If you are thinking about establishing a charitable trust to promote a cause that you support, it's important to start with the fundamentals.
You will need to consider:
- Why you want to set up a charitable trust;
- Who or what the Trust is going to benefit;
- What activities the Trust is likely to carry out;
- How you will raise funds to support the Trust's purposes;
- The role of trustees and how they will be appointed.
While we refer to charitable trusts in this information sheet, the information is relevant for any entity established exclusively for charitable purposes, including companies and incorporated societies.
The distinctive features of a charity
- Donations may be tax deductible;
- Possible exemptions from income tax;
- Charitable trusts can continue in perpetuity if desired, as compared to other types of trusts (e.g. family trusts) that can (currently) only continue for a maximum of 80 years.
There are important distinctions between the various registrations and approvals that are available to charitable trusts.
Charitable status under the Charities Act 2005: Registering as a 'charitable entity' under the Charities Act 2005 means the Trust could be exempt from income tax on all or some of its income. To be a charitable entity, you need to register the Trust with Charities Services (part of the Department of Internal Affairs) under the Charities Act 2005. Once registered, the Trust can enjoy the tax advantages available to registered charitable entities under the Income Tax Act 2007.
Incorporation under the Charitable Trusts Act 1957: Incorporation under this Act will mean that the Trust has separate legal status. The key advantage of registration is that the Trust Board, not the trustees personally, will enter into all obligations. Incorporation does not affect the charitable/tax status of the Trust.
Donee status: This means that individuals who donate money to the Trust can claim a rebate and companies can claim a deduction. Donee status is not dependent on a Trust being a registered charity or being incorporated. Donee status is granted by the IRD if it is satisfied that the tests in the Income Tax Act 2007 are met. This includes that the purposes of the Trust are charitable, benevolent, philanthropic or cultural. Generally, the process for obtaining 'donee status' is automatically triggered if you apply for registration under the Charities Act 2005.
You do not have to be registered, incorporated or hold donee status to call your trust a 'charitable trust.'
What information is required to form a charitable trust?
Establishment of a charitable trust requires a Trust Deed, for which you will need:
- The name of the Trust;
- Its purpose i.e. what the trustees can apply the trust money towards;
- The number of trustees, and the names, addresses and occupations of the initial trustees; and
- The process for appointing new trustees.
Appointment of the board of trustees
The board of the Trust should be large enough to ensure that there is a range of knowledge, views and experience, but not so large as to be inefficient. Our general recommendation is that a charitable trust board has at least three, but no more than five, members.
The process for appointing the board of trustees is usually tailored to each Trust, and will reflect the size, purpose and complexity of the Trust. Some considerations include:
- Whether certain individuals, groups or entities should have the right to appoint any trustees (e.g. key supporters/funders);
- Whether the trustees should include, for example:
- A person with a specified level of experience in a specified industry;
- An accountant or lawyer of at least 10 years' experience;
- A person with a significant amount of previous governance experience.
What is the charitable purpose?
To be registered with Charities Services and enjoy the tax exemptions available to registered charitable entities, the purposes of the Trust must be "charitable," under the Charities Act 2005.
For a purpose to be charitable, it must:
- Fall within one of the four charitable purposes, namely relief of poverty, the advancement of education, the advancement of religion, or any other matter beneficial to the community;
- Provide a public benefit (i.e. a benefit that is available to the general public or wide section of the public); and
- Not be for the benefit of any private individual.
A copy of the Trust Deed will be lodged with the application for registration as a charitable entity, and Charities Services will make its decision based on an assessment of:
- The purposes as stated in the Trust Deed;
- Any activities that have already been carried out by the Trust; and
- Other information available about the Trust's activities and focus, e.g. a business plan, or the Trust's website.
We can provide specific advice once we have detail on the intended purposes of your proposed Trust.
Charities Services also needs to be satisfied that the Trust meets other tests, including:
- That the Trust is not carried on for private financial benefit or profit to an individual.
- A clause that directs all of the Trust's assets to charitable purposes or other charitable organisations on a winding up of the Trust.
What compliance is required?
Trusts registered as charitable entities with Charities Services under the Charities Act 2005 must file an annual return each year that includes a copy of the Trust's financial statements. The reporting standards that apply to financial statements are part of a tiered system, and the tier that a Trust reports under will be dictated by the annual expenses or operating payments of the previous two financial years.
New audit and review requirements for financial statements have also recently been incorporated into the Charities Act 2005. A registered charitable entity will be required to have its financial statements audited or reviewed if its total operating expenditure exceeds prescribed levels. No audit or review is required under the Charities Act 2005 if total operating expenditure is less than $500,000.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.