A charitable trust is one of the main legal structures that community groups may consider. Fifteen per cent of New Zealand not-for-profit institutions are charitable trusts .
There are three main types of charitable trust:
- Unincorporated charitable trust - this may be used when someone sets up a trust to provide funds for a particular cause. Like any unincorporated group, there are limitations to this type of trust and it's not recommended for an ongoing community group.
- Registered charitable trust (trust-based) - in this model, two or more trustees can set up a trust for a charitable purpose. This is useful if the initial trustees want to retain control of the organisation, including appointing further trustees.
- Registered charitable trust (society-based) - in this model, an established group (or a minimum of five people) can register a society as a charitable trust board under the Charitable Trusts Act 1957 as long as it meets the requirements of being charitable. On incorporation, the members of the society become members of the board.
The process of registering a trust or society as a charitable trust board under the Charitable Trusts Act 1957 starts with applying to the Registrar of Incorporated Societies at the Companies Office (see the steps outlined in setting up a registered charitable trust).
Trusts or societies registered as charitable trust boards must act exclusively or principally for charitable purposes, which are:
a. the advancement of education
b. the advancement of religion
c. the relief of poverty, sickness or disability
d. any other purpose that benefits the community.
Note that a charitable organisation whose purpose falls under (d) must also be able to demonstrate public benefit. This means the organisation must show that its purposes can produce a benefit that is recognised by law as beneficial, and that this benefit is available to the public or a sufficient section of the public.
A charitable trust board:
- is set up under the Charitable Trusts Act 1957
- has a board of at least two trustees (if it's a trust) or five members (if it's a society) to make decisions
- must have charitable aims i.e. not be for private profit
- will have a trust deed (if it's a trust) or set of rules or constitution (if it's a society) under which it operates. A copy of these must be lodged with the Registrar of Incorporated Societies at the time of applying for registration
- once registered and incorporated, has a separate legal identity distinct from its members or trustees
- must be registered with Charities Services to obtain or keep charitable tax-exempt status.
As with incorporated societies, the rules (or trust deed or constitution) is a charitable trust's most important document as it sets out the organisation's purpose and sets the rules under which it must operate. The trust deed sets out the rules of a trust-based charity and the constitution sets out the rules of a society-based charity.
Unlike the Incorporated Societies Act 1908, the Charitable Trusts Act 1957 does not state what needs to be included in the rules. However, to ensure the trust or board operates smoothly, it's good practice to include the following items in the trust deed or constitution:
- The purposes of the trust. These need to be charitable and should refer to the mission of the organisation.
- The area of operation. In general, Inland Revenue requires that your activities are restricted to New Zealand in order to obtain donee status for tax purposes (i.e. so that people making a donation can claim a tax deduction).
- The make-up of the board, including the number of trustees/board members, how they are appointed and how long they serve and how they can be removed.
- Whether trustees or members can be paid for their services; this is the pecuniary benefit clause. You should specify that, if trustees or members are paid for their services, this may be no more than the market rate for the work done.
- Board and, if applicable, general members meetings.
- Decision-making, quorum numbers and notice of meetings. You need to be careful that you do not set the quorum too high, if there are a couple of vacancies on the trust/board you may have difficulty obtaining a quorum.
- Board's finances. As with incorporated societies, the accounts do not need to be audited unless the rules state this.
- Powers of the board. In the case of a society these are likely to be the same as those for an incorporated society. In the case of a charitable trust, the trustees are given authority to carry out the aims, which can be very wide or quite narrow depending on what suits the group.
- Permission to alter the trust deed or rules.
Tip: For more information on the legal details of establishing, incorporating and operating a charitable trust, and the distinction between the different types of charitable trust, visit:
 Counting Non-profit Institutions in New Zealand 2005, Statistics NZ http://www.stats.govt.nz/browse_for_stats/people_and_communities/Households/Non-ProfitInstitutionsSatelliteAccount_HOTP2005/Commentary.aspx