An organisation may do good work but not be eligible to get tax donee status in New Zealand. That could be because most of their funds flow offshore. An option in that case is establishing and maintaining a fund as if it were a tax donee organisation. This article describes the steps to set up a fund as a tax donee organisation and the key points to consider.
Not for profits that cannot obtain charity status may be able to get donee status for a particular fund. Donee status means the not for profit could issue receipts for donations to the fund of $5 or more, which allows donors to claim tax credits from the IRD. For more information on Donee Status, see chapter 4 of our Charities Legal Handbook.
A fund is eligible to apply for donee status if it is established and maintained by a not for profit entity and exclusively used for the purpose of providing money for one or more of the charitable, benevolent, religious, philanthropic or cultural purposes within New Zealand of the not for profit entity. For more information on charitable purposes, see our article.
For a successful application to obtain donee status, the application must meet the section LD 3(2)(c) of the Income Tax Act 2007 requirements. Put simply in an IRD briefing, an application to obtain donee status must show that the fund:
- is an actual stock of money or other assets
- set aside on a firm and permanent basis
- for the required purpose.
- Additionally, the establishment and maintenance of the fund must be within the powers of the not for profit entity.
So what documents are needed?
While the Commissioner does not require written documentation, it is unlikely the Commissioner will conclude the requirements of section LD 3(2)(c) are met without written documentation.
A fund is “established” by making book entries in the financial accounts, but it is important to ensure the entries are supported by a fund and show that the fund has been set up on a “firm or permanent basis” for the specified purpose within New Zealand. A “fund” in the context of section LD3(2)(c) is an actual stock of money or other assets set aside for charitable, benevolent, philanthropic or cultural purposes within New Zealand.
The Commissioner would also prefer that more than just book entries are included in the application. This is where a founding document that sets out the establishment, operation and winding up of the fund becomes relevant, as a founding document shows the requirements of section LD 3(2)(c) are met. This document could be part of the rules of the not for profit entity, or a stand-alone document.
What would a Fund’s rules cover?
Pages 10-11 of the IRD briefing set out an example of what a founding document may look like. This is where we come in – we can help you to create a founding document. A founding document helps satisfy the Commissioner that the section LD 3(2)(c) requirements are met. The IRD also notes a founding document may increase the confidence of potential donors to the fund.
The Commissioner must be satisfied the requirements of section LD 3(2)(c) are met for the fund to be included on the list of donee organisations published by the Commissioner under section 41A of the Tax Administration Act 1994. The onus is on your entity to ensure the fund meets the requirements of section LD 3(2)(c) to obtain and maintain the listing.
Once you are happy your application meets the requirements of section LD 3(2)(c), your application can be sent through myIR or by mail.
When you have successfully established a fund, that fund must be maintained for the required purpose. Generally speaking, this involves record keeping around the composition of the fund and how the fund’s money is being used for the required purpose. It is preferable to keep the fund, particularly the fund’s money, separate from that of the not for profit entity. Additionally, it is preferable for donations to clearly state whether the money is for the fund or for the not for profit entity. Details on maintaining a fund are set out from paragraph 37 of the IRD briefing.
A fund with donee organisation status is a great option for a not for profit entity that cannot obtain tax donee status. We have helped may not for profits over the years and would be happy to discuss your situation with you.
For more information or if you have any questions you can contact Steven Moe firstname.lastname@example.org, Aislinn Molloy email@example.com, Michael Belay firstname.lastname@example.org or Sophie Tremewan email@example.com at Parry Field Lawyers.