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Feeling generous and thinking of making a donation to a good cause in the knowledge that the Government will effectively fund 33% of it by way of that nice tax credit?
Following recent legislative changes, in the near future you will have to check if the organisation still qualifies for ‘‘donee organisation’’ status before you can claim a tax credit of 33% on your donation.
On the flip side, if you are involved in an organisation or charity which has donors who rely on being able to claim tax credits for donations, then this article is a heads-up that you should review your future donee organisation status.
A refundable tax credit is available to individuals making gifts of money of $5 or more to a sonee organisation which provides charitable or other public benefit.
Similar rules apply to companies and Maori authorities.
Generally, an entity has previously qualified as a donee organisation if its funds are applied wholly or mainly to charitable, philanthropic or cultural purposes within New Zealand. Prior to the year beginning April 1 2020, simply “meeting” this definition would likely mean that any charitable entity could likely be a donee organisation for tax purposes.
To address concerns about misuse of the rules around claiming a tax credit for donations, from April 1, two legislative changes will take effect on donee organisations’ status.
Currently, an entity established for “charitable” purposes in New Zealand does not have to be registered as a charity with Charity Services to be eligible for donee status. However, under the new legislation, donee organisations that are not currently registered will have until April 1 2020 to register to qualify for or retain their donee organisation status.
After registering, the IRD add the entity to the donee organisation list.
If these entities do not register, their current donee status will be lost and those individuals donating to such an organisation will no longer be able to claim a tax credit.
The second significant change to legislation pertains to donee organisations that currently self-assess whether they meet the “benevolent, philanthropic or cultural purposes” eligibility criteria. These are separate to registered charities and could include sports foundations and the like.
From April 1, previously self-assessed donee organisations will be required to seek approval from the IRD to obtain their status. Currently, this is not a requirement. However, in practice, most self-assessed donee organisations have done so.
The IRD will undoubtedly publish a publicly available approved donee list on its website containing the names of entities meeting the requirements (which will forever be changing), but we would suggest that IRD-approved donee oprganisations be very specific in their communications with prospective donors as to their current status, to remove doubt and save hassle.
Further, in the period leading up to April 1, it may be wise for every organisation thinkingit has, or would like, donee organisation status to take stock of their current and future status, and consider what remedial action may be required.
Individually, as a donor, if the organisation you habitually donate to is already included on the list of donee organisations by IRD or is listed under schedule 32 of the Income Tax Act 2007 (e.g. a school board of trustees for which many people forget to claim), you will likely have no issues with a future tax credit claim. If not, a tax credit may not be available to you in the 2021 tax year for a donation to that organisation, unless the recipient communicates otherwise to you.
In summary, it is vital for entities receiving donations to consider the impact of this legislation upon themselves and their donors, as it could negatively affect the amount of donations that the organisation receives per year if they are not on the IRD’s list of approved donee organisations. The time to act is now to ensure that donee status can be retained.
Scott Mason is a tax specialist and managing partner at Findex in Dunedin.