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Donations: what is required to establish and maintain a fund?

Published 25 June 2019

A person donating money to a donee organisation can receive tax benefits. A donee organisation includes a fund established and maintained exclusively for providing money for specified purposes within New Zealand. QB 19/10: Donations: What is required to establish and maintain a fund under s LD 3(2)(c) of the Income Tax Act 2007? considers what is required to establish and maintain such a fund so it qualifies as a “donee organisation”

QB 19/10 complements interpretation statement IS 18/05: Income tax - donee organisations – meaning of wholly or mainly applying funds to specified purposes within New Zealand.

Read QB 19/10

Read IS 18/05

Recent tax legislation changes for charities, not-for-profits and donee organisations

Published 25 June 2019

The recently enacted Taxation (Annual Rates for 2018-19, Modernising Tax Administration, and Remedial Matters) Act made amendments to the tax rules for charities and donee organisations.

Key features

Amendments ensure that:
   1. the charitable business income tax exemption is restricted to charities registered under the Charities Act 2005;
   2. organisations seeking donee status for donation tax credit must be approved by the Commissioner of Inland Revenue;
   3. organisations with charitable purposes must be a registered charity to obtain donee status;
   4. depreciation income recovery rules apply when a taxable entity becomes a registered charity;
   5. disclosure requirements that apply to foreign trusts also apply to where the trust is a registered charity;
   6. penalty, interest and avoidance provisions may apply to donation tax credits;
   7. clarifies the GST treatment on assets and their disposal by Not for Profit bodies (including charities).
   8. only gifts of money, (cash, electronic bank transfers, credit cards, and cheques) qualify as gifts eligible for donation tax credits or gift deductions. This does not include gifts in kind or debt forgiveness.

Also, donation receipts can now be submitted electronically during the year to a person’s myIR account with donations tax credits claimed as part of the end of year income tax process. However, people can continue to complete a separate donation tax credit claim form should they wish to.

Tax rules for deregistered charities:
   1. address the tax treatment of land owned by deregistered marae charities;
   2. clarify the valuation of assets and liabilities at the date of deregistration;
   3. a de minimis threshold for charities with a low value of accumulated net assets;
   4. prevent potential double-deduction for monetary gifts made within one year of deregistration;
   5. prevent potential over-taxation of deregistered charities in a group structures where multiple members deregister together;
   6. address disposal of a wholly-owned subsidiaries by a charitable group for market value.

More information is in the Tax Information Bulletin Vol 31 No 4 (May 2019)

Debt forgiveness and donation tax concessions

Published 25 June 2019

In August 2018 a High Court judgement held that forgiveness of a debt owed by a donee organisation can constitute a “monetary gift … paid” to a donee organisation. Therefore the donor may be eligible to claim a donation tax credit or gift deduction.

In October 2018 the Commissioner of Inland Revenue announced she would appeal that decision.

The Commissioner’s position continues to be that forgiveness of a debt owed by a donee organisation will not qualify for a donor donation tax credit or gift deduction.

An amendment was included in the Taxation (Annual Rates for 2018-19, Modernising Tax Administration, and Remedial Matters) Act to clarify that only gifts of money, including payments made by way of electronic bank transfers, credit cards, and cheques, qualify for donation tax credits. This amendment is consistent with the policy intent. The previous words “monetary gift of $5 or more” have been replaced with “gift of money of $5 or more”. The application date of the amendment is 1 April 2008. There is a savings provision for donors who have already taken a position that debt forgiveness qualifies as gift, however the savings provision will only apply if these donors filed a return or a donation tax credit claim before 16 January 2019. For these donors, their entitlement to donation tax credits will be subject to the outcome of the Commissioner’s appeal of the High Court judgement.

You can find out more about the August 2018 High Court judgement and the legislation change is explained in Tax Information Bulletin Vol 31 No 4 (May 2019).

You can also read the Commissioner's 2011 Revenue Alert about arrangements entered into to get a donation tax credit where there has not been a true gift of money.

Depreciation recovery when a taxable entity becomes a registered charity

Published 2 April 2019

QB 19/02: Depreciation – change of use event confirms that a business that becomes a charity will have a change of use of its depreciable property. This means depreciation recovery income may arise.
Read QB 19/02 (2 April 2019)

Terrorism financing risks in the Asia-Pacific

Published 21 December 2018

In November 2018, the report 'NPO red flag indicators 2018' was published to help the not-for-profit sector identify and mitigate the risks of terrorism financing in the Asia-Pacific region. It will be of particular interest to New Zealand non-for-profits that operate in or send funds to high-risk regions.

If your not-for-profit organisation sends funds overseas, we expect you to have internal controls to ensure the tax relief you receive is targeted appropriately.

Read the report and find more information about protecting your organisation's funds from being used for terrorism financing, as well as tax rules that affect not-for-profit and charitable organisations working overseas.

The interpretation of "wholly or mainly" for the purposes of the donee organisation test

Published 4 October 2018

Interpretation statement IS 18/05: Income tax - donee organisations – meaning of wholly or mainly applying funds to specified purposes in New Zealand concerns donee organisations under s LD 3(2)(a) of the Income Tax Act 2007.

It applies to organisations applying funds to charitable, benevolent, philanthropic, or cultural purposes within New Zealand and to other purposes (for example, overseas purposes). It doesn’t apply to organisations listed in schedule 32 of the Act.

The statement clarifies the interpretation of these requirements.

It also explains our “safe harbour” approach to administering this requirement. We will generally accept that an organisation meeting the minimum safe harbour percentage of 75% has met the requirement without asking you any more questions.

The statement is accompanied by IS 18/05 - fact sheet – applying the “safe harbour” approach. The fact sheet sets out the most important information from IS 18/05 without the legal details. It includes examples of when funds are considered to be applied to specified purposes within New Zealand, and an example of the safe harbour calculation.

Read the interpretation statement and fact sheet

State and state integrated schools - donation tax credits and GST

Published 21 June 2018

QB 18/10 Income tax – state schools and donation tax credits

QB 18/11 Income tax – state integrated schools and donation tax credits

These two “Questions we’ve been asked” (QWBAs) explain when a parent’s payment to a school will be a gift, so that the school can issue a donation tax receipt to the parent. A payment will be a gift when it is voluntary, does good for the school, and the parent obtains no material benefit or advantage in return for making the payment. The QWBAs refer to Circular 2018/01 Payments by parents of students in schools (Ministry of Education, 2018).

Find out more about QB18/10 and QB 18/11

Public Ruling BR Pub 18/06: Goods and services tax – payments made by parents to state and state integrated schools

GST is not chargeable on payments made by parents to the board of trustees of a state or state integrated school where the payments are made to assist the school with the cost of delivering education services which the student has a statutory entitlement to receive free of charge. GST is chargeable on payments made for supplies of other goods or services that are not integral to the supply of education to which the student has a statutory entitlement, where that supply is conditional on the payment being made.

This Ruling is a reissue of BR Pub 14/06 which expired on 20 June 2018. It is substantially the same as BR Pub 14/06 but some parts have been rewritten to improve readability, and legislative changes have been included. A new example (Example 5) has been added. The Ruling refers to Circular 2018/01 Payments by parents of students in schools (Ministry of Education, 2018).

Find out more about BR Pub 18/06

You can receive email notifications when draft public items are available for comment or when finalised public items are published. Contact Public Consultation to be placed on a distribution list.

Recent changes to the tax rules when a charity deregisters

Published 27 June 2018

In March 2018, amendments were made to the Income Tax Act which affect the tax rules when a charity deregisters. The changes extend the existing deregistration tax rules to all entities that derive exempt income under section CW 42 of the Income Tax Act (previously the rules just applied to registered charities). The changes also clarify that there will be no tax liability if assets are disposed of or transferred to another person for charitable purposes or in accordance with the entity's rules within 1 year of the deregistration.

The amendments apply to charities that are deregistered on or after 6 April 2016. You can find out more information about these changes in Tax Information Bulletin Vol 30 No 5 (June 2018) pp107-108