Caught in the crossfire: how proposed tax reforms could undermine NFPs and governance
When Inland Revenue released its February 2025 consultation paper on not-for-profit taxation, it was billed as a necessary modernisation of an outdated regime. But the New Zealand Institute of Directors’ (IoD’s) response paints a far more precarious picture – one of escalating compliance burdens, strained governance capacity, and potentially damaging consequences for Aotearoa New Zealand’s community fabric.
In a detailed and strategically framed submission, IoD voices sharp concerns about the impact of the proposals, particularly on the largely volunteer-led boards that govern much of the sector. The reforms, which seek to tax certain unrelated business income and tighten the integrity rules for donor-controlled charities, could – ironically – undermine the very organisations that government and community rely on most.
A sector already under strain
The IoD’s response highlights the already fragile state of many not-for-profit entities. Directors and trustees face mounting financial, structural and regulatory pressures, compounded by rising expectations around transparency and performance. Most operate on thin margins, with limited access to professional tax or legal advice.
The submission notes 88 per cent of registered charities reporting business income in 2024 were Tier 3 or Tier 4 entities. These smaller organisations typically have minimal staff and governance structures. Without further amendment, the proposed changes would require them to assess and differentiate related and unrelated business income, oversee new reporting obligations, and potentially manage investment and distribution restrictions. IoD warns that such changes would place a “disproportionate compliance burden” on smaller entities without yielding significant tax revenue or improved compliance.
A shift in governance maturity – at what cost?
At the core of the IoD’s submission is a message about governance risk. With increased tax complexity comes a need for higher governance maturity – systems to monitor distributions, track related-party transactions and evidence tax compliance. This is no small ask for volunteer boards already juggling multiple priorities.
“There will be a greater need for tax expertise at board or management level,” the submission states, “and increased attention to documentation and evidence trails supporting tax positions.” For many boards, this level of oversight and expertise is not currently attainable – nor fundable.
Equally as startling, the IoD submission highlights the impact on the organisation itself – Zealand’s pre-eminent voice for governance could be caught in the net of the proposed tax policy changes.
While the IoD pays tax on its commercial services such as courses and events, it is currently exempt from paying tax on member subscriptions. The proposed removal of that exemption could force the IoD to raise fees or cut services – particularly those aimed at supporting young and not-for-profit directors.
This, the submission argues, would result in a reduction in governance capability across sectors, as fewer directors could access the professional development and policy insights the IoD provides. “The impact of imposing tax on the profits from member subscriptions would significantly impact IoD’s financial model,” the submission notes. The knock-on effect? Weaker governance across businesses, not-for-profits and the public sector.
Beyond tax: the case for a systemic view
IoD does not argue against tax integrity. In fact, it supports the idea that genuine commercial activity should be taxed appropriately. But the submission calls for a “systemic” analysis of the proposals, one that takes account of the sector’s fragile financial model, limited governance capacity and the long-term cost to communities.
It proposes a set of practical mitigations, including:
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- Clear definitions and interpretive guidance for unrelated business income
- De minimis thresholds aligned with reporting tiers to shield smaller organisations
- Transitional relief mechanisms for those adjusting to new distribution rules
- Simplified compliance pathways for volunteer-led entities
As the debate unfolds, what is clear is New Zealand’s tax policy settings for not-for-profits must balance fiscal integrity with sustainability. Otherwise, reforms intended to improve fairness may end up eroding the very governance foundations on which community wellbeing rests, and that supports the delivery of services to the community on which those communities increasingly rely.
