Friday, April 2, 2010

Megachurches' tax status bears scrutiny

Apr 1, 2010

By Andy Ho, Senior Writer

A LOCAL megachurch announced recently that, for $310 million, it was becoming a co-owner of Suntec Singapore.

According to Reverend Kong Hee, who heads City Harvest Church, the megachurch will co-own a company that already owns, in aggregate, 80 per cent of Suntec. That company's profits are, of course, taxed. Thus when the church receives its share of that after-tax income, it would be all kosher.

The church says it created a free-standing, for-profit corporate entity, which it wholly owns, to house its business operations. Still, in a partnership and other joint-venture arrangements, each partner is regarded as being fully involved in the underlying business. The church leadership is reported to have explained that co-ownership of Suntec means that 'the rent we pay out (in renting space at Suntec) will be recovered by CHC (City Harvest Church) in the form of profits and dividends'.

Could this deal jeopardise the church's tax-exempt status? The Commissioner of Charities is seeking clarifications from City Harvest on its business venture.

On his website, Reverend Kong lists his occupation as 'businessman' and says he has a doctorate in business from Seoul's Hansei University - called Soonshin University before 1997 and Full Gospel Theological College in the 1950s. Reverend Kong also has a master's degree and a doctorate in theology, both from an online school. One thus assumes that Reverend Kong, presumably having also been duly advised, would have been able to digest and grasp the tax issues involved.

Why the unease with a church going into business? At first blush, it seems unnecessary to prevent charities, churches included, from using the market as a source of funding. After all, no one would want to ban gift shops or restaurants at the Art Museum or the zoo, for instance.

In a 4-1 majority decision in the Commissioner of Taxation v Word Investments, the Australian High Court declared that 'commercial activities and charitable status are not necessarily inconsistent'.

Still, many find commercial activity by charities odd or even unacceptable. If nothing else, their resources as well as the attention of their managers could be diverted from their core missions. Such charities may also come to be run by a set of managers motivated by market values, the opposite of the altruism that charities should exemplify.

Moreover, commercial activity can also morph into empire building for its own sake, with profits being ploughed back into the business instead of funding the charity's non-business activities.

But these are issues that concern only the organisations themselves. The public policy issue here is whether charities that engage in substantial commercial activity should still retain their tax-exempt status and how they ought to be regulated.

The reason the public should be concerned is that tax exemption is, in effect, a government subsidy. When a church goes into business, the public dollar is effectively subsidising that activity. For example, because City Harvest is using tax-exempt money to buy its share of Suntec, the transaction is effectively being subsidised by public money.

Legal and taxation experts suggest that a corrective tax mechanism would be justifiable in such circumstances. After all, it is implicitly assumed that religious organisations cannot afford to pay taxes since their assets do not produce income streams.

But when a church engages in a massive commercial transaction, it shows that it clearly could have afforded those taxes. Thus, the government would be justified in recouping any uncollected tax.

Think of it as an exit tax imposed on the church for exiting its exclusively non-profit stance for a for-profit one, at least in part.

How should such churches be regulated henceforth?

At least two megachurches here seem to govern themselves more like private foundations than public charities. While a believer at a typical autonomous, non-denominational church here can opt to become a full voting member of his church, very few - say, 700 out of 30,000 in a megachurch that is an autonomous, non-denominational set-up - may be invited to become voting 'executive members'.

Irked by the Suntec deal, investment banker Simon Teoh, who attends City Harvest, has written to the Commissioner of Charities. He alleges that the church's 12-member management board went ahead 'with utilising the church's building fund ($65 million as of end-October 2009) and committing the church to large future liabilities...without consulting the the recent AGM. No EGM has been scheduled'.

Thus, in effect, these megachurches govern themselves like private foundations. In Singapore, private foundations are lightly regulated compared to public charities since their funds come from wealthy individuals or families and not the public. But most private foundations are grant-making institutions. These churches, by contrast, not only make no grants but instead solicit funds from the public.

Once their business enterprises can regularly channel enough profits to them so that Sunday collections will no longer matter, the management boards of these megachurches will no longer be dependent on their members.

But citizens - or the relevant group of citizens, at least - should have a voice in the governance of such churches as long as they are still soliciting funds from the public.

So the Commissioner of Charities should consider if such churches should be regulated more closely. Certainly, their tax-exempt status is no sacred cow that cannot be slaughtered if a critical re-examination justifies doing so.


bic_cherry said...

Regulation of large NON-IPC charities, is regulation lax?

For an example of accounts of 'Institution of Public Character (IPC)' charity: 'Riding for the Disabled Association of Singapore (financial statement)' as an example of the application of 'Annual Online IPC Disclosure Template.doc'- see comment 8 on last page of guideline: "Related Party Transactions".
"Related Party Transactions refer to transactions between the IPC and another person where either person could have influence over the other. For example, if a board member of an IPC is related to a certain supplier of services for the IPC, the value of the transactions should be disclosed. Refer to the Financial
Reporting Standards for the full definition of Related Party Transactions."

True City Harvest Church is just an 'ordinary charity', not yet an IPC , but then again, shouldn't these 'Related Party Transactions' be listed too given the fact that all charities are income-tax-exempt and also given the fact that reserves of CHC: >>> RenCi/ AMKTHK Hosp (even if both are added together).

Balance Sheet: 'Total Funds and Liabilities'- 2009 unless otherwise stated
- Ang Mo Kio – Thye Hua Kwan Hospital, - Financial Information : $10,269,000
- NKF, Financial Information (2008):$ 287,890,000

This is not an accusation of any wrong doing, just an example of what I think is lax disclosure requirements on part of CHC despite its not being an IPC, it is just a 'charity' after all (not a country club/ entertainment ctr that pays income tax/ GST)- albeit a very large one at that.

Comments to article of the same on my blog -, are welcomed.

El Lobo Loco said...

It is not the case that CHC is "not yet" an IPC. By the criteria for being an IPC, it would never be an IPC. Which is good, because as an IPC, it would be able to give tax-exemption for donations received.

As a charity, all that is recognised is that it is in a "business" that don't usually make money. Usually.

As a religious charity, it provides its followers with spiritual guidance, and perhaps hope. What it does is no different from other religious organisations does. The Buddha Tooth Relic Temple in Chinatown was built with donations from Buddhists, for example.

But it does what it does very well. To the point where it may not need the charity status. Or perhaps, its business ventures should be separately managed by a corporation or company registered to carry out secular transactions, with the CHC as a shareholder in whole or in part - in order to separate the church business from their investments.

Personally, I think all religion is fraudulent. But for most people, they need to believe and they need religion. And we cannot protect them from themselves.