Canterbury Development Corporation & Ors v Charities Commission (2010) 24 NZTC 24,143.
Re Education New Zealand Trust (2010) 24 NZTC 24,354
Two recent cases in the High Court have upheld the decision of the Charities Commission to decline charitable status to organisations which had previously been treated as charitable. This appears to signal a shift from the past in the way the Commission exercises its functions under the Charities Act 2005.
The cases arose under the charities structure that has been in place since 2007. Previously, organisations applied to Inland Revenue for approval of charitable status, but registration is now granted or withheld by the Charities Commission. All organisations previously recognised as charitable were required to apply to the Commission for registration under the Charities Act if they wanted to retain their tax exempt status under the Income Tax Act 2007. If an application is declined, an appeal can be made to the High Court, hence the cases cited above.
Canterbury Development – relief of poverty?
For the purpose of the Charities Act 2005, “charitable purpose” includes 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. The central question in the Canterbury Development trilogy of cases was whether a “community development purpose” is a charitable purpose under New Zealand law. The three entities involved in the cases had all previously been regarded as charities, but had their applications for registration declined by the Charities Commission.
The Canterbury Development Corporation (“CDC”) provides industry development assistance, and has criteria for deciding whether it will provide assistance to a project or a business. The Charities Commission declined charitable status on the grounds that the entities’ community development purpose was only charitable where the relevant community was disadvantaged.
CDC submitted that its charitable purpose was relief of poverty, the advancement of education and the beneficial effect to the community through development of industry and commerce. The purpose of CDC’s objects was focused on the development of individual businesses. The provision of support to those businesses was done in the hope and belief that their economic success would be reflected in the economic wellbeing of the Canterbury region.
The High Court ruled that the CDC did not have a charitable purpose. Broadly, CDC was found not to relieve poverty because, while the unemployed could be one of the ultimate beneficiaries of its work, the purpose of CDC was not to assist the unemployed. Instead, CDC’s purpose was to assist businesses to prosper, and the possibility of helping someone who was unemployed was too remote for it to qualify as the charitable purpose of relief of poverty.
It was found that enterprises such as CDC typically provide jobs and generally contribute to the economic wellbeing of the society they operate in, but they are not themselves charities. Neither was CDC found to be charitable because it advanced education. The CDC provided business training for those who identified such a need but given the narrow way in which it defined eligibility, this opportunity was not provided to a broad section of the public. Lastly, CDC’s constitution did not satisfy the requisite “public benefit” test because its primary purpose was the assistance of individual businesses and not all businesses that asked for or needed help were offered it. It was held that Public benefit need not be for all the public, but it must be for a significant part.
The result was the High Court upheld the Charities Commission’s decision to decline charitable status. Significantly, the High Court discussed s 61B of the Charitable Trust Act 1957, the purpose of which is to allow, in appropriate cases, deletion of non-charitable purposes to save a charitable trust. However, the Judge held that it was not possible for a Court to delete significant portions of each organisation’s purposes and be confident that there could be a coherent structure and function left. Nor was CDC allowed the chance to amend its purposes and functions to see if it could bring itself within the definition of a charitable entity sufficient for registration.
This decision has had profound effects on the tax treatment of organisations established by local authorities around the country to promote economic development. Such organisations need to be refocused on particular objectives which fall clearly within the bounds of charity. Thus a Trust might be established not to promote economic development as such but to reduce or to prevent the occurrence of unemployment within a region and to promote in the region the development of employment opportunities to that end. That will not be enough however unless the Trust can show how its activities are directly related to the achievement of these ends.
Re Education New Zealand Trust – Public benefit?
This Trust was established primarily to co-ordinate activities to promote New Zealand as a study destination for foreign students. The Charities Commission was satisfied that the purpose of the trust came within the charitable purpose of advancement of education. The Commission also took the view that promoting international education and training in New Zealand would provide some benefits to the community and would therefore be charitable as “another matter beneficial to the community”. However, the Commission was not satisfied that there was also the requisite public benefit.
The Trust was formed at the instigation of the New Zealand government. It comprised seven members, all of which were umbrella organisations, and included both private education providers and not-for-profit education providers. Counsel for the Trust argued that the mode of generic promotion of New Zealand educational services meant that it was the sector as a whole that was promoted to overseas students, and the benefits accruing to institutions in the for-profit part of the sector were no more than incidental to the benefits to the majority of the sector, being the state-owned, not-for-profit institutions.
It was found that 70% of fees from overseas students were received by the not-for-profit sector, meaning the Trust’s purpose was “substantially altruistic”. The Court indicated that if that had been the Trust’s only activity, the requisite public benefit test would be met. However, it was held that the fact that the private sector comprised 30% of the Trust’s constituency meant that the non-charitable purpose could not be characterised as ancillary, secondary, subordinate or incidental. The generic promotion of courses run by for-profit education providers could not be characterised as substantially altruistic. Even at a generic level, the promotion of such courses was an aspect of commercial businesses.
As in the Canterbury Development cases, the High Court considered whether s 61B of the Charities Act 2005 could be applied to strike out the non-charitable part within the Trust rules. However, the Court rejected such an approach as involving a “cynical narrowing” of the wording in the rules. As the Trust’s purposes were addressed indiscriminately between charitable and non-charitable aspects, that is the promotion of not-for-profit and for-profit educational providers, the Court held that section 61B could not be applied.
Significantly, Dobson J noted in his concluding remarks (para ):
With respect, it ought not to be beyond the wit of legal and accounting advisers to design bifurcated arrangements for generic promotion involving some form of joint venture between a validly charitable trust for those parts of the sector that are not-for-profit, and discrete contributions from the for-profit sector, to be presented in a unified form externally.
The Charities Commission chief executive Trevor Garrett has echoed similar sentiments. These decisions indicate that splitting out uncharitable and charitable purposes is advisable to ensure that an entity will be approved as charitable.
The Education New Zealand Trust case reinforces that there are several steps that an applicant for registration as a charity must take and the particularity with which the Commission can be expected to examine these. First its objects must be charitable. In this case there was undoubtedly a link with the promotion of education but that was not enough in itself. Secondly the activities of the applicant must be undertaken “for a public benefit”.
In the past this has been seen as requiring simply that the charity not be directed to personal or private benefits or outcomes, but it now seems to mean that the public or a sufficient section of the public ought to receive a benefit as recipients or objects of charity in the broad sense. It is not permissible that a section of the public might benefit (in this case the for-profit sector) but in the context not of charity but of business. Lastly, and this is a proposition which may be tested further, it appears the Court has said that the possibility a section of the public may receive non-charitable (ie business) benefits prevents recognition of charitable public benefits accruing to others, even if they represent the majority.
That proposition may be more to do with the expectation that charitable activity should be exclusive and that, at 30% of the market, for-profit support could never be regarded as ancillary or incidental to not-for-profit support.