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Charitable purpose: Social enterprises
Updated October 2011
Social enterprises can be eligible for registration as charitable entities if they have purposes that are exclusively charitable in accordance with New Zealand law and are not established for private profit.
Introduction
This paper sets out the current legal position on the charitable status of social enterprises.
Any organisation (including companies and trustees of trusts) can qualify for registration as a charitable entity under the Charities Act 2005 if its purposes are exclusively charitable in accordance with New Zealand law.
The Commission looks at the purposes and activities of all organisations that apply to it for registration. It then decides whether the organisation has exclusively charitable purposes.
Registration under the Charities Act offers a number of benefits (see our information sheet The Charities Register: Benefits for charities for more details)
Background
The Charities Act 2005 establishes three essential requirements for registration as a charitable entity.
An organisation’s name and its officers must meet the requirements set out in the Charities Act, and it must have exclusively “charitable purposes” which provide a public benefit.
The legal interpretation of the term “charitable purpose” has been developed through the courts and in some legislation. Our information sheet Charitable Purpose summarises the overall position with regard to charitable purpose.
In brief, to be charitable a purpose must fall into one of the four established legal categories of charitable purpose – that is, it must:
- advance education
- advance religion
- relieve poverty
- otherwise benefit the community in a way that the law regards as charitable.
The purpose must also provide a public benefit. This means that it must be aimed at benefiting the public or a sufficient section of the public and the purposes cannot be for private profit.
For more detail see our information sheet "Public benefit" test: Guidance for charities.
Are all social enterprises charitable?
“Social enterprise” is a broad term which does not have a clearly identified meaning. This term is used to describe both not-for-profit and for-profit organisations or projects. For example, this term is used to describe:
- income earning ventures developed by not-for-profit organisations
- any not-for-profit organisation
- for-profit businesses which have integrated social or environmental responsibility into their operations.
In all cases, whether a social enterprise has a legally recognised charitable purpose will depend on the specific purposes stated in its rules and the activities it undertakes.
The rules of the organisation must clearly restrict the purposes to only those that are charitable. Being a not-for-profit organisation will not automatically mean that that organisation will have charitable purposes.
The rules must also make it clear that on winding up, any remaining assets will go to a charitable purpose.
Activities
In addition to looking at an applicant’s stated purposes, the Charities Act[1] requires the Commission to look at the organisation’s current and proposed activities.
To satisfy the Commission that your organisation has exclusively charitable purposes it may be helpful to provide additional information with your application about the specific activities your organisation undertakes.
If your organisation’s purpose is to raise money for a charitable purpose, you should provide evidence of this, such as financial statements or a business plan.
Each application for registration is assessed on a case-by-case basis.
Public benefit
In order for a purpose to be charitable, it must provide benefits to the public, rather than to private individuals. Any private benefits arising from the organisation’s purposes and activities must only be a means of achieving an ultimate public benefit and therefore be ancillary or incidental to it. It will not be a public benefit if the private benefits are an end in themselves.
Courts have sometimes found the promotion of industry and commerce to be charitable where this has been for the benefit of the public.
In Commissioners of Inland Revenue v Yorkshire Agricultural Society,[2] the improvement of agriculture was considered to be charitable where it was for the benefit of the public. However, the Court made it clear that the improvement of agriculture for private profit or benefit would not be charitable.
In Crystal Palace Trustees v Minister of Town and Country Planning[3] the management of a public place for education and recreation and for the promotion of industry, commerce, and art was held to be charitable because there was no intention to further the interests of individuals engaged in trade or industry or commerce.
In Hadaway v Hadaway[4] the Privy Council held that assisting persons carrying on a particular trade or business or profession would not be charitable unless there was a condition that this assistance could only be made for a purpose which was itself charitable. In that case, the Court held that any eventual benefit to the community from the purposes would be too remote.
In Commissioners of Inland Revenue v White[5] the Court held that the promotion or advancement of industry or commerce could be charitable provided that the purpose was to benefit the public and not merely the promotion of the interest of those engaged in the manufacture and sale of their particular products.
In Commissioners of Inland Revenue v Oldham Training and Enterprise Council[6], the Court considered whether promoting the interests of individuals engaged in trade, commerce or enterprise in order to make them more profitable so that employment prospects would improve in their area was a charitable purpose. The Court held that the purposes would confer private benefits on the business owners regardless of any beneficial consequences for employment. The purposes were therefore held not to be charitable because any benefits to the community would be too remote.
Private pecuniary profit and profit making activities
To meet the requirements for registration under the Charities Act, a society or institution must not be carried on for the private pecuniary (financial) profit of any individual.
A charity can carry out profit-making activities and can purchase goods and services as long as all of its activities are to further its charitable purposes and not to further the private financial interests of individuals. Payments must therefore be reasonable and based on “arms length commercial rates”.
Companies must have clauses in their rules that either:
- prevent distribution of dividends or payments to shareholders who are not registered charitable entities or trustees of a trust for charitable purposes or
- restrict current shareholders and the transfer and issue of shares to registered charitable entities or trustees of a trust for charitable purposes.
For examples of private pecuniary (financial) profit clauses which are acceptable, and which are unlikely to be acceptable, see our information sheet Rules and the Charities Act.
If a trust wants to be able to make reasonable payments or provide other benefits to its trustees, its trust deed must clearly show that this is allowed, and it must prevent trustees from acting where they have a conflict of interest.
Frequently asked questions
For more information, please refer to the FAQs raised by the charitable sector, and the Commission’s responses.
