NZ High Court says interest-free mortgage scheme to 'advance religion' is legal

Introduction

Next week's tax summit in Canberra will be facing sober questions about the scale of tax required for governments to meet their many commitments to citizens in the future. You can be sure that one area will be quarantined from any discussion: the centuries old exemption from taxation for purely religious purposes. To their credit, the government announced in its last budget that the commercial businesses of organisations owned by religious organisations will now be taxed. It was also said that a charities commission will be established to monitor charities in the future, as in England and Wales, and in New Zealand.

However, on 2 June 2011 the New Zealand High Court added another burden on taxpayers there when it ruled that an interest-free mortgage scheme devised by the Christian Liberty Trust organisation of Whakatane 'advanced religion'.

The case

In 2010 the New Zealand Charities Commission decided that the Liberty Trust organisation did not fit the legal definition of charity and de-registered them from the Charities register.

Liberty Trust is a Christian organisation that states that ''teaching the Bible's financial principles' has always been their first purpose. The Chairman of the Trustees of Liberty Trust is Kelvin Deal, described in their newsletter as a Chartered Accountant.

Liberty Trust appealed the Charities Commission decision to the High Court and won. The matter came before Justice Mallon on 28 March 2011 and the Judgment delivered on 2 June 2011.

Liberty Trust was registered as a charitable entity in 2007. Its main activity was a mortgage lending scheme funded by donations from 'contributors'. To quote Justice Mallon

Those who contribute to Liberty Trust for five to ten years are eligible for an interest free loan. Once there are sufficient funds, loans are offered in the order of joining Liberty Trust. The standard contribution rate is 20 per cent of the loan application for ten years. For this the contributor can expect to be offered a seven year interest free loan of five times their contribution balance. To receive a longer repayment period the contributor can choose to wait longer or contribute more. Similarly, to receive a loan sooner the contributor can contribute more than 20 per cent. Loans are offered for up to 100 per cent of the valuation of a property and are secured by mortgage over the property.

Justice Mallon states that anyone can join the scheme and cites Liberty Trust's words:

We do not know if any of our donors follow the Christian religion because Liberty Trust exists to serve all people regardless of their beliefs (or lack of beliefs for that matter.) We seek to assist all people socially, physically, spiritually and emotionally as a demonstration of Christian care, and for the advancement of the Gospel of the Kingdom of God.

While the paragraph above states clearly that anyone is eligible for join the Trust and apply for a loan, the application form moves the goalposts considerably. Whereas anyone can apply, the application form requires that an applicant 'covenants' to

• contribute $_____per week/fortnight/month, to be applied by the Trustees in furtherance of the Trust's charitable objectives;

• to research and teach principles relating to finance from God's Word; and

• to outwork those principles by practical ministries.

It concludes:

I desire that my contribution to Liberty trust be regarded as a non-refundable charitable donation for the benefit of God's Kingdom.

One of the characteristics of the advancement of religion as a head of charity is that any religion remains an option for the public, not an obligation. A function of a religion's charitable, tax-exempt status is you can take a church's religion or leave it.

But to get the loan, as cited above, one must undertake to become practically involved in Christian work.

The application form builds in an obligation which is inconsistent with the notion that the tax-exempt status of the 'advancement of religion' as a form of charity is partly dependent on the obligation-free nature of religion as required for a religious 'charity' to retain its tax-exempt status.

The Charities Commission

After a complaint was made in 2008, the Charities Commission investigated and became concerned that the interest-free mortgage scheme was 'an illegal pyramid scheme'. The Commission decided to remove Liberty Trust from the Charity register arguing that the loan scheme did not have a charitable purpose. It said:

The activity of providing interest fee loans to people and the promotion of the teachings of Biblical financial principles are two independent activities, and not ancillary to each other.

The Commission had also cited a 1934 Australian case Roman Catholic Archbishop of Melbourne v Lawlor concerning the charitable status of a Catholic daily newspaper. In denying charitable status, the court made a distinction between the 'advancement of religion' and activity that was 'conducive to religion'. The Commission cited that case. Also citing British and Canadian precedents, it argued that there was no 'public benefit if the private benefits were an end in themselves.' They also argued mutual funds and cooperative schemes have been held to be not charitable because of insufficient public benefit.

The decision

In her decision Justice Mallon noted there has been disquiet about the tax exemption for religion. A case commentary on the 1985 New Zealand case Centrepoint Community Trust v Commissioner of Inland Revenue considered that 'whether there is a social utility in the advancement of religion is 'a very much more doubtful proposition''. This, it was argued, was because the effect of religion 'is usually of a very personal nature' and the question was asked 'why should some members of the community bear a heavier burden of taxation merely because the beliefs of others entitle their organisations to exemption from taxation?'

Her Honour also cited the 2005 NZ case Hester v Commissioner of Inland Revenue where the point was made that

... given the very considerable concessions made to charities, and given contemporary agnosticism and seeming indifference in many quarters to religion, what is it that today supports the concession in favour of religious charities, and more particularly, where are the edges of this head of charity to be drawn?

I have argued in The Purple Economy religion as a head of charity should be abolished altogether on the grounds that the advancement of religion flies in the face of the twentieth century principle of separation of church and state. How to remove the tax-exempt status of other alternatives to religion also needs to be researched following a review of the common law decisions allowing that status.

But, Liberty Trust's argument was accepted hook, line and sinker. I believe Her Honour erred when she stated that 'Membership is not restricted – it is open to all regardless of faith.' She emphasised this point in her conclusion saying 'the benefits of the scheme are not focussed too narrowly on its adherents. It is open to anyone and the money donated is 'recycled' for the benefit of others. Overall it is a scheme about 'giving' in order to lead a Christian life free from the burden of debt.'

It is a very idealistic assumption to think that a Bible-based organisation would happily lend money to say, an atheist, who refused to agree to the Christian conditions of the loan. How then, is it 'open to anyone'?

What a pleasing result for Liberty Trust's Christian members! New Zealand taxpayers, the majority of whom have mortgages where they constantly dread a rise in interest rates, and a third of them at least non-believers, are now obliged to subsidise 'a Christian life free from the burden of debt' for Liberty Trust's members.

Conclusion

In The Purple Economy I argued the religious believe they can avoid death, they know they can avoid tax. Justice Mallon has proved me right.

Something needs to be done about this. Either the Court's decision is appealed to the Court of Appeal or the New Zealand government should legislate to close this cleverly constructed scheme. Given the many and various demands on their budgets, no country can afford to continue to privilege religion through tax exemptions let alone permit their extension.