From April 1, 2008, individuals have been able to claim a rebate on all charitable or other public benefit gift in a tax year if they meet the requirements.
The amount of the rebate is calculated based on the formula: total gifts times 33.33.
For a company that makes a charitable or other public benefit gift in a tax year, the company is entitled to a deduction up to the extent of its net profit.
A charitable or other public benefit gift means a gift of $5 or more paid to a society, institution, association, organisation, trust, or fund that is of the sort listed, or is approved as a "donee organisation" and included in schedule 32 of the Income Tax Act 2007.
Examples of the entities to whom a gift can be made and tax relief claimed in the form of a rebate or a tax deduction include an organisation 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, a public institution or a fund established maintained exclusively for any one or more of the purposes within New Zealand as above, a school's board of trustees.
The IRD has been investigating arrangements where tax credits for donations have been claimed in circumstances where a true gift of money has not been made.
These arrangements involve recharacterising gifts that would not ordinarily been a donation to receive the tax credit.
The IRD has recently given examples where donation tax credits are being claimed which they consider are not valid.
Below are examples to indicate where the IRD's inquiries are focusing.
Example 1
A person has a loan outstanding to a charitable organisation which that organisation is unable to repay.
Instead of forgiving the loan, the person pays the organisation an amount of money equal to the debt in the form of a "donation", on the understanding that the money will, in turn, be used to repay the debt.
The organisation repays the debt and the person claims a donations tax credit.
Example 2
Instead of gifting property to the charity (which would not qualify for the tax credit as it is not "cash") the person makes a gift to the organisation which the organisation then uses to purchase the property from them. The person claims a donations tax credit.
In some cases the arrangement also enables the charitable organisation to claim a second-hand goods input tax credit for GST purposes on the purchase of the property.
Example 3
Fundraising is done on behalf of a charity.
The money raised is then passed to an individual (generally closely associated with the charity) under the understanding that the person will "donate" that money to the organisation.
The organisation will not have to account for any GST on the fundraising event, and the donor will claim a tax credit.
If you are making a donation to a charity and claiming a tax credit, make sure there is an actual gift of money.
Although we disagree with this "cash" requirement from a policy perspective, it seems to be a valid conclusion at present.
The IRD has made it clear that if an arrangement is identified, not only will the IRD recover the excess tax credit from the person making the claim, but it will also consider the imposition of monetary penalties.
In extreme cases, the IRD considers the arrangements amount to fraud and will consider criminal prosecution. For example, donating $200 to a church on Sunday and picking up $200 of groceries on Wednesday from the same church (and claiming a rebate for the gift) may run close to that line.
If you have been involved in an arrangement of the kind identified above, or anything similar, the IRD is recommending you discuss the matter with your tax adviser, and consider making a voluntary disclosure.
- By Scott Mason, tax consulting principal at WHK in Dunedin.
