Greater tax incentives for charitable donations

Tax incentives for donations of money made by individuals, companies and Maori authorities have been greatly enhanced. The changes include removing the maximum limit on the tax credit for donations made by individuals, removing the 5 percent deduction limit on donations made by companies and Maori authorities, and extending the company deduction to apply to close companies not listed on a recognised stock exchange.

The changes are aimed at facilitating greater giving to charities and other non-profit organisations and encouraging a culture of generosity in New Zealand.

All legislation relating to the changes is contained in the newly enacted Income Tax Act 2007. Unless otherwise stated, the legislative references in this item refer to the Income Tax Act 2007.

Background

As part of the Confidence and Supply Agreement between Labour and United Future, the government released the October 2006 discussion document, Tax incentives for giving to charities and other non-profit organisations. The discussion document canvassed a range of options for encouraging greater giving to charities and other non-profit organisations and for making it easier to give in time, money and skills to these organisations.

Among the options canvassed in the discussion document were proposals to increase the limits on the current tax incentives for cash donations made by individuals, companies and Maori authorities. In response to submissions on the discussion document, the government agreed to remove the current limits altogether. These changes represent the first stage in the government policy commitment, Fostering a culture of charitable giving, which was announced as part of Budget 2007.

The changes were included in the Taxation (Annual Rates, Business Taxation, KiwiSaver, and Remedial Matters) Bill, which was introduced in May 2007. The changes amended the Income Tax Act 2004 and applied from the 2008-09 income year.

As the bill passed through its final legislative stage, the Income Tax Act 2007 was enacted. The Income Tax Act 2007 contains rewritten Parts F to the end of the Act, including schedules and consolidated parts A to E. In particular, the Income Tax Act 2007 restructured and rewrote section KC 5 of the Income Tax Act 2004, which contained the tax rebate for donations made by individuals, and consolidated the provisions providing tax relief for donations made by Maori authorities and companies.

As a result, a Supplementary Order Paper was introduced at the final legislative stage of the bill. Its purpose was to cancel the amendments to the Income Tax Act 2004 and insert those amendments (with appropriate modifications) in the Income Tax Act 2007. Because the amendments and the provisions of the Income Tax Act 2007 apply for the 2008-09 income years and later tax years, amendments to the Income Tax Act 2004 were unnecessary.

Key features

Company deduction

Section DB 41 allows a company to claim a deduction for all charitable or other public benefit gifts it makes to a society, institution, association, organisation, trust or fund of any kind described in section LD 3(2) or set out in Schedule 32. The deduction is limited to the amount that would be the company's net income before taking into account the donation deduction.

The deduction is also available to close companies that are not listed on a recognised exchange.

Maori authority deduction

Section DV 12 allows a Maori authority to claim a deduction for all donations it makes to a Maori association ²⁵ and all charitable or other public benefit gifts it makes to a society, institution, association, organisation, trust or fund of any kind described in section LD 3(2) or set out in Schedule 32. The deduction is limited to the amount that would be the Maori authority's net income before taking into account the donation deduction.

Individuals' tax credit

Section LD 1 provides that a person who makes a charitable or other public benefit gift in a tax year and who meets the requirements of section 41A of the Tax Administration Act 1994 is entitled to a tax credit equal to the amount calculated using the following formula:

Total gifts x 33 1/3%

"Total gifts" means the total amount of all charitable or other public benefit gifts made by the person in the tax year.

The equivalent provision in the Income Tax Act 2004 (section KC 5) has been rewritten and restructured in subpart LD and Schedule 32. The following detailed analysis explains both the structural changes and new terminology used.

Application date

The changes apply for the income years corresponding to the 2008-09 and later tax years.

Detailed analysis

Individuals' tax credit

Section KC 5(1) of the Income Tax Act 2004 contained the tax rebate for donations made by individuals. This provision was rewritten and its various parts relocated in subpart LD and Schedule 32. Consequential amendments were also made to section 41A of the Tax Administration Act 1994 to take into account new terminology used and renumbering of certain sections.

The tax rebate for donations is now a "tax credit". Part L contains most of the rules relating to the application of tax credits. In particular, subpart LA identifies when a tax credit arises, and sets out how the Act applies a tax credit to satisfy a person's obligations under section BB 2.

Section LD 1 allows a person who makes a "charitable or other public benefit gift" in a tax year to claim a tax credit for the tax year equal to one-third of the total amount of all charitable or other public benefit gifts made in that tax year.

The tax credit is treated as a "refundable tax credit" under section LA 7 and is not to be taken into account for the purposes of sections LA 2 to LA 6 (which relate to a person's income tax liability).

Section LD 2 states that an absentee taxpayer, company, public authority, Maori authority, unincorporated body or a trustee liable for income tax under subpart HC and section HZ 2 are not eligible for the tax credit.

Section LD 3(1) defines a "charitable or other public benefit gift". It means a gift of $5 or more that is paid to a society, institution, association, organisation, trust or fund described in section LD 3(2) or listed in Schedule 32. It also includes a subscription paid to a society, institution, association, organisation, trust or fund, only if the subscription does not confer any rights arising from membership in that or any other society, institution, association, organisation, trust or fund. The term does not include testamentary gifts.

Section LD 3(2) describes the entities or trusts referred to in section LD 3(1). The equivalent provisions are located in sections KC 5(1)(aa) to (ad) of the Income Tax Act 2004.

Schedule 32 contains the list of named organisations that are listed in sections KC 5(1)(ae) to (cu) of the Income Tax Act 2004. These organisations are now referred to as "recipients of charitable or other public benefit gifts".

Section 41A of the Tax Administration Act 1994 has also been rewritten to reflect the renumbering and new terminology used in the Income Tax Act 2007. Therefore, the restrictions on the amount of the tax credit are unaffected.

The term "charitable or other public benefit gift" is also used in section DB 41 (which relates to companies) and section DV 12 (which relates to Maori authorities).

The equivalent provisions of the Income Tax Act 2004 use the term "gift of money".

²⁶ "Maori association" is defined in the Maori Community Development Act 1962