Tax effective giving
Here is a summary of the tax rules applying to giving and the charitable sector.
Giving is only tax effective when made to approved charitable organisations, otherwise the donor may be liable to gift duty (subject to certain exemptions). Giving can be made tax effective in a number of ways, depending on how much is donated and the tax status of the donor.
Approved charitable organisations (the donee) are exempt from income tax Please refer to the charitable organisations paper for details of this option. (With effect from 1 July 2008, in order for charitable organisations to retain their tax-exempt status, it is a requirement that they register with the Charities Commission).
New tax legislation took effect for most people on 1 April 2008. The changes have focused on two key areas.
- Removal of the limit placed on tax deductible gifts of cash
- Tightening the application of the charitable purposes exemption
Details have also been released on the intention of Government to introduce a pay-roll giving system for collecting donations to charitable organistions.
Tax deductible gifts of cash
The Income Tax Act deals separately with giving by individuals, and giving by other types of taxpayers, but there is an important common element. Only gifts satisfying the definition of a "charitable or other public benefit gift" will qualify for tax relief.
A caritable or other public benefit gift is a gift of $5 or more that is paid to:
- a society, institution, association, organisation, trust or fund that is not carried on for the private pecuniary profit of an individual, and whose funds are applied wholly or mainly to charitable, benevolent, philanthropic, or cultural purposes within New Zealand;
- or a public institution maintained exclusively for any 1 or more of the above purposes.
Such organisations are commonly referred to as approved donee organisations.
It is a common misconception that only gifts to charities qualify for tax relief, but as the above definition shows, an approved donee can have a non-charitable purpose. It can be assumed however that any gift to a registered charity will qualify.
Inland Revenue Department approval must be obtained before an organisation becomes an approved donee, and a full list of New Zealand approved donees may be found on the IRD website at: www.ird.govt.nz/donee-organisations/
Overseas organisations must be approved by Parliament, and a list is contained in Schedule 32 of the Income Tax Act 2007.
Gifts must be in cash, and no tax relief is available for gifts of goods or services, although Government is currently seeking comment on whether this is a desirable extension of the position.
The nature of the tax relief for individuals is a tax credit amounting to 33 1/3% of the amount of the gift. A tax credit reduces the amount of income tax payable by a person.
This credit does not form part of a person's normal income tax return. The PAYE system is designed to deduct the correct amount of income tax during the year, making a return unnecessary for many wage and salary earners. So, the tax credit is delivered to individuals as a separate tax refund after lodgement of a special claim form (IR 526).
Prior to 1 April 2008, the maximum refund available was $630 meaning that only the first $1,890 of an individual's giving received any income tax relief. As of 1 April 2008 this limit was abolished. All charitable and public benefit gifts up to the amount of the person's taxable income now qualify for the tax credit. This is good news for those who were giving more than $1,890 and needs to be highlighted by readers who want to encourage new giving to their organisations.
The Income Tax Act deals with corporate giving in a different way.
A company does not receive a tax credit and so no refunds of the sort available to individuals are made. Instead, a company is allowed a deduction for charitable and public benefit gifts made. A deduction reduces the amount of a company's taxable income and so reduces its income tax payable.
Some companies with specifically tailored Constitutions can claim charitable status and avoid income tax altogether meaning deductibility is not an issue.
On the other hand, prior to the commencement of the 2008 - 09 income year (1 April 2008 for companies with a 31 March balance date) small companies caught by the definition of a "close company" got no tax relief for gifts at all (unless they were listed on the stock exchange).
All other companies were entitled to a tax deduction for charitable and other public benefit gifts but limited to 5% of their taxable income.
This limit has now been removed, and any company (including a close company) may now claim a tax deduction for charitable and other public benefit gifts up to the amount of its taxable income before making the gifts. It cannot create a tax loss by gifting more than its taxable income.
Once again this is good news since it positively encourages corporate giving.
For tax purposes the definition of "company" includes any incorporated body such as Maori Authorities and Incorporated Societies.
This is of particular interest to the service clubs of the nation (Rotary, Lions, Round Table etc) who might have escaped income tax on their fund-raising activities by claiming the charitable purposes exemption, but who are now finding their applications to the Charities Commission being denied. Such bodies will need to carefully consider whether their income is taxable from 1 July onwards, and if so, whether the cost of their community activities are deductible as charitable or public benefit gifts.
Changes to the Charitable Purposes exemption
The Income Tax Act contains a specific exemption for the income of a charitable trust or any other body "established and maintained exclusively for charitable purposes and not carried on for the private pecuniary gain of any individual". This is called the charitable purposes exemption, and until recently its availability was confirmed by the IRD issuing a letter to an organisation claiming the exemption.
From 1 July 2008, the exemption will only apply to bodies registered with the Charities Commission. All letters issued by the IRD confirming charitable status will expire. Any organisation holding a letter but not registered on 1 July will potentially become a taxpayer until it can re-establish its charitable credentials. No "grandfathering" will be allowed by the IRD. Further, any organisation losing its charitable status will lose its existing approved donee status and any certificates of exemption from withholding tax.
The Commission has a serious lack of resources and is struggling to deal with the number of applications received. Any application forwarded to the Commission today will simply not be processed by 1 July at the current rate of progress.
The Commission has recognised this issue and announced that it will backdate an applicant's charitable status to the date the application was received providing the application is properly completed. This means an organisation whose application is received before 1 July but who does not receive notification of registration until a later date will not lose the benefit of the charitable purposes exemption during the intervening period.
It was also announced as part of the 2008 Budget that the IRD will consider granting an extension of time for registering with the Charities Commission for any entity that has not already been advised by Inland Revenue that it is not a charity, but that has been unable to complete the application process by 1 July. Detailed guidelines on how the Inland Revenue will administer this extension process are yet to be announced.
Some new remedial legislation is also being undertaken in the charitable sector. For example, certain state funded tertiary education institutions, state integrated schools and non-resident charities are not required to register with the Charities Commission to retain their tax exempt status.
A non-resident charity is a non-resident entity that is registered as a charity in its own country which would not be normally allowed to register with the Charities Commission because it is not established in New Zealand or has no strong connection with New Zealand. Such a body will lose its tax exempt status on New Zealand sourced charity related income from 1 July. This will now be restored with Inland Revenue approval.
Details have been released on the intention of Government to introduce a pay-roll giving system for collecting donations to charitable organisations. This will be a voluntary pay-roll giving system that will enable people to make donations to charitable organisations through work based pay-roll deductions.
It will be voluntary for employers to introduce pay-roll giving into their workplace and voluntary for employees to participate. It will be only be available to employers who file their employer monthly schedules with the Inland Revenue electronically. The schedules will provide payday information and employee's salaries and wages, PAYE deductions and other social policy related deductions such as student loan deductions and child support.
The system will deliver payday tax relief on charitable donations by way of a PAYE credit. Each pay day employees will receive a PAYE credit on the amount of their donation rather than having to file the donation form at the end of an income year. The PAYE credit will be calculated at the rate of 33 1/3%.
The current end-of-year process will continue and employees who do not or are not able to donate through payroll giving can still claim a tax credit for their donations.
Philanthropy New Zealand would like to acknowledge and thank Colin Jones for writing this summary. Colin is a member of Philanthropy New Zealand's Government Relations Committee and a Principal at BDO Spicers Wellington Ltd.