Gift Duty and Charitable Donations 09 Dec 2011

EUREKA! Gift Duty Applies to Donations!

Unlike the naked Archimedes’s joyful exclamation, the recent expose of the Eureka Trust comes as a more serious warning for those working in the charitable sector. Charities never need to bother with tax issues do they? Actually, yes ...

In recent weeks, the newspapers have been filled with articles on Eureka Trust for all the wrong reasons. It is alleged that Eureka Trust, a charitable trust, has been giving donations to sporting organisations in the mistaken belief that these were valid gifts to charity when they were possibly not.  Eureka has suspended all grants to sporting bodies while the matter is cleared up, and it may mean that a good source of funding for sport will now be directed to other charities.

The story has broken as the full effect of the changes to the regulation of charities starts to bite. The Charities Commission was set up in 2008, and this body is charged with the regulation of charities in New Zealand.  Previously charities were able to carry on virtually unmonitored, and the aim of the Charities Commission is to cast light in dark places.  Hopefully no monsters are found in these dark places, but as the charity reporting season heats up, public scrutiny may prove to be all that is needed to shake up this part of our society. That has certainly been the experience of the UK after their charities sector reform.

Donations for non-charitable purposes may attract gift duty

Things can go badly wrong for charities if they make errors.  All the facts are not available in Eureka’s case, so it is not possible to say whether it has in fact made any mistake. In principle however, donations for non-charitable purposes will be exposed to gift duty on those donations.

If a charity gives the money to a non-charitable entity, there will be tax consequences.  The charity has to consider whether gift duty is payable, whether the income tax exemptions still apply, and importantly, whether there are any GST considerations that need to be taken into account.  If non charity gifts are significant there is also a risk that the Charities Commission revokes charitable status, and if that happens the charity will lose all the tax benefits that applies.

Gift duty is an archaic tax, and usually is very easy to minimize.  The Government collects about $1million per year from this tax.  However, if structuring is not done correctly gift duty may apply to the value of the gift at 25% in some cases.  Gifts to charity are exempt from gift duty.  However, if gifts are made to non-charitable entities, and the gifts are not excluded for other reasons, then gift duty will apply.

Where charities do err the one thing they (or the trustees) and Archimedes might have in common is that both will be remembered for losing their shirts.  Givers punish charities that waste funds on too much admin- it is likely however that the IRD will punish charities that do not do enough.

Parry Field Lawyers provide legal advice on a range of tax matters and are able to assist you with any tax or gift duty questions that you might have. For further assistance please contact Ken Lord (348 8480).

Please note that this article is not intended to be legal or investment advice, and is only intended as a general guide. Reliance should not be placed on this article where any specific issues are concerned.