Understanding Donations and Tax Benefits in New Zealand: A Comprehensive Guide for Individuals and Companies
In New Zealand, donations to approved donee organisations can provide significant tax benefits, whether made by individuals or companies. However, the rules and benefits differ between these two groups. This blog post will explore what can and can't be claimed, with a particular focus on school donations, and how individuals and companies can maximise their tax benefits.
What Qualifies as a Donation for Tax Credits?
Under the Income Tax Act 2007, a donation must be a "charitable or other public benefit gift" to qualify for a tax credit. This means a gift of money of $5 or more to a donee organisation, which includes entities listed in Schedule 32 of the Income Tax Act, such as registered charities and certain educational institutions.
Key Criteria for a Donation to Qualify
Voluntary Payment: The donation must be made voluntarily, without any obligation or expectation of receiving a material benefit in return.
No Material Benefit: The donor or their family must not receive any material benefit from the donation. For example, if a school offers discounted fees in return for a donation, the payment would not qualify.
Receipt Requirement: Donors must obtain a receipt from the donee organisation to claim the tax credit. The receipt should clearly state that it is for a donation.
School Donations: What Can Be Claimed?
School donations can be complex due to the nature of payments made to educational institutions. Here's how they are generally treated:
State Schools: Donations to state schools can qualify for tax credits if they meet the criteria of being voluntary and without material benefit. State schools are considered donee organisations, and parents can claim a tax credit for donations of $5 or more.¹ ³ However, payments for specific services or goods, such as stationery or extracurricular activities, do not qualify as donations.
State Integrated Schools: Payments to state integrated schools can qualify as donations if they are voluntary and do not provide a direct benefit. For example, payments to assist with the school's curriculum or for specific projects that benefit the school as a whole can qualify.
Private Schools: For private schools, the situation is similar. The school must be a registered donee organisation, and the donation must be voluntary and without any direct benefit to the donor. Payments that substitute for school fees or provide a direct benefit, such as reduced tuition, do not qualify.
Claiming Donations as an Individual
Individuals can claim a tax credit for donations made to approved donee organisations. This is typically done by submitting a claim form, often referred to as an IR526, along with receipts for the donations made. The process can be completed online through myIR, where individuals can upload receipts throughout the year.
Tax Credit Rate: The tax credit is 33.33% of the total donations made, up to the amount of the individual's taxable income for the year.
Limitations: Individuals cannot claim tax credits for payments that provide a direct benefit, such as school fees or extracurricular activities.
Claiming Donations as a Company
Companies can also claim deductions for donations made to donee organisations, but the process and benefits differ from those available to individuals. Companies claim these donations as business expenses, which reduces their taxable income.
Eligible Donations: Companies can claim deductions for cash donations made to donee organisations. The deduction is limited to the company's net income for the year.
Tax Deduction vs. Tax Credit: Unlike individuals who receive a tax credit, companies receive a deduction, which reduces their taxable income. This means the benefit is realised at the company's tax rate, which is currently 28%.
Comparing the Tax Benefits
The tax benefits of claiming donations differ significantly between individuals and companies:
Individuals: The tax credit directly reduces the amount of tax payable by the individual. For example, if an individual donates $300, they can claim a tax credit of $100 (33.33% of $300), which directly reduces their tax liability.
Companies: The deduction reduces the company's taxable income, which indirectly reduces the tax payable. For instance, if a company donates $300 and has a tax rate of 28%, the tax saving is $84 (28% of $300).
Conclusion
Understanding the nuances of what constitutes a claimable donation is essential for both donors and organisations. By ensuring that donations meet the criteria set out in the Income Tax Act, individuals and companies can take advantage of tax benefits while supporting charitable causes. For more detailed guidance, refer to the Income Tax Act 2007, particularly sections LD 1 to LD 3, and consult the Inland Revenue's resources on donations.
Example
You donate $300 to your favourite registered charity in the financial year (from 1 April to 31 March) - you can get $100 (being 33.33%) back which will either reduce your tax bill, or be refunded into your nominated bank account! Or if you pay this as a company, it will reduce your company tax bill by $84 (being 28%).