De-registration of a charity without then transferring net assets across to another charity results in the charity’s current market value treated as income and taxed.
There is a twelve month window after de-registration to transfer assets to another charity before tax authorities swoop. The rationale is that these assets have been built up in a tax-exempt environment, so should be taxed as accumulated income if now available for private use.
Charities are exempt from income tax and fringe benefit tax.
The World Gospel Bible College Charitable Trust challenged a $686,000 tax bill arising from its 2019 deregistration.
The Trust was established by a Korean Christian church group to recruit and train ministers. In 2008 it was registered on the Charities Register.
The High Court was told its religious purpose took a backseat in 2014 when the Trust’s registration with the New Zealand Qualifications Authority ended. It carried on as a property company, receiving rentals.
Acting on its accountant’s advice, the Trust stopped filing annual returns for the Charities Register to reduce administration costs. This resulted in its subsequent de-registration in 2019 for failing to comply with the Charities Act.
Later learning of the tax consequences, the Trust challenged its 2019 de-registration.
The High Court confirmed de-registration. Charitable entities cannot simply put aside public reporting requirements that accompany their privileged tax status, Justice Palmer said.
The Trust said notice warning of de-registration and a follow-up letter advising of the need to transfer assets to another charity had been sent to the wrong address.
There was evidence that Trust management had become aware of de-registration in Trust correspondence with Inland Revenue recorded through its online MyIR portal.
The High Court was told the Trust was re-registered as a charity in 2021. Re-registration, by itself, does not change any adverse tax consequences following from prior de-registration.
World Gospel Bible College Charitable Trust v. Inland Revenue – High Court (17.05.24)
24.127