Fact Sheet
Donee organisations — clarifying when funds are applied wholly or
mainly to specified purposes within New Zealand
Do people donate money to your organisation, and if they do, will they get a tax
break on that donation…or not?
Currently Inland Revenue is examining the rules on this issue and the key point for
discussion is whether donated money is used “wholly or mainly” in New Zealand.
Because if it is then donors can get tax breaks.
Up to now, Inland Revenue has said that “wholly or mainly” means that 51% or more of
the money donated is used for things that happen in New Zealand.
But a discussion paper we are about to put out suggests that that 51% minimum be
increased, possibly up to 90%, and we are asking for public comment on this matter.
While we think this change is strongly arguable, it is not certain so Inland Revenue is
undertaking a consultation process.
The law as it stands…
Under the Income Tax Act 2007 an individual donor can get a tax refund of 33.3% of the
value of donations over $5 and donations made by companies and Māori authorities get
an income tax deduction for the amount of the gift.
But in both cases, tax breaks are only available if the donations are used “wholly or
mainly” in New Zealand.
But first, is this relevant to you? Are you a “donee organisation”?
“Donee organisations” in this context are organisations using donated money for
charitable, benevolent, philanthropic, or cultural purposes.
If your organisation is a donee organisation and applies any of its funds to purposes
outside of New Zealand then this issue could have important implications for you and
your donors.
But if you do not apply any of your funds to purposes outside New Zealand then you do
not need to read any further.
Why is “wholly or mainly” being considered in an issues paper and what is
suggested?
The issues paper has been prompted by our awareness that there has been confusion
over some of the legislative requirements of being a donee organisation. In addition, it
appears Inland Revenue may be incorrectly applying the legislation.
So the issues paper suggests that it might be more consistent with the intent of the
current law if “wholly or mainly” had a much higher minimum level - possibly as much as
90%.
Changing the meaning of “wholly or mainly” in this way may mean some organisations
using funds for activities outside of New Zealand will need to consider other ways (if
possible) of ensuring their donors continue to receive tax breaks on their donations.
Issues papers are used as a vehicle to prompt submissions and further discussion of the
issues examined. While presenting Inland Revenue’s preliminary but considered views,
they do not present any fixed or final views.
Some more detail
Methodology to determine compliance with the “wholly or mainly” requirement
The issues paper also considers how the percentage to which an organisation has applied
funds to specified purposes is calculated. It is currently unclear how organisations are
making this calculation. The proposed method would provide greater certainty and
consistency than applies at present.
Also, the issues paper suggests adopting a “safe harbour” approach. This means Inland
Revenue would generally presume there is compliance with the “wholly or mainly”
requirement when the calculation shows that an appropriate percentage (possibly, 90%
or more) of an organisation’s funds have been applied to specified purposes in New
Zealand. Those organisations falling outside of the safe harbour would be considered on
a case-by-case basis.
The meaning of applying funds
Finally, the issues paper confirms Inland Revenue’s initial view that where funds are
spent does not determine where they are applied. That is, applying funds to specified
purposes within New Zealand does not limit an organisation to spending funds within
New Zealand (e.g., an organisation can buy medication from overseas for distribution to
those in need in New Zealand). Conversely, an organisation may be applying funds to
purposes outside New Zealand even though it is spending funds in New Zealand.
Alternatives for affected organisations
Some affected organisations may need to consider alternative means (if possible) of
ensuring their donors continue to receive tax advantages from making gifts to that
organisation. The alternatives include listing in schedule 32 of the Income Tax Act 2007
as an approved “overseas” donee organisation. However, an organisation is not eligible
for inclusion in schedule 32 if it is established for the principal purpose of fostering or
administering any religion, cult or political creed. Another option is to establish a
separate fund devoted exclusively to purposes in New Zealand with only donations to
that fund eligible for tax benefits.
Opportunity for your comment
There will be an opportunity for all interested parties to comment on the issues paper
during the eight week public consultation period, which will commence once the issues
paper is released for public consultation.
28 April 2016