In the Tax Working Group, September 2018 released a Background Paper ‘Charities and the not-for-profit sector’. The Executive Summary highlights some particular issues which are prominent either to the public or for the sector. Paragraphs 3 and 4 of the Executive Summary state: “3. One of these [issues] is the tax exemption that applies to business income earned by charities. Concerns are often expressed that the exemption provides an unfair competitive advantage to charitable businesses at the expense of taxpaying for-profit businesses. 4. Officials note that New Zealand’s review of the tax treatment of charities in 2001 and recent reviews of the tax system in Australia (2010) have not supported this perceived unfairness. In principle, the tax concession does not impart a competitive advantage because a trading operation owned by a charity faces the same incentives as a commercial entity when it comes to setting prices. Its tax-exempt status alone should not lead to undercutting of rivals.” Further, a recommended action in the Background Paper suggests that the treatment of accumulations (including the potential to require a particular level of distribution each year) be included in the Interim Report. Some charities accumulate significant reserves and own substantial assets

a) Discuss whether or not in your opinion the charitable income tax exemption for commercial operations should remain. Explain your answer and include any suggestions you may have to improve tax equity and fairness in relation to charities running commercial operations in New Zealand.
b) Discuss whether a reserves policy should be mandatory for all charities.