Childcare giant Best Start audit triggers $7m tax bill

Wayne and Chloe Wright. Photo / Norrie Montgomery.

Childcare giant Best Start Educare has been stung with a $7m tax bill after Inland Revenue audited transactions around its controversial metamorphosis into a tax-free charity.

Notes to the most recent accounts of the businesses' owner, the Wright Family Foundation (WFF), show an unexpected tax bill had arisen in the year to March 31, 2020.

"Following an audit investigation undertaken by the Commissioner of Inland Revenue, an amount of $7m has been recorded in respect of an amended 2015 income tax assessment. 2015 was the year of restructure of Best Start's shares to a charity," the accounts said.

Best Start is the country's largest childcare operator - with more than 260 centres nationally looking after 15,000 children each week - and has had a colourful history since being founded in 1996 by husband and wife pair Wayne and Chloe Wright in 1996.

First called Kidicorp, the company was briefly listed on the NZX in the mid 2000s before choppy financial waters saw the Wrights take the company back into private hands in 2007. In 2015 the operation made a well-publicised metamorphosis into registered charity Best Start Educare.

Less well-publicised was the complex financial engineering behind this transformation that saw the Wright family sell Best-Start's shares to their family-run charity - the WFF - for $332m, with the purchase settled through regular repayments of an interest-free loan.

The arrangement now sees WFF pay the family around $20m a year from Best Start's now tax-free earnings. According to the most recent annual report, $208.5m of this loan remains outstanding, meaning Best Start's operation as an charity unencumbered by related-party loan repayments is still a decade away.

Wayne Wright, the chairman and until recently the chief executive of Best Start, said the unexpected tax bill related to a $25m donation in 2015 from Best Start to the WFF. He said the deduction on this donation - $7m - was claimed as a refund through a Notice of Proposed Adjustment, before Inland Revenue recently decided to take another look.

Best Start early child learning centre in Otara. Photo / Dean Purcell

"Due to my significant influence on the large flow of money in a number of entities I'm connected to, the IRD looks at them every five years or so," Wright said.

"In the audit last year they decided there was an error in the paperwork supporting the transaction and demanded the Trust pay back the refund."

The Wright family last year defended this charitable arrangement from members of the Tax Working Group who told the Herald they had recommended much stricter limits on related-party foundations and donations.

Wayne Wright said WFF's annual distributions to charitable causes of around $7m was comparable to the tax bill previously paid by Kidicorp.

Chloe Wright, the WFF managing director, was made an officer of the New Zealand Order of Merit in December for services to philanthropy, education and health.

The WFF is a significant donor to Plunket, and runs a small network of Birthing Centres.

Another cause funded by the WFF is perinatal lobby group Mothers Matter, whose three-minute short-film about maternal suicide aired in advertising slots on television was in March ordered off the air by the Advertising Standards Authority over concerns it may trigger self-harm.

The 2020 accounts, which to March 31 fail to include the worst effects of Covid, show annual revenues - the vast bulk of which came from Best Start, which in turn received nearly $200m in government funding - had grown to $280m.

But a $40m loss was booked for the year, largely off the back of a $60m goodwill impairment to Best Start's value. The accounts also record $19,973,575 went to the Wright family to pay down the related-party loan.