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Michael Gousmett

Dr Michael Gousmett (PhD FCIS BCom(Hons) BBS DipCM DipTchg) is an independent researcher and public historian, whose speciality is the charity and non-profit sector. Michael has over 25 years charity and non-profit sector experience as a general manager and executive officer, and is a former member of the External Reporting Advisory Panel, advocating for non-profit sector financial reporting issues. He is a regular contributor to the charities issue of the New Zealand Law Journal. With a Diploma in Teaching, Michael is also an experienced lecturer and tutor in financial and management accounting, taxation, and finance. His Doctorate, on the historical origins of the charitable purposes exemption from income tax, is available at the University of Canterbury via http://hdl.handle.net/10092/3448

Ngai Tahu’s Charitable Status as a Land-Dealing Property Developer

The Press of 3 October carried yet another story on Ngai Tahu’s continuing successes, this time focussing on its property developments at Wigram Skies, the former air force base.

The CEO of Ngai Tahu Property Limited, Tony Sewell, in responding to people who criticise Ngai Tahu’s income tax exempt status as a charity, stated that he thinks that Maori in New Zealand are easy to criticise for being successful, and in so doing misses the point altogether.

When I lecture my advanced tax students at the University of Canterbury on charities and income tax I make the point that Ngai Tahu is to be congratulated for being so successful, whether or not they are Maori, and that I am not “Maori-bashing.” I also make the point that because a shareholder has charitable status and is therefore exempt from income tax, as also stated by Mr Sewell, why is it then that that status colours the commercial activities undertaken by the shareholding company with the same income tax privilege?

This is not a failing of charity law; it is a failure of tax policy and of successive governments to address the issue.

Since 1967 numerous tax reviews have argued that trading by charities should be taxed. If the commercial activity is not directly related to the charitable purposes of the entity, then it should be liable to income tax, as happens in the UK where this concept dates back to the 1920s.

To explain: a private school charges fees for the provision of education. Under charity law, the advancement of education is one of the four heads of charitable purpose as laid down in the famous Pemsel case in England in 1891. The fees are directly related to advancing education.

What then is the activity in property development that is a related charitable purpose? Are homes for the disadvantaged built at Wigram Skies and provided at minimal cost to the purchaser regardless of race? If so, that falls under Pemsel’s fourth head, public benefit.

However that does not appear to be the case with Ngai Tahu Property, but I will stand corrected if I am wrong.

But when we are talking of property development, there is another issue that needs to be considered. Under the Income Tax Act 2007, dealing in land with the intention of making a profit creates an income tax liability.

The Press article states that Ngai Tahu bought Wigram Aerodrome in 1997 for $16 million. The Press also recently reported that Ngai Tahu Property’s assets have grown from about $3 million to an equity value of $553 million at June 30 2015 with total property assets valued at $700 million.

Clearly Ngai Tahu deals in land with the intention of making a profit. What for-profit property developer could possibly compete against an entity with such a privileged fiscal status?

How is it that such dealing, which has nothing to with charitable purposes other than claiming that as its shareholder has charitable status therefore dealing land is also coloured with that privilege, is not coming under the scrutiny of Inland Revenue?



Dr Michael Gousmett FCIS PhD
Independent Researcher and Public Historian

The existing legislation should be amended to provide that profits from trading derived directly or indirectly by charitable organisations and dividends derived from any company substantially owned by such organisations are assessable for income tax at normal rates.
   Taxation Review Committee, 1967

The competitive advantage a charity could gain through the ability to accumulate tax-free profits [enables] a faster accumulation of funds [which would allow it] to expand more rapidly than its competitors. [This was] the real competitive advantage that trading activities owned by charities have over their competitors. Trading operations owned by charities would be subject to tax in the same way as other businesses.
  Tax and Charities, IRD, June 2001

Recently TV3’s “Story” ran an item on Waikato-Tainui in which a number of claims were made which need an explanation from the iwi. Those claims were made by the Chairman of Te Arataura o Waikato-Tainui, Rahui Papa. “Expanding is easier to do when you don’t have to pay tax, and getting the charitable tax exemption was part of the Treaty settlement too,” said Mr Papa, according to a transcript of the show. Mr Papa also stated that “in almost every year we distribute more than what we would’ve paid in tax. If it were an income taxpaying business, last year it would have stumped up $5 million. It spent more than $22 million on charity. The year before, tax would have been $6.3 million.” I would like Mr Papa to show me in whatever legislation it is stated that, as part of their Treaty settlement, Waikato-Tainui’s commercial trading activities have been granted the privilege of exemption from income tax. I would also like to know when Parliament started legislating tax policy other than in tax legislation. If this particular fiscal privilege which was granted specifically to Waikato-Tainui is, as claimed by Mr Papa, indeed in our tax legislation, where might it be found?

A close study of Waikato-Tainui’s reporting on the Charities Register only adds more confusion in attempting to understand their financial activities. Apart from various annual returns, which are a standard form template in which charities can “hide” movements of funds due to the lack of a requirement to provide a statement of movement in equity ($200 million in one charity over a number of years, $28 million in another, $6 million in a third), there are three sets of financial statements for Waikato-Tainui for 2014 that need to be studied, but we will begin with the key document. That document is the annual report of Waikato-Tainui for 2014, an impressive document of 100 pages. The parent entity of Waikato-Tainui is the Waikato Raupatu Lands Trust, of which the Trustee and ultimate controlling party is Waikato-Tainui Te Kauhanganui Incorporated. There are also a number of entities that comprise its associates, as well as joint ventures. Of those subsidiaries, 17 are limited liability companies, of which 9 are registered with Charities Services. There are 3 limited partnerships, which by their very nature are secretive and not accountable to the public, and one incorporated society which has ultimate authority over all Waikato-Tainui entities, Waikato-Tainui Te Kauhanganui Incorporated, which is also registered with Charities Services. The one associate was by the end of the financial year a subsidiary company. In addition there are 5 unincorporated joint ventures, of which 2 are limited liability companies, 2 are limited partnerships, and one is a joint venture.

The relevance of this is that the notes to the financial statements declare that as “the Trust” is approved as being charitable under the Income Tax Act 1994, “accordingly no income tax is payable.” The Trust reported a net operating profit of $22.6 million before extraordinary items which then produced a net profit before tax of $69.3 million. Before tax? Yes, before tax. Or at least before a tax credit of $1.6 million which took the net profit for the year to $70.9 million and, after a further adjustment, to total comprehensive income of $73.9 million. The Trust reported profit subject to income tax of $1.2 million (probably due to some subsidiaries and associates entities being taxable but with no explanation as to who they might be) on which company tax at 28% was $342,000 before a tax refund on a bonus issue which produced the income tax credit of $1.6 million. So not only does the tax payer subsidise these business activities, we also provide tax credits. Assuming also that the net operating profit was taxable income in a for-profit company, which would result in an income tax liability of $6.3 million on a net profit of $22.6 million, an amount that agrees with that stated by Mr Papa. It would appear then that he was talking about the Trust’s 2015 financial statements which are yet to be filed with Charities Services. During the 2014 financial year the Trust distributed $6.1 million, almost the same amount as it would have paid in tax for 2014, and retained income tax exempt income of $16.5 million – an indirect income tax subsidy of $4.6 million for 2014 alone.

The second report which needs to be studied is that of Tainui Group Holdings Limited which was filed with Charities Services for all but one of the registered subsidiary companies, but because of a propensity for Waikato-Tainui to change the names of their companies frequently, it is something of an exercise to figure which is which in relation to the list in the Trust’s report! Like the Trust’s report, the TGHL report contains a mix of “charitable” companies and others that are not - yet – registered as charities.

However, this is where the discrepancy between the Trust’s financial statements and those of Tainui Group Holdings Limited, which reported a net profit of $47 million before income tax of $342,000, a difference between the Trust and the Group of some $24 million becomes apparent. If the Group were a for-profit entity it would have an income tax liability of $13.2 million on its net profit of $47 million, compared to the Trust’s income tax of $6.3 million on its net profit of $22.6 million.

What then are the principal activities of the Waikato Raupatu Lands Trust and its subsidiaries? The Trust describes these as being:
  • Grant distribution;
  • Property investment;
  • Property development;
  • Agriculture;
  • Hotels;
  • Fishing; and Investments.
What then of grant distributions? We find details of those in the financial statements which reported a grant expense for 2014 of $6.1 million (2013: $7.1 million) which almost equates to the income tax figure stated by Mr Papa. However, that’s a tad short of the $22 million claimed by Mr Papa by about $16 million.

Who then are the subsidiaries that are part of this Trust? The list makes interesting reading:
Registered with Charities Services:
  • Raukura Moana Seafoods Limited
  • Raukura Whare Limited
  • Tainui Corporation Limited
  • Tainui Development Limited
  • Tainui Group Holdings Limited
  • TDL No. 1 Limited
  • TDL No. 2 Limited
  • Te Rapa 2002 Limited
  • The Base Limited
  • Plus:
  • Waikato-Tanui Te Kauhanganui Incorporated.
Not registered with Charities Services:
  • Hamilton Riverview Hotel Limited
  • Ruakura Fee Simple Limited
  • Ruakura Limited
  • Tainui Auckland Airport Hotel GP Limited
  • TGH No. 1 Limited
  • Waikato-Tainui Distributions Limited
  • Waikato-Tainui Fisheries Limited
  • Waikato-Tainui Koiora Limited
  • Tainui Auckland Airport Hotel LP
  • Waikato-Tainui Koira Collective LP
  • Waikato-Tainui Tribal Authority LP
  • Plus:
  • Waikato Raupatu River Trust
It is curious that Waikato-Tainui do not list the River Trust as being charitable, as the rules for the Waikato River Clean-up Trust on the Charities Register consist of an Act of Parliament, the Waikato-Tainui Raupatu Claims (Waikato River) Settlement Act 2010, with Waikato-Tainui being one of 5 iwi listed in the Act as “river iwi.” Reference is made to the River Trust, as well as the Clean-up Trust, in the Waikato-Tainui Annual Report. The annual report for 2014 filed with Charities Services by the Trustee for the Clean-up Trust is that of the Waikato River Authority, being the third report of the three that needs to be studied, in which it was stated that $5.5 million had been allocated to 33 projects from total revenue for 2014 of $914,502.

It is also interesting to see that on 31 March 2015 the Waikato Raupatu Lands Trust and Group had registered 5 more limited liability companies with Charities Services, and a sixth on 8 April 2015: TGH Direct Investments Limited, TGH Hotels Limited, Ruakura Limited, TGH Primary Industries Limited, TGH Farms and Forestry Limited, and TDL No. 3 Limited.

However, the financial performance of the Ngai Tahu Charitable Group of 33 limited liability companies, with their 2014 annual return reporting a total gross income of $408 million and a net surplus of $135 million, far exceeds that of Waikato-Tainui. In particular, with grants of $442,500 being only 0.1 per cent of total gross income, why is the government not investigating the charitable status of the Ngai Tahu Charitable Group? The Ngai Tahu Charitable Group’s net surpluses also exceed those of “Sanitarium” and their net surplus of $21 million before charitable distributions of $18 million leaving $3 million untaxed, a subsidy of $835,000. In comparison to all of these entities, Marist Holdings (Greenmeadows) Limited have yet to file their financial statements for 2014, but in 2013 reported a net surplus of $2.9 million from which a dividend of $1.5 million was paid to its sole shareholder, The Society of Mary General New Zealand Trust, leaving an untaxed surplus of $1.4 million, a subsidy of $384,000.

The question must be asked: Is this what Parliament intended in 1892 when it first granted an exemption from income tax for public charitable institutions carried on for public charitable purposes in our first true income tax Act? Why have the recommendations of tax experts, from the Ross Committee of 1967, to the Tax and Charities discussion document of 2001, and others such as Roger Douglas in 1987, all of which recommended that trading by charities should be subject to income tax, been ignored by successive governments? When is a New Zealand government going to restore equity to our tax legislation by levelling the playing field in the commercial sector between so-called commercial “charities” and their for-profit competitors by stopping what is now becoming at best an abuse of our income tax legislation and at worst a farce? Why has this situation been allowed to develop when in England, the country which is the source of our charity law, taxes large scale trading undertaken by charities that is not an activity directly related to its charitable purposes and has done so since the 1920’s? How is it that in New Zealand because a shareholder has charitable status as the owner of a commercial trading activity, that status colours the trading activities with charitable fiscal privileges as well? This issue is not a failure of charity law; it is a failure of New Zealand’s tax policy.
7 September 2015

Ngai Tahu distributions and tax

An article in the Christchurch Press of 1 August about Ngai Tahu claims that some profits from the iwi’s operations go to the tribal members in annual distributions and that the exemption from income tax benefits iwi members and not Ngai Tahu Property.

I beg to differ, as an analysis of the annual returns filed by the Ngai Tahu Charitable Group on the Charities Register tell a different story.

I suspect that the annual distributions are made by the Maori Authority that is a part of Ngai Tahu, with the Authority paying income tax at 17.5 cents in the dollar.

For the six years from 2009, when the Group first filed an Annual Return, to 2014 the Ngai Tahu Charitable Group distributed only $1.5 million by way of grants and donations, which is 0.11% of the Group’s gross income of $1.4 billion......

Continue reading Dr Michael Gousmett's interesting and informative article HERE

Taxing Non-related Large-scale Trading by Charities - correcting an unintended consequence

Recent letters to the Press have asked the question, why do trading operations undertaken by Ngai Tahu have charitable status, therefore are exempt from income tax? As a charity specialist I always reply to such letters but the Press in exercising its editorial discretion does not always see fit for whatever reason to publish my informed responses.

The latest letter, on 25 June by John Burn, pointed out that no doubt property developers and agricultural commercial rivals would be aggrieved at the fact that Ngai Tahu pays no income tax on its trading activities, the basis of which are public assets gifted by the government which now allows Ngai Tahu to build a huge corpus. Mr Burn is quite right about the growth of Ngai Tahu’s trading activities and my response to the Press explained how that growth is occurring.....

Continue reading HERE

The Failure of Ngai Tahu holdings Corporation as a “Charitable” Entity

No-one can say that Ngai Tahu has not done well out of the settlement with the Crown of compensation worth $170 million in 1998, with the net worth of Ngai Tahu now being in excess of $1 billion. However, Ngai Tahu have taken advantage of the income tax legislation and charity law to grow the settlement to the point which must raise questions about the privilege of the exemption from income tax being granted to limited liability companies. This surely must raise issues of competitive neutrality, equity and fairness with respect to income tax. Adam Smith must be turning in his grave!

When in 1880 provision was made in our legislation for entities that undertook commercial activities for the promotion of charity to do so with the status of limited liability, the government of the day could not have foreseen what in tax parlance is described as the unintended consequence of that status. That unintended consequence now allows income–tax exempt commercial activity on a scale never before seen in New Zealand, as can be seen in Ngai Tahu’s latest results. Ngai Tahu can claim charitable status for their commercial operations because they are said to be for charitable purposes. However, in order to discover the legal basis for their charitable status requires effort, for it is not evident on the Ngai Tahu Charitable Group details on the Charities Register – in fact there is no constitution on the Register for the Group that the public can read. The constitution for Ngai Tahu Seafood Limited, a member of the Group which can be found on the Companies Office register as well as the Charities Register, empowers the company to carry out its business as trustee in trust for the Ngai Tahu Charitable Trust, another member of the Group. The Objects of that charitable trust include:....

Continue reading HERE

Tax-payer subsidised charities and their business activities – time for change

What of the South Island based Te Runanga o Ngai Tahu (TRONT) and its Ngai Tahu Charitable Trust? To understand their financial activity, reference must be made to both the Charities Register and Ngai Tahu’s website. The Charities Register carries the combined group financial statements for the Ngai Tahu Charitable Trust, a group comprised of the Trust, Ngai Tahu Holdings Corporations and its subsidiaries and trusts. This structure contains 38 limited liability companies, three trusts including the Ngai Tahu Charitable Trust, and a scholarship fund. There is also another set of financial statements on Ngai Tahu’s website which reports the summary group financial statements comprised of TRONT and the Ngai Tahu Charitable Trust, which is “extracted” from the audited full group financial Statements. For 2012, these financial statements reported revenue and other income from trading operations of $209 million, and a profit of $69 million before Maori authority and Australian taxation of $427,000. Distributions relating to tribal, runanga and whanau amount to $16.6 million, or 8 per cent of revenue, from an asset base of $658 million, yet the report by the chair and chief executive claims that distributions to TRONT totalled $26.26 million. It is difficult to see where in the financial statements this figure can be found. Why also the need for two sets of financial statements? By extrapolation between the two sets of financial statements, it appears that TRONT earned revenue of $8.2 million, not $26.26 million as claimed, and spent $10.8 million on what was described as tribal, runanga and whanau distribution “expenses.” Why then, with these levels of funding, are there reports of housing and poverty issues amongst Maori in Canterbury? The TRONT report also discloses levels of remuneration in bands of $100,000. In 2012 there were 67 employees who earned $100,000 or more, at a total cost of $12.8 million, an 18.5 per cent increase on 2011 at a cost of $10.8 million. How then is it possible for an organisation which argues that it is a charity can pay its top three earners between $1.76 and $1.79 million, or 14 per cent of the remuneration paid to the 67 employees, with the top earner receiving between $680,000 and $689,999? In 2011 there were 61 employees who earned in excess of $100,000, with the top of the remuneration band being $499,999. This suggests that the top earner received an increase in remuneration of 38 per cent, or a maximum of $190,000 in 2012. The simple question is, why? Excesses in remuneration are not unique to the for-profit corporate sector, as such figures now show.....

Read full article HERE