Tax effective giving
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).
Individuals
Cash Donations:
A limited tax rebate is available to the donor for cash donations in excess of $5, provided they are made to organisations that have “donee status”. Inland Revenue will approve donee status to New Zealand organisations that meet the required charitable criteria. Organisations which are charitable but have not been approved by Inland Revenue do not have donee status. Organisations which apply funds outside New Zealand can only obtain donee status by special legislation, such as for major aid organisations.
A list of organisations which have be given donee status is list at www.ird.govt.nz/otherservices/donee/
The rebate for each year ended 31 March is the lesser of $630, 1/3rd of the total qualifying donations paid, or the amount of tax paid. This means that amounts gifted in excess of $1,890 will not qualify for the rebate, although the excess may be transferred to a spouse who has not used their full $1,890.
Proposed Changes
As part of the 2007 budget it was announced that with effect from the beginning of the 2009 financial year (1 April 2008) this donation rebate threshold would be removed. Donors will be entitled to claim a 33⅓% tax rebate for qualifying donations up to their annual net income.
At the date of writing this, the new legislation had not yet been enacted – until this occurs it is subject to change.
Donations of Income
The current tax rebate provides only limited tax benefits for donors. However, if a person is able to donate income before it is taxed, a more effective donation can be made. The entire tax paid on the income can be saved (whether this be at the 19.5%, 33% or 39% tax rate) with the benefit accruing to the donee. This benefit does not apply to dividends, as imputation credits attached to dividends are not currently refundable to charities.
This benefit can be achieved in the following ways:
Assignment of Income
A donor can elect to assign income, other than income arising from personal exertion, to a charity prior to it being derived, and therefore not incur any tax liability on that income. The donor still owns and controls the asset. As the charity is exempt from income tax no tax liability arises for that income.
Having a Charity as a Discretionary Beneficiary of a Family Trust
An alternative to assigning income is to have a charity named as a discretionary beneficiary of the family trust. There is no obligation to pay an amount to the charity, but the trustees can allocate current year income as beneficiary income before any tax liability crystallises. That beneficiary income will be exempt from income tax to the charity.
Companies
Sponsorship is a common means of providing cash, goods or services to a charitable organisation. By getting something back in return, such as naming rights or recognition, the company should obtain a tax deduction. Where this reciprocity does not exist, tax effectiveness is more limited, as detailed below.
Cash Donations
Tax rebates are currently not available for companies. Donations are not a tax deductible expense for closely-held companies, other than if such entities are listed on a recognised exchange. Closely-held companies are ones that have 5 or fewer natural persons who have an aggregate of voting interests in the company in excess of 50%. Shareholders associated with each other are treated as 1 shareholder for this test.
All other companies that make a cash donation to any “donee organisation” are limited in the tax deduction each year to an amount not exceeding 5% of the company’s net income for the year (excluding the gifts).
Proposed Changes
Changes have also been announced in relation to this area at the 2007 Budget. It is intended that from the commencement of the 2009 financial year (1 April 2008) all companies will be entitled to an income tax deduction for donations made to charitable organisations, limited only by the amount of the company’s net income.
At the date of writing this, the new legislation had not yet been enacted – until this occurs it is subject to change.
Donating Goods or Services
The tax deductibility of donated goods or services depends on the company showing a nexus between the expenditure and the business carried on for deriving taxable income. Such a requirement is not necessary where goods no longer used in the business are donated.
These comments which are current as at 11 July 2007 are general in nature and should not be relied upon. Donors are recommended to seek professional advice particular to their circumstances. A current version of this document is available at www.giving.org.nz/