Minimal benefit, maximum harm

My submission to the IRD on taxing charities

Date: 31 March 2025

To: Inland Revenue

Re: Submission on Taxation and the Not-for-Profit Sector

This is a submission on the Inland Revenue Department’s consultation document, Taxation and the Not-for-Profit Sector. It is a personal submission, made in my own capacity and not on behalf of any organisation.

I am a lawyer practising in the provinces. I advise charities and not-for-profits every week. I see first-hand the value they deliver to our communities and the challenges they face. The proposal to revisit the tax treatment of income-earning activity by charities, including the possible introduction of a UBIT-style regime, is of serious concern.

In my view, applying income tax to business activity undertaken by charities is a mistake. It risks doing real harm to the sector for minimal, if any, revenue benefit. I set out my reasons below.

The Role of Charities in Society and the Tax System

Charitable organisations exist to deliver public benefit. They do not distribute profits, do not generate private gain, and typically operate under strict fiduciary and governance constraints. Their surplus, if any, is reinvested into their work. The consultation document rightly acknowledges this, but risks undermining that very principle by suggesting that a commercial activity, even if wholly directed to charitable outcomes, may no longer warrant tax relief.

Tax policy has long recognised the distinction between purpose and form. A café operated by a private business aims to generate profit for shareholders. A café operated by a charity might exist to provide training to the unemployed, reintegrate recovering addicts into the workforce, or subsidise the organisation’s primary charitable services. The superficial similarity in activity does not imply equivalence in nature.

Any move to tax such income on the basis that it is “unrelated” to the core charitable purpose, even where its profits are wholly applied to charitable purposes, would amount to an erosion of that principle, and a retreat from the settled policy logic underpinning the current exemption.

International Experience with UBIT is Poor

The consultation document appears to look to the United States’ Unrelated Business Income Tax (UBIT) regime as a possible model. I believe this would be a serious error. The U.S. experience provides a cautionary tale, not a precedent to follow.

UBIT in the United States raises vanishingly small revenue—typically less than 0.03% of total federal tax income—while imposing substantial compliance burdens on charitable entities. According to IRS data, fewer than 4% of charities report any unrelated business income, and even fewer pay any tax after deductions.¹

Moreover, UBIT’s complexity forces even modest charities to spend scarce resources on legal and tax advice to interpret vague and inconsistent rules. For example, the requirement to “silo” each activity and track unrelated profits and losses separately has led to significant increases in accounting costs for thousands of organisations. The result is a disproportionate burden on smaller charities, which often abandon or avoid income-generating initiatives altogether due to the risk of tax exposure or inadvertent non-compliance.

In 2019, the U.S. Congress was forced to repeal a recent UBIT extension (taxing parking and transport benefits for staff) after widespread backlash and bipartisan recognition that the tax was pointless and harmful. The lesson is clear: UBIT offers ideological tidiness, not practical benefit.

A Solution in Search of a Problem

The consultation document acknowledges that New Zealand’s charitable sector is smaller and more community-based than in other jurisdictions. The likely revenue from a New Zealand UBIT regime would therefore be even more limited even as the administrative burden still falls hard on local charities.

No robust modelling or evidence has ever been produced that suggests significant tax leakage is occurring under the current framework. Nor is there evidence that charitable entities are engaging in unfair commercial competition at scale. The suggestion of taxing charities in the name of “level playing fields” appears driven more by theoretical consistency than empirical concern.

In this respect, I draw Inland Revenue’s attention to the work of Professor John D. Colombo, a leading American scholar on tax-exempt law, who has analysed and rejected the argument that taxing the commercial income of charities is necessary to preserve a level playing field.²

He notes that charitable entities typically operate under different incentives and constraints than for-profits, and that their commercial activities are often small-scale or in areas where for-profit providers are absent. Colombo concludes that any competitive distortion is minimal and does not justify the loss of charitable capacity that would result from taxation. The rationale, in other words, is more theoretical than real.

In practice, taxing income-generating activities would not eliminate the charitable purpose to which profits are applied. It would simply reduce the funds available to pursue that purpose. That means fewer meals served, fewer beds offered, fewer counselling hours provided, and fewer youth supported. The public cost of weakening the charitable sector would exceed any hypothetical revenue.

Charities Already Face High Administrative Burden

Even without new tax rules, New Zealand charities must comply with extensive reporting, financial, and governance requirements. Introducing a requirement to determine whether an income source is sufficiently “related” to a charity’s purpose would introduce unavoidable ambiguity and friction. The law does not need more ambiguity and friction.

Who decides whether a church retreat is part of a spiritual mission or a commercial accommodation service? Whether a social enterprise bakery is rehabilitative or simply retail? These questions cannot be mechanised. Every determination would require subjective analysis, legal interpretation, and potential dispute. Charities would need legal advice. Inland Revenue would need new enforcement mechanisms.

This is the opposite of administrative efficiency.

Transparency and Targeted Integrity Measures

If there are concerns about charitable entities operating in a way that conflicts with the spirit of their exemption, the answer is targeted transparency and accountability, not broad-based taxation.

It would make sense to always be considering:

• Improved reporting for large charitable entities with significant business income

• Better enforcement tools where organisations misuse charitable status

• Measures to prevent private benefit or abuse of tax-exempt structures

None of that requires a blunt tax instrument that penalises legitimate activity, imposes unjustified costs, and solves a problem that has not been demonstrated to exist.

Reject an Ideological Turn

Charities are already under pressure. Demand for their services is growing. Volunteer time is finite. Donations are stretched. And the public expects them to deliver more, not less.

Introducing a UBIT-style regime would not safeguard the integrity of the tax system. It would weaken the sector, diminish the services they provide, increase demand for public services and raise almost no meaningful revenue.

This would prioritise abstract consistency over practical justice—and impose costs that New Zealanders, especially the vulnerable, would ultimately bear. I urge Inland Revenue and the Government to reject this proposal in full. Tax policy should serve people and an obsession with abstract consistency.

Liam Hehir

1. Per IRS Statistics of Income – Exempt Organizations, Form 990-T (2017); Urban Institute “How the TCJA’s New UBIT Provisions Will Affect Nonprofits” (2019).

2. John D. Colombo, “Commercial Activity and Charitable Tax Exemption,” 44 William & Mary Law Review 487 (2002), especially at 510–51.