Thursday, April 1, 2010

Letter to ST forum in response to Andy Ho article titled “Megachurches’ tax status bears scrutiny”

Dear Editor,

I refer to the ST article by Andy Ho titled “Megachurches’ tax status bears scrutiny” dated 1 April 2010.

I believe the joint reply by IRAS, MCYS and URA in response to the forum letter by Mr Lester Lam on the same subject has clarified the official position of the respective authorities. Nonetheless, I think Andy’s effort to share further insights on the matter is commendable.

I find it unfortunate though, that Andy failed to make a distinction between churches that do not solicit funds from the general public with charities that do. By using terms such as ‘public charities’, ‘public policy’ and ‘public money’ in his discussion about churches, he might have caused some confusion among his readers who may be led to think that churches are involved in soliciting funds from the general public like charities such as Ren Ci Hospital and NKF, when in fact churches only receive tithes and offerings from their members. In this respect, churches are similar to private foundations whose funds come from select groups of individuals and families and not the general public.

As to whether the funds of a church and its related entities should be subject to taxation, I think a distinction should be made between income generated from business activities and the tithes and offerings received from church members. In view of the difference in their nature – one being commercial and the other being non-commercial, I believe the former should be subject to taxation but not the latter. In order to properly record and report the different forms of activities conducted by the church and its related entities, it is therefore crucial for churches to make sure their organisational structure and their accounting functions are suitably set up and adequately segregated. Having said the above, I reckon this is a matter best left to the relevant authorities to deliberate and decide upon.

With regards the motivation of the mega churches getting involved in commercial deals, I am of the view that they are not motivated by profits, but by the practical needs for larger venues to accommodate their growing congregations. In Singapore, land plots allotted for religious use are limited in availability and size – a typical plot is usually around 4,000 sq m in size, which is good for a 1,000 plus seat sanctuary. With such strict zoning of land usage in Singapore, mega churches are, in a sense, ‘forced’ to take the commercial path. How many of us would seriously regard committing funds into the building of a civic and cultural centre or the securing of some convention facilities as the best way to invest for profits? If the key objective were to be profits, I believe most of us would prefer to go for the many other options available.

It is also important for some of us to clear the misconception that the mega churches are constructing a church building, or converting existing commercial properties into premises exclusively for church use. The civic and cultural centre at one-north will be, and the Suntec Convention Centre will remain, open to and available for the public to use and enjoy. The mega churches in question will only be renting certain spaces at the respective venues when needed, not unlike what the smaller churches are doing on weekends all around Singapore – leasing the many hotel ballrooms and other commercial venues to hold their activities.

As for the issue on members’ voting rights, I believe that in large organisations, for practical and efficiency reasons, it is not uncommon to have a smaller group of voting members making decisions on behalf of the larger whole of all members. In Singapore, a church may set its own policies on membership criteria, privileges and voting rights and these are subject to approval by the Registrar of Societies. Setting the appropriate criteria for full voting membership is an important step to protect the vision and the finances of a church, or for the matter, any society or association.

Valid concerns and suggestions have been raised by various quarters in our community since City Harvest Church made their announcement on the Suntec deal. Let us trust the Commissioner of Charity and his team, whom I understand are looking into the matter, to carry out the necessary investigations and clarifications, and to enforce the appropriate measures to safeguard the best interests of everyone concerned.

Best regards,
Tan Lip Kee


The Straits Times – Review

Apr 1, 2010

Megachurches’ tax status bears scrutiny

By Andy Ho

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 members…at 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.

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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.

bic_cherry said...

Re: Megachurches' tax status bears scrutiny- Response to Tan Lip Kee