An Update on legislative changes affecting the sector

By Sue Barker, Charities Law

There is a lot of change affecting the charitable sector at the moment.

Incorporated societies’ reform

For example, on 5 April 2026, the Incorporated Societies Act 1908 will be repealed and any societies still registered under it will cease to exist, an outcome that will trigger a range of significant practical and legal consequences (including, potentially, an inability to access the assets of the former society). Every incorporated society must proactively work out how it is going to respond to the Incorporated Societies Act 2022 if it wishes to retain the benefits of incorporation and avoid the consequences of a forced de-incorporation. There appears to be a lot of confusion about this in practice: so far, only about 10% of incorporated societies have successfully transitioned to the new legislation. Research indicates that many charities are not aware of their underlying legal structure, or consider that registered charitable status will shield them from the effects of the new legislation. This is not correct: registered charitable status has nothing to do with a charity’s underlying legal status. It is very important that charities, whether registered or not, take the following steps:

1. work out whether they are a trust or a society;

2. if they are a society, work out whether they are incorporated; and

3. if they are incorporated, work out which Act they are incorporated under.

Societies incorporated under the Incorporated Societies Act 1908 must take action now before it is too late. Societies incorporated under the Charitable Trusts Act 1957 may transition to the new legislation if they wish, but are not required to do so. Charitable trusts are not affected by the new legislation for incorporated societies. If unsure, please seek specialist legal advice.

For more on this, see: https://legalwiseseminars.co.nz/insights/changes-for-charities-incorporated-societies-regulations-2023.

Deregistration tax

Another red flashing light that all registered charities should be aware of is the deregistration tax in section HR 12 of the Income Tax Act 2007. Section HR 12 has been amended many times since its introduction in 2014 and it is now a reasonably complicated tax but, broadly, a registered charity that is deregistered, for whatever reason, must either reregister under the Charities Act 2005, or divest itself of all its assets, within 12 months, or it will be required to pay tax on the market value of its net assets (plus interest and potentially penalties). Market value can be significant for assets, such as land and buildings, that may have increased significantly in value over time. The Inland Revenue Department is very active in this area and it is catching a lot of charities out, particularly if they have outsourced filing of annual returns to a third party. It is important to note that, even if the third party is at fault for failing to file the annual returns, the charity remains responsible. Many thousands of charities have been deregistered for failure to file 2 consecutive annual returns. If a charity is in this position, it must take action before the 12-month period expires or there may be very little that can be done (and it may have to sell significant assets to pay the tax).

For more on this, see World Gospel Bible College Charitable Trust v Commissioner of Inland Revenue [2024] NZHC 1232 (17 May 2024).

Taxing the business income of charities?

In April 2024, Charities Services | Ngā Ratonga Kaupapa Atawhai issued new forms for charities to use to file their annual returns, update their details and apply for registration. The new annual return forms are mandatory for reporting periods beginning on or after 1 April 2024, which means that, for most registered charities, the new annual return form will first need to be used in September 2025.

The new annual return forms ask larger charities to report the reasons for their accumulated funds, as foreshadowed by the former Minister in June 2022 following the Department of Internal Affairs’ (“DIA’s”) controversial review of the Charities Act. However, the new forms also contain other questions that were not similarly foreshadowed, including the following:

“is generating funds for, or making grants or donations to, other charities or organisations, the main way your organization/charity carries out its charitable purposes”

This question also appears in the new application for registration form, and the new “update details” form. It is also not limited to larger charities; all registered charities will be expected to answer this question.

It is not clear what this question has to do with the Charities Act, as required by section 72A. Instead, this question appears intended to dovetail in with the accumulated funds question to identify which charities with accumulated funds fall into the Tax Working Group’s categories of “private foundations and charities running businesses”, to build the case for imposing minimum distribution requirements, and potentially also for removing charities’ business income tax exemption in some form or another.

Two decades and $100 million of “regulation” under the Charities Act appear to have eviscerated the charitable sector to such an extent that unhelpful narratives and misconceptions are now taking root in public and policy-makers’ minds. The Minister of Finance has indicated she is looking at taxing charities in some way, with more detail expected in this year’s budget on 22 May. Philanthropy New Zealand is organising an open letter, urging Ministers to consult with the charitable sector before making any changes. For anyone concerned about charities and those they work to support, we would similarly urge them to contact their local MP (and any other MP) and ask the same.

For more on this, see: https://legalwiseseminars.co.nz/seminar-details?event=14841775500.

Reviewing rules

The Charities Amendment Act 2023 also ushered in a number of other unhelpful changes, including a requirement for charities to “review their rules” every 3 years.

This change is problematic in a number of respects, not least for its underlying assumption that the charitable sector is struggling with governance. While governance issues unquestionably do arise from time to time, more often than not, this is because someone connected with the charity is acting in breach of the charity’s rules. It is important to note that every registered charity, irrespective of its underlying legal structure, is already subject to important fiduciary duties to act in good faith to further its stated charitable purposes in accordance with its rules. Acting in breach of a charity’s rules is therefore “unlawful”, which already constitutes “serious wrongdoing” as that term is defined in the Charities Act. Charities Services therefore has all the tools it needs to take action in such circumstances, and doing so would likely transform any governance issues in the New Zealand charitable sector overnight.

However, Charities Services refuses to do so. Instead, DIA pushed to have a new duty inserted into the Charities Act, for charities to review their governance procedures (whether they are set out in the charity’s rules or elsewhere), and consider whether they are fit for purpose, and assist the charity to achieve its charitable purpose and meet its obligations under the Charities Act.

The duties of those who govern organisations is an area where angels fear to tread, as evidenced by the care and consideration that went into articulating duties in the Companies Act 1993, the Trusts Act 2019 and the Incorporated Societies Act 2022. This new duty is particularly problematic because it did not receive any consultation with the charitable sector before being inserted into the Charities Amendment Bill. Despite overwhelming opposition from submitters, new section 42G was inserted into the legislation with effect from 5 October 2023.

In light of new section 42G, the new annual return forms now ask:

“has your charity reviewed its governance procedures within the last 3 years?”.

It is not clear what outcome would befall a charity that answered no to this question.

It is important to be aware that this new duty does not displace the underlying fiduciary duties: charities should continue to ensure that all decisions are made in the best interests of their charity’s stated purposes and in accordance with their rules and the broader law.

For more information on this, see: https://www.seedthechange.nz/charities-reform.

About the author:

Sue Barker is the director of Sue Barker Charities Law, an award-winning boutique law firm based in Wellington specialising in charities law and public tax law. Sue is the author of Taxation of Charities in Aotearoa New Zealand due to be published in April, and a director of the Charity Law Association of Australia and New Zealand. In 2019, Sue was awarded the New Zealand Law Foundation International Research Fellowship Te Karahipi Rangahau ā Taiao, New Zealand’s premier legal research award, to undertake research into the question “What does a world-leading framework of charities law look like?”. The final report from the Fellowship, entitled Focus on purpose, was released in April 2022 making 70 recommendations for charities law reform in Aotearoa New Zealand. More information about Sue and the research can be found at www.charitieslaw.co and www.charitieslawreform.nz.

Kim CableMarch 18, 2025