Some charities provide benefit partly for New Zealand purposes and partly for overseas purposes. It is also possible for funds to be applied in New Zealand for overseas purposes or applied overseas for New Zealand purposes. If a charity applies too high a percentage of its funds for overseas purposes, then it may not qualify for tax donee status. The percentage permitted by IRD to be applied for overseas purposes is therefore very important.
In relation to this, on 20 September 2018, the IRD issued Interpretation Statement 18/05 regarding the meaning of the phrase ‘wholly or mainly’. The interpretation statement is accessible here at and a shorter fact sheet is here.
This Interpretation Statement is important because an organisation may qualify for tax donee status if it applies its funds ‘wholly or mainly’ within New Zealand. A charity focused primarily overseas will not qualify for tax donee status. In the past, the view accepted by IRD has been that if more than 50% of funds were applied in New Zealand for New Zealand purposes then the organisation would qualify as operating ‘wholly or mainly’ in New Zealand. That percentage has now been changed to 75%. Earlier discussion papers had suggested the figure might rise to as high as 90% but it was later moderated to the lower figure of 75% wholly or mainly within New Zealand for New Zealand purposes.
What the key change actually entails
If an organisation applies more than 25% of its funds for the benefit of overseas purposes, then it may no longer be considered to be operating ‘wholly or mainly’ in New Zealand and could lose its tax donee organisation status. The reason this may impact on charities you advise is that some charities have traditionally sent significant amounts overseas to support works there (disaster relief, orphanages, aid workers etc). It is possible that religious organisations in particular who support people overseas may already be at, or close to, the new threshold, and be unaware of the changes. It could cause them problems in the future if they continue to operate in the same way.
If you’re a lawyer advising a client who does send funds overseas, it would be important to advise them about the new approach.
The key provision itself
The section relevant in the Interpretation Statement 18/05 and related fact sheet is the Income Tax Act 2017 section LD 3(2)(a) which sets out the meaning of a charitable or other public benefit gift. The type of entity that qualifies is:
“a society, institution, association, organisation, or trust that is not carried on for the private pecuniary profit of an individual, and whose funds are applied wholly or mainly to charitable, benevolent, philanthropic, or cultural purposes within New Zealand.”
In clarifying what these definitions mean – “within New Zealand,” means the purposes are what is looked at, rather than the location where funds are spent. “Wholly or mainly” – will mean “75% or more” of funds being applied in New Zealand. Lastly, “funds are applied,” means action of sorts needs to be taken by the organisation to either spend or accumulate the funds.
The Interpretation Statement has been issued to clarify what entities qualify as a donee organisation under that section. The new interpretation will be implemented from the 1st of April 2019. For those entities that do not have a 1 April balance date the new interpretation percentage will apply from the first day of their income year for 2019/20.
The “safe harbour exception”
There will be some flexibility in how the percentages will work. An organisation can choose a method to calculate a “safe harbour percentage.” The key steps involved in doing this is to calculate the total funds and then divide that by the amount spent for specified purposes within New Zealand to get the percentage.
If in any year the safe harbour of 75% is not met then IRD can also look at the two preceding years. The purpose of this is to allow for some one off exceptions. It does this by looking at the cumulative figures over the three years. This means that the current year might be at say 70% but the previous two years were respectively at 80% and 90%. By looking at the cumulative total the percentage over the last three years might average 80%. IRD provides some key examples on the guidance of this, see here.
Another option for those sending funds overseas
Schedule 32 of the Income Tax Act 2007 could provide another exception to this new interpretation. If you are a lawyer with a client who will no longer meet the threshold proposed due to the significant funds applied overseas, this provides another option to them.
Applying to be added to Schedule 32 of the Income Tax Act 2007 can give qualifying charities a unique status in the New Zealand tax regime. Schedule 32 status is only granted to a select few (full list here). It provides the ability for those organisation to issue receipts to their donees for donations made to the charity even if applied wholly for overseas purposes.
At times the Government had a flood of requests and even published special guidelines to charities on how to make the application. For those charities that do not have their charitable purposes principally (more than 75%) in New Zealand, then the charity cannot qualify as a donee organisation unless it is listed in Schedule 32.
When applying to be listed under Schedule 32, it is the purposes for which funds are applied which is the most critical point. This may be different to where you spend the money. For example, buying toys in New Zealand to send to children in third world countries would mean that the purposes are overseas, not in New Zealand.
Furthermore, there are other hurdles to be aware of if applying for Schedule 32 status.
- The process for applying is long and arduous and IRD has to put a special request to Cabinet for final approval and these happen only once or twice a year.
- The purpose of the overseas charity is also important. When applying, Cabinet will want to see that the charity’s purpose falls within these three humanitarian categories; “the relief of poverty, hunger, sickness, or the ravages of war or natural disaster; or the economy of developing countries; or raising the educational standards of a developing country.” Advancement of religion and political advocacy is thus not noted in this list.
- You must “tell the story” of your charity, specifically focusing on who the trustees are, what they are involved in and how the charity purposes are being practically carried out. Furthermore, there must be evidence that the New Zealand trustees regularly visit any overseas offices and an audit of the money raised.
Why is this an important change
If someone makes a donation above $5 to a donee organsiation they receive a refundable tax credit/income tax deduction. This encourages people to give to organisations that qualify. If an organisation does not have tax donee status then it will be more difficult to solicit donations.
If you would like to know more information, please contact one of our Partners Steven Moe.
Steven can be contacted on:
M: +64 021 761 292