Upcoming tax changes that might affect your charity
Posted on 17 July 2018
If you operate a registered charity then your charity will be able to access a range of tax benefits. Typically, this means your charity’s income will be tax exempt, your charity’s bank will not need to deduct resident withholding tax from its interest income, your charity may not need to pay fringe benefit tax on some benefits provided to its employees, your charity can access GST concessions, and your charity may be able to issue donation receipts so that its donors can claim donation tax credits or gift deductions. The full range of these types of benefits is outlined in our booklet IR255 Charitable and donee organisations (June 2018). (external link)
All of these tax benefits are subject to continual monitoring and review by the Government to make sure they are effective.
The Taxation (Annual Rates for 2018-19, Modernising Tax Administration, and Remedial Matters) Bill was introduced on 28 June 2018 and has been referred to Parliament’s Finance and Expenditure Committee for public submissions.
The bill contains a number of remedial changes to address unintended gaps in the current law governing the tax treatment of charities and not-for-profit entities. These proposed changes are intended to ensure greater transparency from entities that receive tax concessions, and improve the overall integrity and coherence of the rules.
Here is a summary of the proposed changes in the bill that could affect your charity. If you want more information, we recommend you read the commentary on the bill (external link) (not-for-profits remedials and tax rules for deregistered charities).
Donations and donee organisations
Since 2008/2009, when the Government removed the $630 maximum limit on the tax credit for donations made by individuals, the amount of donor concessions have significantly increased. Donor concessions, which had been approximately $100 million per annum with the $630 limit, now exceed $280 million per annum. This means it is increasingly important for donee organisations to be transparent and for the donee organisation rules to be robust. We are proposing several changes to the current system for donee organisations.
IRD donee organisation list:
At present it is possible for an organisation to self-assess whether it satisfies the criteria for donee organisation status without informing Inland Revenue or being recorded on the Inland Revenue donee organisation list. The bill proposes that organisations seeking donee status must obtain approval by the Commissioner of Inland Revenue and be recorded on the official Inland Revenue donee organisation list. This proposal will only affect a very small number of donee organisations not currently on the Inland Revenue list. It will apply from 1 April 2019.
Obtaining donee organisation status:
At present, organisations with charitable purposes can obtain donee organisation status without being registered under the Charities Act 2005. This creates inconsistencies between the obligations of entities with identical tax benefits. The Government is proposing that in order to obtain donee organisation status, all organisations with charitable purposes need to be registered under the Charities Act. This proposal allows affected donee organisations to seek registration under the Charities Act by 1 April 2020.
Approving donee organisations:
Donations to organisations that apply most of their funds overseas will not qualify for donee organisation status, unless the organisation is approved as a donee organisation by the New Zealand Parliament and listed in schedule 32 of the Tax Administration Act. You can find more information about requesting overseas donee status (external link) on our website. The bill adds 13 charities to the list of donee organisations in schedule 32.
Donor consequences if donation tax credits are claimed inappropriately:
Under the current law, use-of-money interest, avoidance provisions and some penalties cannot be applied when donation tax credits are overstated. The bill contains a measure to ensure that relevant penalty, interest, and avoidance provisions apply to donation tax credits.
Making it easier for donors to claim donation tax credits:
Finally, the bill proposes measures to simplify tax returns for individuals. This includes letting individuals scan or photograph and upload copies of their donation receipts directly into myIR either during the year or at the end of the year. This change will apply from 1 April 2019.
Charities that are deregistered under the Charities Act
Six refinements are proposed to the tax rules for charities that are deregistered under the Charities Act.
An important change for small charities will be the introduction of a $5,000 net asset de minimis threshold in the deregistration tax rules. This means if your charity’s net assets are valued at less than $5,000 when you deregister, you will no longer have a deregistration tax liability. However, you may still need to start filing income tax returns and pay income tax on your income after you deregister. You can find out more information on the Deregistration of charities (external link) section of our website.
The changes also carve out marae assets – which means that marae on reservation land would not have to pay tax on deregistration. This is a fairness measure as marae assets cannot legally be disposed of or transferred to another entity under the Te Ture Whenua Māori Act 1993.
The rest of the refinements concern more complex business structures and arrangements and ensure that all entities are treated fairly and consistently when deregistering. In summary, these refinements:
- Address over-taxation of deregistered charities in group structures that deregister at the same time
- Address over-taxation when there is a disposal of shares in a registered charity by a charitable group for market value
- Specify the valuation of assets and liabilities for the purposes of the deregistration tax rules
- Deny a gift deduction for monetary gifts made within one year of deregistration.
Charities and business income
A small number of businesses have taken advantage of the charitable business income tax exemption without registering under the Charities Act. This reduces the transparency requirements for these businesses and creates inconsistencies between them and other charitable businesses. The Government is proposing that all entities which receive income tax exemptions for charitable purposes need to apply for registration under the Charities Act and report annually. This change will apply from the 2019/20 and later income years.
Taxpaying entities that become tax exempt charities and own depreciable assets
This change ensures that if a taxpaying entity with depreciable assets registers as a charity under the Charities Act, it is treated as if it disposed of those assets immediately before the entity is treated as being exempt from income tax. This ensures that excessive depreciation deductions are paid back before the entity leaves the tax base. The proposed amendment will apply from 28 June 2018, being the date the bill was introduced.
Charities that are foreign trusts
Foreign trusts that are registered charities are currently not subject to the foreign trust disclosure requirements administered by Inland Revenue. This change reverses that position and ensures that foreign trusts that are registered charities will also be subject to the foreign trust disclosure requirements.
You can find out more about the bill and its progress on Inland Revenue’s Tax Policy website (external link) . Submissions on the bill are being accepted up to 13 August 2018. More information about submissions can be found on the New Zealand Parliament web page (external link) .
Don’t forget that you can also keep up-to-date with other charity tax changes on the “News and Updates” section of the Inland Revenue Non-profit organisations website (external link) .