9 May 2022
Sunlight is the best disinfectant - The case for transparency and accountability in the charities sector
Think piece from Craig Fisher – Chair of the XRB's External Advisory Committee
Charites, large and small, do fantastic work in Aotearoa New Zealand. Many people, myself included, see them as an essential part of the glue that holds our communities and society together. As such, they should be supported.
Support in New Zealand comes in many forms. Financially from generous individuals, businesses, and philanthropic trusts and foundations. In addition, our legislation and regulation in New Zealand mean that it is, by international comparison, very easy to establish a charity and for it to apply for, and be granted, charitable status.
The main benefits of charitable status are primarily twofold:
- Exemption from income tax
- Public recognition as a registered charity
Exemption from income tax is effectively the Government granting, on behalf the general tax paying public, a tangible financial benefit (i.e. not having to pay 28% income tax like a business) to help support a charity’s mahi. A related additional financial benefit granted by the Government is donee status meaning that donors can get a tax rebate for their donation generosity.
Having registered charity status is also very valuable for a charity’s credibility. It helps confirm to the general public the charity’s social licence to operate as charitable and helps engender trust in the charitable sector.
A quid pro quo for the benefits
Legislative reforms regarding charities in New Zealand from 2005 onwards clarified that if a charity is to gain the considerable benefits of registered charity status, then an appropriate level of accountability and transparency to the tax paying public is required. In effect, it is the quid pro quo for the considerable benefits of registered charitable status.
Key planks of the accountability and transparency would be delivered primarily by the creation of a public register, maintained by Charities Services, containing freely searchable information on all registered charities. Significantly this would include annual financial statements of each charity prepared in accordance with the appropriate accounting standards.
Understandability and comparability are key features of transparency. The requirement to follow appropriate accounting standards assists with this.
However also recognised was the very different sizes and complexity of our charities in New Zealand. Hence our 4 tiers of financial reporting standards which are essentially different levels of complexity for different sizes of charities – a pragmatic NZ “horses for courses” approach.
But do the compliance costs outweight the benefits?
With any system of tiers someone has to draw a line. And whenever you draw a line, some people will be unhappy. There will be grumbles of unfairness. However, in my personal view we have drawn the lines pretty fairly in this case.
The other common grumble is the cost to comply: “But it is too hard” “The compliance costs are too much for us”.
I can personally attest to the considerable amount of very thoughtful effort which has gone into ensuring the reporting requirements are appropriate. In addition to this, helpful guidance, templates etc are also provided.
The XRB is also undertaking a review of Tier 3 & 4 requirements, and anyone can engage in this process and have their say.
I am aware that some in the charity sector remain unconvinced and still want to complain about the effort of compliance. However, in my mind, the answer is simple: No-one is forcing you to be a registered charity. It’s ultimately your choice. There are clear advantages to being a registered charity such as the income tax exempt status and public credibility. And if an entity wants to avail itself of these potentially considerable advantages, then there will be some compliance required.
Quite simply this compliance is the “tickets to the game”.
As a proud New Zealander, I want to ensure we continue to have a strong, vibrant, wellsupported charitable sector for the health of our society.
As a taxpayer and donor to charities, I want to ensure my charitable and public funds are being appropriately used and that there is appropriate accountability and transparency by charities for the benefits their status gives them.
We have to strike a balance. We have to draw those difficult lines.
About the Author
Craig Fisher FCA is a former audit partner and now Consultant at RSM. Craig chairs the XRB's External Reporting Advisory Panel. The views expressed here are his own.
Contact Craig on:
D: +64 21 899 848
The XRB have recently launched their consultation on Tiers 3 & 4 Not-for-Profit reporting standards. Read more here