Rules around tax breaks for charitable donations have undergone a lot of change in recent years. With the introduction of the Charities Act and the removal of the restrictions on deductions/credits for charitable giving the landscape is now quite different than it was a few years ago.
Individuals and businesses can now claim a credit (individuals) or deduction (companies) for donations made to eligible organisations. The first thing to check is whether your intended recipient is actually eligible. They need to be recorded as a Donee Organisation by the IRD. You can find a list of these on the IRD website (http://www.ird.govt.nz/donee-organisations/donee-organisations-index.html). Being registered with the Charities Office is not necessarily the same (although in practical terms almost every registered charity is also a donee organisation, but there are some exceptions). You can only claim credits/deductions if you have a proper charitable receipt from a donee organisation.
Limitations on Charitable Deductions
Another sticky issue is that you can only claim a credit/deduction for cash donations. Each donation must be at least $5 in order for it to be used. Donations of goods or services are not eligible for a receipt. The IRD acknowledge in one publication that a business may be able to claim a deduction for the cost of goods that are donated through their normal expenses, but this is different from claiming a deduction for a charitable donation (and, in our opinion, the business still needs to be able to justify the deduction in terms of the general deduction rules which could be tricky). The safest way to make such a donation is to invoice the charity for the goods/service and make a corresponding donation.
The maximum you can claim as credit/deduction is further limited to your taxable income in that year (for companies this means that your charitable donations deduction can not exceed your taxable net income before the deduction). You can not carry donations forward to next year or transfer them to another taxpayer (other than to a husband/wife/domestic partner).
Process to Claim
The process for claiming your deduction/credit is very straightforward. Companies simply include the expense in the annual accounts. Individuals (including self-employed people filing an IR3) don’t claim a deduction on their tax return but instead file a separate form to claim the credit (IR526). Individuals need to attach their receipts to their IR526 form to evidence that the donation is to a done organisation. The IR526 form will probably be held by the IRD until your IR3 is filed (in order to verify that your total donations are less than your taxable income for the year).
Personal or Business – which is best?
If you operate your business through a company then you have a choice (if you plan it properly) as to whether you claim a deduction through the company or claim a credit through your personal return. Claiming a credit means that you get a refund from the IRD for one third of the amount donated. If you make total donations of $1000 you will receive $333.33 back when your claim is processed. If you take a deduction through your company then you get in effect a 28% credit, which is less than the tax credit rate (or lower if we transfer the taxable profit to your personal tax return and your marginal tax rate is lower than 28%). In most cases for small business owners this effectively reduces the amount of earnings that is allocated to your personal account. Depending on your total income your personal rate may be lower than the credit rate (the maximum personal rate is currently 33.33% but if your taxable income is under $70,000 then your margin rate will be 30% or less). Therefore it is usually more beneficial to claim the donation credit personally rather than through the company. The only advantage for claiming through the company is that it may reduce your personal assessable income, which might be advantageous for other purposes. There are one or two scenarios where it may be better to give through your company, but you’ll have to call me to find out!
Would you like a 72.5% return on your donation?
The final thing to mention here is probably more of a personal pet peeve of mine. Take this scenario: your church wants to supply snacks to the kids during Sunday School but has a limited budget so it asks parents to bring in large bags of popcorn or biscuits. Because you’re generous (and are sick of hungry kids in the car on the way home) you decide to go to the supermarket and buy $100 worth to help them out. The church is very appreciative! But have you spent your money wisely? No! You would have been better to give the money to the church and have them buy the materials (or ask that they reimburse you for your purchase) and made a corresponding donation. Why? Donating the goods means that neither you nor the church can claim back the GST on the purchase and you cannot claim a charitable donation credit – you have given up about 50% of the value. In fact, for the same $100 cost to you the church could have purchased $172.50 in supplies! Here’s how it works: You were willing to donate $100 out of pocket. If you had donated $150 cash and then received a credit for $50 from the IRD you would still be out the same $100. The church purchases supplies worth $172.50 and claims back 15% in GST to spend the $150 you donated. Your $100 investment has resulted in an immediate return of 72.5% for your selected charity! Much better than merely donating goods!
If you have a church or charitable organisation that would like help with its accounting and being more tax efficient please pass our details on to them.
Some Problem Areas
In May 2014 the IRD issued a revenue alert about certain donations made to private schools and childcare facilities. It appears that some are getting creative about how they treat fees, and reclassifying them as “donations” thereby attempting to allow a donations tax credit for the giver and avoiding GST for the centre.
In the Revenue Alert, the IRD clarify that a payment of money of is a gift (and therefore eligible for a charitable donation credit/deduction) when it is:
- made voluntarily;
- for no consideration;
- the giver (or someone else) receives no benefit of a material character by way of return; and
- the payment is made by way of benefaction where the charitable organisation suffers no countervailing material disadvantage
If there is any benefit to the donor (child gets to go on a trip or camp, goods or services are provided, admission to an event, etc.) then it is probably NOT a donation. Charities should be very careful relabelling things as a donation as they could lose their Donee Status.
If you or a Charity you are involved in would like some advice on whether your “donations” are valid please do not hesitate to call us on 04-831-1232 to book a consultation.