Overseas Charities and New Zealand Donations Tax Law 09 Dec 2011

International Charities and New Zealand Tax Law

Are you an international charity that has recently applied for listing on Schedule 32 of the Income Tax Act 2007?  Or do you have a client in this position?  If so, we would like to hear from you.

What is Schedule 32 Status?

Very briefly, Schedule 32 status gives qualifying charities the ability to issue receipts to their donees for donations made to the charity. The donees can use those receipts to claim a credit or deduction against their income tax.  If they are an individual they can get a third of the donation as a credit, just as long as the donation was not more than their taxable income.  If a company, they can claim a deduction, as long as the donation was not more than their taxable income in the absence of that deduction.

Schedule 32 status is granted to a select few international charities, and with the lifting of the caps on donations credits and deductions, there has been a flood of applications to be listed.

The Government was so inundated with requests that it even published special guidelines to charities on how to make the application.  The issue is very simple, if a charity does not have its charitable purposes principally in New Zealand, then that charity cannot qualify as a donee organization unless it is listed on Schedule 32.

In addition, the whole area is currently under consideration, and the Government is likely to produce new guidelines on how to apply for this status.  If you are interested in helping influence policy in this area then please contact the author at the contact details provided under the author profile.

Don’t get tripped up by confusing IRD correspondence on donee status!

International charities, or their advisors, can easily get tripped up as to their tax status in New Zealand.  This is so because the application for donee status as part of registration with the Charities Commission is not very clear, and possibly not correct.

Briefly the problem is as follows:  the law provides that donee organizations are those organizations with their charitable purposes principally in New Zealand.  Now there is no case law on this, but it is accepted that if your purposes are more than 50% in New Zealand then you will qualify.  Note that it is where your purposes are, not where you spend your money that is the important question.

Your purposes could all be overseas, and you can spend all your money in New Zealand.  For example, where you send blankets purchased in New Zealand to the poor in Romania.

When charities are applying with the Charities Commission for registration, Form 1 question 22 asks:

What percentage of New Zealand sourced funds did you spend overseas in the last financial year? If the entity has not been operating for a year, what percentage of New Zealand sourced funds does it intend to spend overseas in the next financial year?”

The explanation of this questions attempts to clarify the point regarding where charitable purposes are, but our experience is that this question still confuses some charities.

We understand that IRD practice is to send out a “donee letter” if the charity puts down anything less than 50%. If you are a charity that spends your money in New Zealand, but your purposes are restricted to purely overseas purposes, you may think that this letter allows you to give tax-deductible receipts.  It does not.  You need to apply to be listed on Schedule 32 before you can get donee status. You don’t qualify under the normal provisions for donee status.

Parry Field Lawyers provide legal advice on a range of tax matters and are able to assist you with any tax questions that you might have. Please contact Ken Lord at Parry Field's Christchurch office (348 8480) for help with tax matters.

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.