By SociaLink Chief Executive Liz Davies
In a somewhat ironic twist, the Government is considering reducing the corporate tax rate while consulting on introducing tax on charities that generate unrelated business income.
This raises important questions about priorities, fairness and the long-term implications for both the economy and meeting need in our communities.
A reduction in the corporate tax rate would allow businesses to retain more of their profits, theoretically fostering economic growth, investment and job creation. However, it also means less revenue available for public services at a time when many communities are already struggling with increased demand for support.
Meanwhile, the proposal to tax charities on unrelated business income introduces new financial burdens that could significantly reduce resources available for community services. These policies could mean the very people who need support the most will suffer.
Understanding the impact
Charities often have revenue-generating activities to supplement donations and Government grants to provide critical services. Many operate op-shops, social enterprises or other business ventures. Under current rules, any profit generated is reinvested into charitable work, benefiting society as a whole.
If this tax change is implemented, charities will face:
- Reduced services – Taxing unrelated business income means fewer funds for frontline services. This will directly impact vulnerable communities, particularly where Government funding is already insufficient, such as hospices.
- Higher compliance costs – Increased regulatory and compliance burdens will divert resources away from service delivery. Charities already operate under tight budgets, and additional administrative costs could force many to cut back on core activities.
- Uncertain tax revenues – While the Government may anticipate revenue from taxing charities, it is unlikely to make up for loss of revenue from reducing the corporate tax rate. Charities are not profit-driven; they reinvest earnings into social good. Taxing them may diminish their effectiveness rather than contribute significantly to Government coffers.
Addressing rogue charities
Unfortunately it appears that of the over 28,000 charities in New Zealand there are a very small number of rogue charities that do not meet their legal obligations. These rightly need to be dealt with by Inland Revenue and Charities Services, who have the regulatory powers to hold charities accountable.
The vast majority work incredibly hard to deliver much-needed services to their communities, including generating more money from business activities to be able to deliver more services. Applying a ‘one size fits all’ approach to address a few rogue charities by removing tax exemptions on all charities is using a hammer to crack a walnut and will ultimately mean fewer services for our communities.
The need won’t disappear. Indeed, given the cutbacks to public services, the need is increasing. That leaves two choices – either the need is not addressed affecting overall community wellbeing, such as increased crime, or Government needs to step in to meet the need, which will cost more than if delivered by a charity.
Prioritising economic growth over community wellbeing
Businesses are undeniably critical to a thriving economy. They create jobs, drive innovation and contribute to tax revenue. However, prioritising corporate tax cuts while imposing new taxes on charities raises serious equity concerns. The logic behind reducing the corporate tax rate is that it will stimulate economic activity, but at what cost? Who benefits from corporate tax cuts?
Remember the ‘trickle down economics’ of the 1980s which suggested tax cuts and deregulation for businesses would stimulate economic growth, to benefit everyone? What it did do was benefit the wealthy and did not effectively ‘trickle down’ or address the needs of the broader population.
The social services sector is already under immense pressure. Rising living costs, increased demand for services and shifts in funding streams have made it more difficult than ever for charities to support their communities. This tax change could exacerbate the struggles of those who rely on essential community services.
A balanced approach
The Government could consider a more balanced approach:
● Maintaining tax exemptions for charities – Charities play an essential role in community wellbeing and should not be penalised for finding innovative ways to generate income. Ensuring they can continue to reinvest all revenue into their services will ultimately benefit society.
● Assessing the true cost of corporate tax cuts – Before reducing corporate tax rates, there should be a thorough analysis of the long-term impact on Government revenue and public services. If there’s a shortfall, will it be offset by growth, or lead to further cuts in social spending?
● Supporting social enterprises – If the Government is serious about fostering a sustainable economy, it should explore policies that support social enterprises rather than hinder them.
It is essential to question whether the proposals align with values of fairness and community well-being. While supporting businesses is important, it should not come at the expense of community services that provide lifelines to thousands of people.
Charities and social enterprises work tirelessly to bridge the gaps in society where Government support falls short. Taxing them will not solve fiscal challenges – it will only create new ones.
A fair tax system should promote a thriving economy without undermining the social infrastructure that supports our most vulnerable communities. If the Government truly wants to build a stronger and more resilient society, it must find a way to balance business incentives with the need to sustain essential community services.
Now is the time for meaningful consultation and thoughtful policy-making that recognises the vital role of both in shaping a better future for all.
EDIT: See SociaLink’s submission here: Submission on Taxation and the Not for Profit Sector
