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How big changes will affect you
Stuart Hutchinson, Raymond Yee and Nick Bland discuss proposals to enhance tax incentives for charitable giving and the tax treatment of charities' investments. They also provide a timely reminder regarding registration under the Charities Act 2005. From 1 July 2008 charitable entities must be registered under that Act to benefit from income tax and gift duty exemptions.
Radically Improved Tax Incentives for Charitable Giving
In the 2007 Budget, the government announced what is a paradigm shift in terms of tax incentives for charitable giving. The proposals follow on from recent consultation on how to enhance incentives for contributions to the charitable sector (see www.taxpolicy.ird.govt.nz).
The principal changes relate to tax rebates available to individual donors and tax deductions available to certain corporate donors. These incentives apply to gifts of money to so-called "approved donee organisations", not just charities. This includes New Zealand entities (and funds) that use their funds wholly or mainly for charitable, benevolent, philanthropic or cultural purposes in New Zealand and also various listed entities (e.g., Red Cross, UNICEF, SPARC, to name a few).
Changes are included in a tax bill currently before Select Committee, scheduled to report back to Parliament in November 2007. The proposed changes are to apply from the 2008/2009 tax year. These changes will significantly enhance the attractiveness of charitable giving for both individuals and companies (small and large) alike.
What’s in it for companies?
For large and small companies, two key changes are proposed which affect the concessionary tax deduction for gifts of money by companies to approved donee organisations:
- the current concessionary deduction is not available to “close companies” (generally, companies controlled by 5 or fewer individuals) unless they have their shares listed on a recognised exchange. It is proposed that the deduction will be made available to all companies, including unlisted close companies. Given that 97% of businesses in NZ are SMEs, the potential of this change is significant
- it is proposed that a company will be able to claim the concessionary deduction each year for gifts of money up to the amount of its net income (calculated without the deduction) for the year. Currently, the deduction is limited to gifts of up to 5% of a company's net income per year.
By way of example, XYZ Limited, an unlisted close company (with a net income of, say, $100,000), will be able to make a cash donation of $10,000 to a charity and claim a tax deduction for that amount, rather than having to apply general deductibility rules. The effective cost of the donation to the company would be $7,000 (the company tax rate being 30% from the 2008/2009 tax year.
Under current provisions, that same company cannot claim a concessionary deduction for such a donation (though it might instead make sponsorship or similar payments, deductible under general deductibility rules). In addition, even if the company was not an unlisted close company, its net income for the year would need to equal or exceed $200,000 to be able to deduct the full amount of the donation.
Notably, the benefit of the tax deduction is not limited if a company has tax losses (or is in a loss making group), as the net income of a company is calculated before taking into account tax losses.
What’s in it for individual taxpayers?
Individual taxpayers can claim each year a tax rebate, ie, a refundable credit, in respect of gifts of money to approved donee organisations. The tax rebate is calculated at 33 1/3% of the amount of such gifts.
Currently, the rebate is capped at $630 per year (i.e., it is available for gifts of up to $1890 per year). Under the proposed changes, this cap will be removed. This potentially unlocks a significant source of charitable funds.
Under the proposal, for example, an individual donor (with an annual taxable income of, say, $50,000) making cash donations of $10,000 to charities in a year will be able to claim a tax rebate of $3,333. The effective cost of these donations to the donor would be $6,667. Under the current regime, the donor's tax rebate would be limited to $630.
Notably, as currently drafted, the scope for claiming the rebate will be limited to the extent that an individual's tax losses shelter their taxable income for the year.
Other incentives
The government is still looking at other proposals, including the possible introduction of:
- a "payroll giving" scheme for donations to charity (a discussion document is scheduled for release in November 2007)
- legislative amendments clarifying the tax treatment of volunteer reimbursement payments and honoraria
- tax incentives for non-monetary donations
- a "gift aid" scheme, under which the tax incentive provided would be transferred to the charity not the donor.
Charity Investments
The government has also confirmed that, as part of a review of the imputation credit system (scheduled for this year), it will look at the option of making imputation credits attached to dividends paid to charities refundable. This would ensure that, in effect, a charity can derive income through a company tax free, to the benefit of the charity, even though the company is not tax exempt.
The same result can be obtained for income derived by charities through other investment vehicles, e.g., discretionary trusts, other flow-through vehicles (e.g., partnerships, soon to include limited liability partnerships or LLPs) and, from 1 October 2007, certain portfolio investment entities (or PIEs).
Charities Act Registration
The Charities Act has established a new registration regime for charitable entities, run by the Charities Commission (see www.charities.govt.nz). From 1 July 2008 charitable entities must be registered to benefit from income tax and gift duty exemptions (but not the tax incentives for donors, discussed above).
It is important that organisations take the following steps:
- identify any charitable entities (especially trusts) to which registration may be relevant
- collate governing documentation and other information, e.g., legal advice, financial information relating to each entity
- assess, in relation to each entity, whether registration will be worthwhile
- determine whether any restructuring or other steps, e.g., reviewing/revising entity documents, should be taken prior to (or following) registration
- complete and submit registration application packages for all relevant entities
- prepare each registered entity for ongoing compliance under the regime
- keep informed, e.g., information is available on the Commission's website and monthly newsletters can be requested by emailing info@charities.govt.nz
These steps should be taken without delay. In addition, although the tax effect of registration will not apply until 1 July 2008 and registration can be backdated to the date of receipt of a properly completed application, registration applications should be filed as soon as practicable, to allow time to confirm that the applications are properly completed and to deal with any queries raised by the Commission. The Commission currently takes at least 3 to 4 months to process a straight forward application and the Commission will be inundated with registration applications as the 1 July 2008 deadline looms.
Is registration worthwhile?
Registration is optional. However, a charitable entity must register to benefit from:
- income tax exemptions for charities' business and non-business income
- an exemption from gift duty for gifts made to create, or to assist, a charitable entity.
The relevance of these exemptions will depend on an entity's circumstances, in particular the level of non-exempt income it would otherwise derive or dutiable gifts it would otherwise receive. Administrative benefits, such as not being obliged to complete a tax return (a charity deriving non-exempt income will be required to file tax returns), may also be a significant consideration.
A registered charity will also be able to brand itself as "registered" and this status is likely to be of significant benefit, in the eye of funding bodies and that of the general public.
For most charities, these benefits will outweigh the costs of registration and of ongoing compliance, including maintaining registry information and filing annual returns (including financial information) with the Commission.
What is a charitable entity?
A charitable entity may be the trustee or trustees of a trust or a society, company or other body corporate. It is important to identify each separate entity (especially assets/funds held under separate trust arrangements), for registration purposes.
An entity will qualify as a charitable entity for registration purposes if:
- for the trustee(s) of a trust, the trust is of a kind that derives income in trust for "charitable purposes"
- the entity is established and maintained exclusively for "charitable purposes" and not carried on for private pecuniary profit.
The Charities Act generally relies on the definition of "charitable purposes" at common law, determined by decisions of the courts, but there is some statutory overlay. The common law recognises four heads of charity, namely relief of poverty, advancement of education, advancement of religion and other purposes beneficial to the community.
Other registration criteria
The principal additional criteria that must be meet for registration purposes are that:
- the entity's name must be approved under some other legislative regime or otherwise must not be misleading or offensive
- the entity's officers (generally, the trustee(s) of a trust and the members of the board or controlling body of any other entity) must be unaffected by, or obtain a waiver in respect of, specified disqualification criteria.
Registration applications
A charitable entity may apply to register either as an individual entity or as part of a group, i.e., a "parent" entity and affiliated/related entities, registering as a "single entity". The application package will include:
- an individual or "single entity" registration application
- officer certifications signed by, or on behalf of, each applicant entity's officers
- the rules of each applicant entity, e.g., its trust deed, constitution, rules or statute
- for "single entity" registration only, an additional written submission.
The relevant forms are available on the Commission's website. Application material can generally be filed either by post or online (via the Commission's website) and the Commission should confirm receipt of a completed application shortly after filing. However, the Commission's estimated timeframe for processing a properly completed, straight forward application is 3 to 4 months and any complications may prolong this timeframe.
The Commission must undertake a fresh assessment of the charitable status of each applicant entity, taking into account its purposes and its activities. Any existing IRD assessment (other than a binding ruling), e.g., a letter confirming charitable status for tax purposes, is not relevant.
The Commission will either accept or decline an application. If an application is declined, the decision can be appealed in the first instance to the High Court.
Backdated registration is permitted, but only to the date of submission of a properly completed registration application or, in relation to a gift made to create a charitable entity, to the date of the gift.
Tax matters
All tax matters, including the income tax and gift duty exemptions for which registration will be required, continue to be administered by IRD. It is even possible that IRD and the Commission could take conflicting positions, e.g., regarding an entity's charitable status.
However, IRD will work closely with the Commission. There is specific statutory provision for the gathering and exchange of tax-related information and a working protocol has been agreed between them. IRD has also issued an operational statement outlining its approach to its administration of tax concessions in light of the Charities Act (see www.ird.govt.nz).
Notably, Charities Act registration does not affect other tax concessions for charities and other public purpose entities, including:
- other income tax exemptions, e.g., for public/local authorities, local/regional promotion entities, community trusts, promoters of amateur sports/games, certain educational institutions, licensed gaming machine operators (but these entities may register under the Charities Act for the gift duty exemption, if they are charitable)
- tax incentives for donations to approved donee organisations, as discussed above
- a limited exemption from FBT, available to most approved donee organisations
- concessionary GST provisions applicable to "non-profit bodies".
Other matters
Charities Act registration does not affect other legal requirements applicable to any charitable entity. This includes any statutory incorporation/registration regime applicable to the entity (e.g., under the Charitable Trusts Act 1957, Incorporated Societies Act 1908 or Companies Act 1993) and general regulation of charities (e.g., under the Charitable Trusts Act 1957).
This newsletter is produced by Simpson Grierson. It is intended to provide general information in summary form. The contents do not constitute legal advice and should not be relied on as such. Specialist legal advice should be sought in particular matters.
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