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Application of charities business exemption explained

By December 23, 2020 No Comments

IR has issued two draft QWBA’s on application of the charities business exemption contained within section CW 42 of the Income Tax Act 2007 (‘the Act’).

The first QWBA is referenced PUB00359a, with the title – Charities business exemption – when must it be used. The commentary considers when a charity needs to apply section CW 42 as opposed to section CW 41 in respect of determining the exempt income status or not of income the charity has derived during the year.

As presently drafted – “A charitable entity must use the business income exemption test in s CW 42 to work out whether income it derives from a business is exempt if:

  • the charitable entity is carrying on the business; or,
  • another charitable entity (the operating entity) is carrying on the business “for, or for the benefit of” the charitable entity (the controlling entity).”

The commentary then confirms that a business will be carried on by an operating entity for, or for the benefit of a controlling entity if all the rights to the income and capital of the business held by the operating entity are held for the benefit of the controlling entity.

The remainder of the draft QWBA comments primarily on the scenario of the business being carried on by a separate charitable entity (which may or may not be owned by the “parent” charitable entity – e.g., a charitable trust wholly owning an operating company which itself is a registered charity) and concludes with some narrative of how to treat the different sources of income (business and other income), applying either section CW 41 or section CW 42 accordingly.

The deadline for comment on PUB00359a is 1st February 2021.

The second QWBA is referenced PUB00359b, with the title – Charities business exemption – business carried on in partnership. Slightly shorter in length than PUB00359a, the primary focus of the QWBA, is whether the fact that a charity may carry on the business in partnership with a non-charity, may then negate the charities ability to claim the section CW 42 business income exemption.

The present view provided by the draft QWBA, is that section CW 42 remains available to the charity, because the income and capital of the business is allocated in accordance with each partner’s partnership share. Consequently, each taxpayer to the partnership, then separately determines the application of the Act to its share of the business income.

In this last regard, the reader is then referred to the first QWBA, from the perspective of whether the business income is derived directly or indirectly (via a separate operating charitable entity) by the charity considering the section CW 42 exemption.

As with the first draft QWBA, PUB00359b also has a comment deadline of February 1st.  

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