Claiming Tax Credits on Donations to Charities supporting Overseas Causes
Many New Zealand based charities also support overseas causes – this is often a result of donations being “ear-marked” by donors as being for support of a particular overseas-based person or purpose. Although these amounts usually make up a small percentage of the charity’s total spending, there appears to be some confusion as to the status of these donations. Shedding light on this issue may help charities to increase the support base for persons they wish to support overseas.
What is the status of donations made to charities for overseas purposes?
A charity that is registered with the Charities Commission can issue receipts for donations made to it where its funds are applied wholly or mainly to charitable purposes within New Zealand.
Why does the IRD recommend charities keep separate accounts for funds spent outside New Zealand?
When approving a charity for donee status (the ability to issue receipts enabling the donor to claim a tax credit/deduction for up to one third of their donation), the IRD usually recommend that charities maintain separate accounts which clearly identify funds applied or spent outside New Zealand. This has led to some charities believing that these overseas bound funds are ineligible for tax credits.
“Wholly or mainly” has been interpreted as meaning 75% or more. So, provided a charity applies 75% or more of its funds to its New Zealand based charitable purposes, it can issue receipts to all of its donors, even those whose giving has been earmarked for the support of persons serving overseas. Our view is that the IRD advice to keep separate accounts is merely reiterating that this is a good idea to help the charity measure what percentage of funds are being applied toward NZ purposes vs overseas purposes. This is so that, when the charity’s annual return is completed, it can accurately state the proportions as required.
We have found that shedding some clarity on this issue has enabled charities to increase the support base for persons they wish to support overseas, as potential donors are more likely to give to the charity if they can claim a tax credit/deduction.
What tax credits are donors entitled to?
Generally speaking, an individual can get a third of the donation as a credit, so long as the donation is not more than their taxable income, and a company can claim the donation as a tax deduction, to the extent that the donation is not more than its taxable income.
One warning however is that when accepting a donation, while it is acceptable for the donor to express a ‘wish’ as to its allocation, the charity needs to retain a discretion in relation to the ultimate application of funds, rather than being bound by an absolute condition attached to the gift – otherwise, it is possible that the charity is only an agent for those funds, and that the donation is not really to the charity at all, but directly to the overseas person.
Parry Field Lawyers provide legal advice on a range of tax matters and are able to assist you with any tax questions that you might have. Please contact Tim Rankin or Ken Lord if you would like further advice on these issues or any other tax or compliance issue affecting your charity.
Please note that this article is not intended to be legal or investment advice, and is only intended as a general guide. Reliance should not be placed on this article where any specific issues are concerned.
