A 2011 decision by the New Jersey Supreme Court in the United States regarding property tax exemptions for non-profit organisations highlighted the risks of co-mingling non-profit finances and operations with for-profit affiliates. In its ruling, the Court warned that doing so could jeopardise the tax status of the non-profit entity. 

In the United States, there is no “bright-line test” for the amount of for-profit activity that a tax-exempt entity may undertake, however it is generally considered that at least more than half of all activities (presumably measured in financial terms) must be in furtherance of its tax-exempt purposes. In practice, this appears to have resulted in the widespread legal establishment of for-profit subsidiaries, which shield the non-profit organisation from commercial financial risk.

Given the current financial challenges for community sport in New Zealand, the risks of “co-mingling finance and operations” are worth considering.

Some sport organisations reporting as “public benefit entities1” may aggregate all forms of income and expense (both community and commercially-related). It is therefore possible that a failure of an entity’s commercial activities could have both unintended operational and financial impacts on its ability to deliver sport to the community. (Of course, this could equally arise from a failure of the community-funding model which relies on central government, local authorities, donations, grants and membership subscriptions).

In the current environment, where both the commercial business of sport in New Zealand and traditional community-funding is under considerable financial stress, a clear separation of entities which are on the one-hand supporting amateur sport for community benefit, from entities which are on the other hand generating revenues for commercial purposes, could be a sensible option. Clear separation of finance and operations for the specific purposes of each, may in fact serve to better protect both.

1A “public benefit entity” is one whose “primary objective is to provide goods or services for community or social benefit and where equity has been provided with a view to supporting that primary objective rather than for a financial return."