Department of Internal Affairs Gambling Compliance director Debbie Despard said Grassroots was penalised for failing to distribute a minimum of 37.12 per cent of gaming machine proceeds to authorised purposes, a shortfall of $561,482, and over-paying venue expenses by $79,359 in the year ending March 2010.
She said the department initially decided to cancel the trust's licence, but after negotiations with the trust withdrew that action.
"In bringing about a resolution, the trust has agreed to licence conditions that require it to distribute a minimum of 40 per cent of gaming machine profit to the community and to limit the expenses it pays to its venues in a year to 14.5 per cent of GMP (gambling machine profits), rather than the statutory cap of 16 per cent."
However, Mr Hennessy said the decision was ludicrous and disgraceful. "There is simply no justice or common sense in this approach. Why are the trustees and managers not being fined?
"This is something we have no control or influence over. The community and the Government miss out on grants and taxes and the venue is unable to provide an entertainment mechanism to its customers.
"No regard has been given to the impact this will have on venues. It's like the passengers on a bus being fined because the bus was late," Mr Hennessy said.
Ms Despard said the department was satisfied the trust had taken the appropriate action.
"High expectations for the future have been set, and the trust has already shown signs of improving its performance.
"The successful end to negotiations shows the department is prepared to be flexible in order to maximise benefits for the community.
"Gaming trusts exist to maximise gaming machine proceeds to the community and, ultimately, the community will benefit from the commitments that Grassroots has made," she said.
Grassroots Trust chairman, Hamilton-based lawyer Martin Bradley, said the trust's gaming revenue was affected by the global financial crisis as well as some unexpected venue closures in 2009 causing revenue to fall by about 7 per cent.
He said the trust invested more than $700,000 in "harm minimisation measures" and installing player information displays on its 300-plus gaming machines in 2008 and 2009 resulting in a drop in grant payments.
"This suspension will have a significant impact on our venues and the community for which we are deeply sorry," Mr Bradley said.
"The grounds for the suspension relate solely to the amount of profit the trust was able to generate for authorised purpose grants in the year ending March 2010 and its breach of income to venue payments for the same year - both are historical accounting issues.
"The trust is currently in a very strong financial position and will continue to be a major contributor to local communities."
The Grassroots Trust is a Waikato-based Charitable Gaming Machine Trust and was established in March 2003 to primarily foster the amateur game of Rugby Union within New Zealand.
In the year ending March 2011 the trust distributed $5.6 million to community organisations.