IRD explains "wholly or mainly" 15 Oct 2018

The Inland Revenue Department recently issued their views on the meaning of “wholly or mainly” in an interpretation statement and fact sheet. The upcoming change as a result of this new information will likely impact many donee organisations in New Zealand, so it is important that you are fully informed and aware of the implications.

We have received copies of the interpretation statement and fact sheet, which will shortly be available on the Inland Revenue website, and have set out below the key points to take away from this new information:

1. Interpretation of “wholly or mainly”

The “wholly or mainly” test, which relates to an organisation having “donee organisation” status, is governed by section LD 3(2)(a) of the Income Tax Act 2007, which requires:

“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”

The benefit of attaining status as a donee organisation by meeting the requirements of LD 3(2)(a) is the tax advantage whereby natural persons who gift $5 or more to the organisation are refunded 33% of that gift by Inland Revenue. Uncertainty has arisen as to what exactly is meant by “wholly or mainly”, which this new interpretation statement seeks to resolve.

The interpretation statement issued by Inland Revenue includes a 16 page analysis of the words “wholly” and mainly”, concluding that, “while something considerably greater than a bare majority is indicated, it is not possible to interpret the expression with any greater certainty”. Inland Revenue has adopted a “safe harbour” approach with a threshold of 75% which will assist in making inquiries under section LD 3(2)(a).

2. “Safe Harbour” approach

A “safe harbour” approach has been adopted for administering the wholly or mainly test, which will involve:

1. Using the organisation’s financial statements to determine the “total funds” figure (this is the sum of cash of cash at the end of a year and cash spent during the year);

2. Calculating the amount of funds that were applied to specified purposes within New Zealand; and

3. Dividing this figure by the total funds figure to calculate the percentage.

This new approach has the effect that if the percentage calculated meets or exceeds the 75% threshold, Inland Revenue will generally not need to make any further inquiries as to how the funds of the particular organisation are applied.

3. Three year rolling period

In exceptional years there may be flexibility around the 75% threshold. For example, there may be one year where there is a tsunami in another country, and the organisation wishes to give more funds than usual to an aid organisation overseas. In these situations, Inland Revenue will instead be looking at the way the organisation has applied their funds in the past three years. However, in any of those three years, the percentage of funds applied in New Zealand should not be less than 50%, and the average of funds applied for purposes in New Zealand over the three years should not be less than 75%. Organisations should contact Inland Revenue in this situation.

4. Interpretation Statement to apply from beginning of 2019/20 income year for organisations

The interpretation statement will be of effect from the beginning of the 2019/20 income year for organisations in New Zealand. Accordingly, if you have been saving funds to use overseas, you may want to do that now before the new interpretation statement kicks in for your organisation.

If you have any questions or if you would like to receive a copy of the interpretation statement and fact sheet, please feel free to contact Steven Moe at stevenmoe@parryfield.com or 03 348 8480.

This article is not a substitute for legal advice and you should talk to your lawyer about your specific situation.