NOT CHILD’S PLAY

Childcare giant’s tax-free income pays off loan from family trust

Kidicorp’s restructuring as the charity Best Start Educare is seeing $20 million in tax-free income paid each year directly to the childcare giant’s private founders.

The complex 2015 deal — involving interestfree loans and a related-party charitable foundation — appears to be allowed by current tax and charity laws, but has sparked questions by members of the Tax Working Group who are urging the Government to speed up recommended reforms.

Kidicorp was founded by Bay of Plenty couple Wayne and Chloe Wright in 1996, and today its charitable iteration Best Start is the largest such operation in the country, running 260 childcare centres nationally and caring for 15,000 children.

It makes $275m in annual revenue — of which nearly $200m a year is from Government funding.

In 2015 the Wrights announced Kidicorp would be rebranded as Best Start and run as a charity. At the time the couple said: “profits and returns have never been a priority for us”, and “we have consistently reinvested surpluses into opening new centres”.

A review of annual accounts filed by new charitable holding vehicle the Wright Family Foundation shows this transformation was engineered with a purchase of shares from the private Wright Family Trust for $332m. The price was settled with a no-interest related-party loan repaid at $20m a year, using most of the childcare operation’s now-untaxed surplus cashflow.

To date the Foundation has paid $127m to the Family Trust and at the current rate Best Start will still be paying the vast majority of its tax-free income to the Wrights until 2030.

The Foundation is run by Chloe Wright, while Wayne Wright, who — until he handed the reins to former Health Minister Tony Ryall in 2018 — was Best Start’s chief executive. He told the Weekend Herald the 2015 deal was advised by KPMG and the purchase price set by valuers Libertas.

He said Inland Revenue considered him to be a “high net worth individual” and the deal was subjected to additional scrutiny.

“They’ve just completed a review of my affairs and they’re perfectly happy with the way the transaction was done,” he said.

Wright said the shares were sold to the Foundation on a commercial basis as the Kidicorp shares were “a major portion of the family’s trust assets, and we needed to preserve that for future generations”.

The deal saw most of Kidicorp’s real estate assets, mostly childcare centres used by the business, remain in Wright family hands. Accounts show a quarter of all rent payments made by the Foundation — $8.6m out of $33.9m — are to family-owned entities.

Accounts for the Foundation also show around $2.5m in charitable donations were made annually — dwarfed by the $20m in annual loan repayments. This donation figure is understood to include support for the New Zealand Spelling Bee and $500,000 annually to Plunket.

Wayne Wright said that under its limited liability structure Kidicorp had paid about $7m tax each year, but its charitable spending today — combining donations with subsidies to the Foundations’ four Birthing Centres — was equivalent to this figure. He added neither he nor his wife drew salaries from the enterprise.

Tax Working Group members Andrea Black and Craig Elliffe — who noted in their 2018 report to the Government that

unlike other countries, New Zealand has no requirements for private foundations to have arms-length governance or requirements to make donations — both believe the Best Start structuring raises questions.

Elliffe, a tax law professor at the University of Auckland, said: “This is the very thing we were looking at and that we were worried about. The bigger policy question is whether this is an appropriate use of charitable structures.”

Black, who is now policy director at the Council of Trade Unions, said the purpose of charities — and their tax exemption — was to improve the wellbeing of people in New Zealand.

“Given the small rate of donations, the selling — rather than gifting — of the business with a loan back and the otherwise taxable profit paying back some of the loan, it is hard to see the benefit to the New Zealand community,” she said.

Inland Revenue declined to comment on Best Start, citing tax secrecy law legislation. Revenue Minister Stuart Nash also declined to answer questions.

Wright said he had no concerns about potential law changes. “Everything we’ve done is open and legit, and done with the knowledge of IRD. I don’t have any worries at all.”

According to searches of the Charities Register, the Best Start rebirth made the Wright Family Foundation New Zealand’s second-largest charitable foundation, eclipsed in total assets only by faith-based rest home operator the Selwyn Foundation.

The move finally marked a successful exit from Kidicorp for the Wrights, who previously engineered a backdoor listing on the NZX in 2004, only for the company to hit choppy waters and be taken back into family control in 2007.

That 2007 takeover and delisting of Kidicorp from the NZX valued the business at $42m, making the 2015 sale to WFF for $332m a sharp appreciation.

Wayne Wright said the intervening period has seen Kidicorp surge in value: “It’s grown in size dramatically”.