Where an organisation has met the criteria for donee status, individuals making monetary gifts to the organisation will qualify for a donations tax credit and a company may be eligible for a deduction against its income.
To qualify as a donee organisation the funds of the organisation must have been “applied wholly or mainly to a charitable, benevolent, philanthropic, or cultural purpose in New Zealand”. Inland Revenue recently updated its position on when it considers an organisation to have satisfied this requirement and, therefore, be eligible for donee status.
Inland Revenue considers that to satisfy the “applied wholly or mainly” requirement an organisation needs to be applying 75% of its funds to the specified purposes in New Zealand. If an organisation does not meet the threshold of 75% in any tax year, Inland Revenue will allow a revised calculation based on the current tax year and the two preceding tax years. This rolling three-year cumulative approach allows some year on year variations.
For example, an organisation’s total funds in the 2018 tax year was $5,000 and it applied $3,000 of this amount to specified purposes within New Zealand. This gives 60% of funds applied to a specified purpose, below the 75% threshold. Because this is below the 75% threshold, the organisation can have regard to the application of funds in the preceding two years. In the 2017 tax year, its total funds were also $5,000 and the organisation applied $4,000 to specified purposes within New Zealand. In the 2016 tax year, the total funds were $10,000 and the organisation applied $9,000 to specified purposes within New Zealand. The cumulative total funds are $20,000 and the cumulative total of funds the organisation applied to specified purposes within New Zealand is $16,000. Therefore, over the three years the organisation has applied 80% of its funds to specified purposes within New Zealand and the organisation meets the 75% threshold requirement to be a donee organisation.
The onus of proving this threshold is satisfied resides with the organisation. Although the above example seems quite straightforward, the reality is that identifying what the organisation’s total funds for a tax year are and how those funds have been applied can be a complex exercise. Inland Revenue will expect organisations seeking donee status to have calculated these amounts each year to ensure they meet the requirement for being a donee organisation.
For assistance with this process and how Inland Revenue’s new position may affect your organisation, contact your Crowe Horwath adviser.
Technical Director – Tax Advisory