation should be able to nominate its balance date at the time of registration, and should be able to alter the date without the Commission s approval, provided that the time between balance dates does not exceed 15 months and the entity has a balance date in each calendar year. If the organisation wants to change the date to one that does not meet these requirements, approval should be required from the Commission. Whether approval is or is not required, the Commission should be informed of any balance date changes. Annual assessment of organisations Clause 56 requires the Commission, following the receipt of an annual return, to examine the activities of a charity in the past year, its proposed future activities, and any other relevant information, to determine whether it continues to qualify for registration as a charitable entity. This ensures that charities cannot choose to reduce or abandon their charitable activities and still remain on the register. The majority considers this important, but does not consider the provisions in clause 56 to be the best way to achieve this purpose.

15 Commentary Charities 15 Instead, the majority considers that the monitoring of charitable entities should be a function of the Commission. The majority therefore recommends that clause 56 be omitted, and that clause 10 be amended to add, as a new function of the Commission, the monitoring of charitable entities and their activities to ensure they continue to qualify for registration. Organisational structures We realise that the charitable sector displays a wide diversity of structures, and that some organisations may experience difficulty meeting specific obligations because of the particular nature of their structure. It is therefore important that the Commission have the power to make allowance for the diversity of structures in the sector, particularly by exercising an exemption power to relieve difficulties that differently structured entities may encounter in meeting the bill s obligations. The majority therefore recommends that the bill give the Commission an exemption power that may be used where necessary to provide different organisational structures with flexibility regarding the way they comply with duties and obligations under subpart 3 of Part 2 or relevant regulations. The exercise of this power should also reduce compliance costs incurred by the entity. Annual meeting Clause 12 requires the Commission to hold an annual meeting with representatives of charitable entities, to ensure it remains accountable to the charitable sector. Some submitters proposed that the Commission be required to hold meetings in multiple locations around the country, to allow more charities an opportunity to contribute. The majority recognises the value of holding annual meetings in different locations, but consider this should be a choice made by the Commission, rather than a requirement imposed by statute. The majority therefore recommends amending clause 12 to enable the Commission, if it considers it necessary, to hold annual meetings in multiple locations. The Commission is currently required to send written notice of an annual meeting to every registered charity. The majority considers that the process of informing registered charities by post would be overly costly and time consuming, and instead recommend amending the bill to require it to advertise the details of the annual meeting in major newspapers in the region and on the Commission s website.

16 16 Charities Commentary The majority also considers that, as part of the annual meeting, the Commission should be required to report on any significant matters impacting on the sector, and recommends clause 12(6) include this requirement. Prosecutions The bill is currently unclear about the role of the Commission in any prosecutions brought as a result of breaches of this legislation. The majority considers that the Commission should be responsible for undertaking any such prosecutions, and therefore recommends amending the bill to give this responsibility to the Commission. Recognising that this function may increase the Commission s exposure to liability, the majority recommends requiring the Commission, as a protective measure, to consult with a Crown solicitor before commencing a prosecution. Withholding of information from register Clause 22 details the information that must be contained in the register of charitable entities, including particular contact details. As a general rule the public should have access to the information on the register, to ensure transparency in the sector. We heard some submissions expressing concern with this requirement, noting that some charities may have legitimate reasons for wishing to preserve the anonymity of those behind the entity. For example, an individual may wish to establish a grant-making charitable trust for philanthropic reasons, but may wish to keep the fact of their giving private. The majority therefore recommend that the bill be amended to allow the Commission to decide to remove particular information from the register, or restrict access to certain information, in cases where it is in the public interest to do so. The Commission should be able to exercise this power on application from the charity or on its own motion. We note that clause 48 already allows the Commission to remove information and documents from the register, and the majority considers the recommended amendment to be a necessary expansion and strengthening of this provision. Waiver of fees Clause 139(3) allows for an Order in Council to be made to authorise the Commission to waive payment of any fee or amount payable. The majority recommends that this provision be amended to also

17 Commentary Charities 17 allow the Commission to refund fees already paid where appropriate. For example, the Government has indicated that organisations with an annual income of less than $10,000 will not be required to pay annual return fees. An entity may pay the annual return fee, and later be discovered to have income under the threshold, and in such cases it is appropriate that the fee be refunded. Publication of notice Clause 64 provides that, in cases where the Commission has sent a clause 63 warning notice, but the matter has not been remedied, the Commissioner may publish a notice to the effect that the Commission considers the charity may have breached the Act, committed serious wrongdoing, or may no longer qualify for registration as a charitable entity. The clause also protects the Commission from any actions for defamation arising out of such a notice, unless the Commission acted in bad faith in publishing the notice. We heard a number of submissions expressing concern that the bill lacked sufficient safeguards to protect charities, given the significant negative consequences that could result from the publication of unproven accusations. The majority agrees, and recommends amending the bill to provide charities with a right to appeal against a decision to publish details under clause 64. In addition, the majority recommends amending clause 68 to allow charities to apply to the Courts for an interim order preventing the publication of the notice while the appeal is ongoing. Minor definition changes The majority recommends that the term administrator, as defined in clause 4(1), be omitted from the bill as it is unnecessary. The definition of serious wrongdoing in clause 4(1) captures an unlawful, corrupt, or irregular use of the charity s funds or resources. The majority considers that irregular use sets too low a threshold for this test, and therefore recommends the word irregular be omitted from paragraph (a) of the definition of serious wrongdoing. The majority recommends the definition of the term rules in clause 4(1) be amended by omitting paragraph (b). Submitters suggest this paragraph, which includes rules governing the conduct of the affairs of that entity is too broad, and could capture in-house policies, operating manuals, and even commercial contracts. While

18 18 Charities Commentary the Commission would be likely to apply the definition in a sensible manner, and the definition will not be applied as widely as submitters fear, the majority considers paragraph (b) to be unnecessary and that it should be omitted. Other minor amendments The majority recommends: amending clause 5 to allow trustees of a nameless trust to give the trust a name when registering it as a charitable entity. clause 14 be amended to confirm that, where a charity is incorporated under a name under the Companies Act 1993, that name complies with clause 14. clause 59 and 60, detailing requirements for notices and service of notices, be relocated as clauses 64A and 64B, and amended to provide that they apply, not only to notices given under clause 58, but also to warning notices given under clause 63. clause 138 be omitted, to reduce the penalties imposed on unregistered charities. The majority also recommends a number of amendments to ensure the bill is consistent with wording contained in the Income Tax Act 2004 and the Public Finance (State Sector Management) Bill. Responsible department During our consideration of this bill, we also discussed which department would be most appropriate to take responsibility for the Commission. The bill does not specifically address this issue, which will be decided by the Prime Minister next year, and the majority therefore recommends no change to the bill. Nevertheless, the majority recommends that the Ministry of Social Development be the responsible department for the Commission. The majority considers this is consistent with the Ministry s operations, particularly the activities of the Office of the Community and Voluntary Sector administered by the Ministry. We also note that this issue was considered by the Working Party on Registration, Reporting and Monitoring of Charities, and that entities in the charitable sector expressed a clear preference for the Commission to be under the Ministry of Social Development.

19 Commentary Charities 19 Other recommendations to Government The majority recommends that, following the establishment of the Charities Commission, Government undertakes a review of information flows between the charitable sector and Government departments with a view to compliance cost reduction. In particular, the review should identify areas of overlap in relation to requests for information by departments such as Statistics New Zealand and the Department of Internal Affairs. The majority understands that the Minister of Revenue, the instigator of the work that has led to the establishment of the Commission, is on record as saying that he would look at the possibility of a more generous tax regime for charities following the establishment of the Commission. In particular, the majority is aware the charities have, for many years now, sought an increase in the tax rebate level for gifts to charities (by both individuals and companies) and access to dividend imputation credits where charities invest in companies. The majority commends further consideration of this matter to Government. Minority views New Zealand National Party Although changes have been made to this bill through the Select Committee process New Zealand National is opposed to its introduction. The Government managed to upset most of the voluntary sector of New Zealand with this bill, which was poorly drafted and required a substantial rewrite. The submitters were appalled by the details of the bill, which they saw as a heavy-handed approach i.e. a hammer to crush an ant. We heard no evidence of impropriety in the charitable sector through the submission process though this belief was used as a genesis for this legislation. The legislation was developed to prevent charitable entities simply being set up just for the purpose of tax evasion and tax avoidance. Charities already need to be registered with Inland Revenue Department for tax-exempt status and having to register with another agency was felt by many to be unnecessary bureaucracy. Non-government organisation charities expressed major concern about the compliance cost which may put many

20 20 Charities Commentary charities out of business. The concern was expressed that the Charities Commission should be an independent entity and we are pleased to see this change has been made. The consultation process was inadequate with the original bill and we have major concerns that the redrafted sections of the bill should have been made available for a further period of sector wide consultation. We all know the devil is in the detail and if the bill gets it wrong, as the first draft definitely did the charitable sector will pay the price and we will see many charitable organisations close. There is the possibility that there are a number of structural issues in the bill remaining unaddressed and without a further period of consultation with the sector it is difficult to fully identify these. The New Zealand National Party sought to have a further period of consultation given that the changes to the bill were so dramatic but this was declined. Charities want to see the Commission working for them, to defend and support them, whereas they currently feel the bill is the heavy hand of government designed to police and control them. The impact on sporting groups, arts and cultural organisations that currently receive funding from trusts remains uncertain. We recognise how much these groups rely on such funding to be able to function. ACT New Zealand Party ACT New Zealand opposes the Charities Bill. ACT believes that the wholesale regulation of the charities sector is unnecessary. While legitimate concerns have been raised about the questionable activities of a small number of organizations which call themselves charities, we remain convinced that our present laws are sufficient to deal with bogus groups if they were properly enforced by the Inland Revenue Department and the police. Further, while this issue was identified as a key reason behind the introduction of this legislation, it does not appear that the bill as proposed adequately addresses it. The ACT Party is extremely concerned that the proposed regulations contained in the bill will impose significant additional compliance costs on charities. These will come at a time when the effect of other government regulations is already impacting heavily on this sector forcing some organisations out of business. It is regrettable that in spite of the special nature of the sector, the Minister did not feel the need to undertake a compliance cost impact analysis before the bill was drafted.

21 Commentary Charities 21 It became obvious to the Committee during the hearing of submissions that the bill as tabled was fundamentally flawed. Further it is very disappointing that an open and robust consultation process over the considerable changes to the bill was not undertaken. ACT strongly supported extending the report back date for the bill to allow for wider consultation rather than limited discussions with small groups selected by the Government in order to ensure that any unintended consequences from this legislation are minimized. The charitable sector underpins New Zealand s civil society. ACT believes that to grow and flourish, the voluntary organizations that work in this sector should be left as free as possible from State control. This bill seriously erodes their independence. Green Party The Green Party opposes the Charities Bill. Even with the proposed amendments, we believe it still poses a potential threat to the democratic and independent status of the voluntary sector. The bill as drafted presents a wide range of problems, many of which are still not addressed, including issues around: the definition of charity, charitable purpose and public benefit advocacy and the extent to which the advocacy function of community organisations can and should be regulated through the mechanism of this bill quite how independent the Commission will be the inability to develop common law in relation to the sector because of limited appeal rights what consultation process will exist around the regulations which will be put in place subsequent to the bill s enactment queries as to whether the bill adequately addresses the need to find better ways to expose and extinguish bogus and corrupt activities within the charitable sector. Overall, the Green Party maintains that if there is a need to establish a Charities Commission, this should be done through a wideranging and genuinely consultative process, which also makes use of the work already done here through the non-governmental organisations/government consultation of the last five years and of best practice from similar jurisdictions internationally.

22 22 Charities Commentary The Green Party believes that the community and voluntary sector plays a critical role in society, not only in providing services and nurturing people and the environment, but also in offering an independent, values-based voice that should be respected in any country that considers itself a democracy. We would like to see a Charities Bill that acknowledged the sector s true nature and worth.

23 Commentary Charities 23 Appendix Committee process The Charities Bill was referred to the committee on 30 March The closing date for submissions was 3 June We received and considered 753 submissions from interested groups and individuals. We heard 161 submissions, which included holding hearings in Auckland. Hearings of evidence took 28 hours and consideration took 8 hours 42 minutes. We received advice from the Ministry of Economic Development, the Inland Revenue Department, the Ministry of Social Development (Office of the Community and Voluntary Sector), the Treasury and Parliamentary Counsel. Committee membership Georgina Beyer (Chairperson) Dr Muriel Newman (Deputy Chairperson) Paul Adams Sue Bradford Hon Taito Phillip Field Bill Gudgeon Moana Mackey Katherine Rich Dr Lynda Scott Hon Judith Tizard Gordon Copeland replaced Paul Adams