In a High Court judgement released in May this year, the World Gospel Bible College (the college) was refused reregistration as a charitable entity under the Charities Act 2005. This meant that the college was unable to overcome a deregistration tax assessment for $686,000 it received when deregistered. We set out an abridged version of the facts below, but at the outset we note that this unfortunate circumstance could have been avoided had the college paid more attention to its compliance obligations under the Charities Act 2005.
By way of background, the college was deregistered as a charity by Charities Services for failing to file 2 annual returns to Charities Services. This was regarded by Charities Services as “a significant or persistent failure” to comply with the Charity’s obligations under the Charities Act 2005 and thus grounds to deregister the charity. The college did not appeal the Charities Services decision to deregister the charity within the timeframes allowed in the Charities Act 2005. However, following contact from Inland Revenue about its deregistration tax obligations the college commenced proceedings in the High Court to have the entity reregistered and thus avoid the deregistration tax.
Under tax rules, charities that are deregistered, that are not reregistered within 12 months, face a deregistration tax on the current market value of their accumulated net assets. The college had valuable land on its balance sheet when deregistered. The value of the land was taken into account in determining the deregistration tax cost of $686,000. Readers will be immediately aware that in taxing the net value of an asset, the deregistration tax is taxing gains derived by a charity that are outside the current income tax net.
The case for a deregistration tax is understandable when a charity has accumulated its assets tax-free under the income tax exemptions for charitable entities in our income tax law. If a charity fails to meet the requirements to be a charity, the deregistration tax claws back the tax benefits of the charitable exemptions. Presumably the basis for extending the breadth of the deregistration tax to the value of the assets (rather than just the tax benefit forgone) is to recover the tax costs of any tax credits applied to donations made to the charity.
However, be that as it may, if a charity holds assets that are increasing in value – any deregistration tax should not recover an amount more than the tax benefits enjoyed by a former charity when it was a charity.
While I have sympathy for agencies that have responsibilities for ensuring compliance with legislation such as the Charities Act, and thus for ensuring annual returns of charities are filed on time, I agree with counsel for the college that failure to file 2 returns should not constitute significant or persistent failure. This is particularly alarming when the college had been advised by its accountant that it need not file – presumably on the basis it was no longer an active charity. Unfortunately, that advice was wrong. With the appeal to challenge deregistration failing, the college had to pay deregistration tax and legal and court costs for not filing its charities returns.
This is a significant price to pay for a compliance failure that could have been easily remedied.
Importantly for Charities the decision highlights Charities Services' view that 2 failures to file returns amounts to “significant or persistent failure”. However, it merits understanding that the “significant or persistent failure” rule applies not only to breaches of obligations under the Charities Act 2005 but extends to breaches of obligations under “any other enactment”. So, for example, if a Charity is GST registered and failed to file GST returns this could also be considered by Charities Services when considering deregistration.
As an advisory firm we understand that organisations that are staffed by volunteers can and do make inadvertent errors in compliance matters, but unfortunately our laws do not make allowances for that.
The message to charities is that it pays to keep on top on compliance obligations.
Craig Macalister, Partner - Tax Advisory
The views and opinions expressed in this article are those of the author/s and do not necessarily reflect the thought or position of Crowe Australasia.
This document contains general information and is also not intended to constitute legal or taxation advice. If you need legal or taxation advice, we recommend you speak to a qualified adviser.