How to create a charitable trust
The first requirement is to draft a suitable trust deed. Some key components are:
- The trust must have a clearly defined “charitable purpose”.
- The trust’s powers should be listed and it should be clear that the trust does not have the power do anything which is outside its charitable purpose.
- There must be a prohibition on providing any private benefits or profits to any person. Reasonable “arm’s-length” salaries and expense reimbursements are allowed, if they are provided for in the trust deed. However the amounts of these payments cannot be set by any person receiving the payments.
- The trust deed must specify what happens to the trust’s assets if the trust is eventually wound up. This final distribution of the trust’s assets must be made for a charitable purpose. For example, the trust deed might specify that, on winding up, the trust’s assets will be distributed to another charity that has a similar charitable purpose.
Once a trust deed has been finalised and signed, the trustees of a charitable trust will usually choose to register under the Charitable Trusts Act 1957. This involves an application to the Companies Office and is a relatively quick process. One benefit of registering is that the trustees become an incorporated charitable trust board, and are then a separate legal entity that can enter into contracts. This is preferable to simply being a group of individual trustees with personal liability for the trust’s debts. Another benefit is that assets such as land are registered in the name of the trust board rather than the individual trustees. This makes the administration of a change of trustees much easier.
A charitable trust can then apply to the Department of Internal Affairs to become a registered charity under the Charities Act 2005. A charity can still exist without being registered under the Charities Act 2005. However it may not be entitled to an income tax exemption, so will have to pay tax on its income. Some funders also require a charity to become a registered charity before they will provide grants. It is therefore of significant benefit to become (and remain) a registered charity.
What is a “charitable purpose”?
As noted above, to register under the Charities Act 2005 the trust must have a “charitable purpose”.
Under the Charities Act 2005, a charitable purpose includes “the relief of poverty, the advancement of education or religion, or any other matter beneficial to the community”. There have been many decisions made by the Charities Registration Board and its predecessor, the Charities Commission, on whether a trust has a charitable purpose. Some of these decisions have even been appealed through the court system.
For example, the Charities Commission revoked Greenpeace’s registration as a charity in 2010 on the basis that it did not have a qualifying “charitable purpose”. The Commission accepted that the promotion of the protection and preservation of nature and the environment were charitable, but found that the promotion of disarmament and peace was not charitable. Greenpeace appealed this decision, but the High Court agreed with the Charities Commission. By 2014, this case had made its way to the Supreme Court, which ruled in Greenpeace’s favour, allowing them to become a registered charity.
Another example is the Jedi Society Incorporated’s application to become a registered charity which was rejected in 2015. The Society claimed to have the charitable purpose of advancing the Jedi religion but the Charities Registration Board ruled that the Society’s belief system was not organised or structured in a way that enabled it to be registered as a charity.
To qualify as a charitable purpose, the purpose must also be for the benefit of the public. This means that a significant number of the public must benefit from the activities of the charity. If a purpose of the charity is to provide benefits to a very limited range of people, then the Department of Internal Affairs is likely to reject the charity’s application for registration.
For example the Charities Registration Board refused a registration application from the Astrolabe Community Trust, established by the owners of the Rena wreck. The application was declined because the Trust’s main purpose was to apply for a specific resource consent to leave the remainder of the wreck on the reef. The Trust did not demonstrate that this purpose provided sufficient public benefit.
Promotion of amateur sport can also be a charitable purpose, but only if it is “the means by which a charitable purpose is pursued”. For example, the charitable purpose may be to promote fitness and good health for young people, and the means of pursuing this may be though a sports club.
The charitable nature of sporting organisations was considered by the Charities Registration Board in 2014, when it revoked Swimming New Zealand’s registration as a charity. The Charities Registration Board found that, while Swimming New Zealand had the charitable purpose of promoting health and swimming education, it also had a non-charitable purpose of promoting success in competitive swimming at an elite level. Similarly, in September 2015, the Charities Registration Board ruled that New Zealand Rowing Incorporated does not have a charitable purpose because its purposes are to promote rowing itself and to promote success in rowing at an elite level. Rowing New Zealand’s charitable registration was cancelled as a result.
Many other interesting decisions can be viewed online at www.charities.govt.nz.
To achieve and maintain registered charity status, it is therefore extremely important that the trust deed is carefully drafted and the trust’s ongoing activities are restricted to the charitable purpose contained in the trust deed. Please contact us if you require assistance with drafting your charitable trust deed or with maintaining your registered charity status.