When is a gift not a donation?

If an individual pays “…a monetary gift of $5 or more…” to a charity they are able to claim one third of it back from Inland Revenue.

Prior to 1 April 2008, individuals could only claim donations of up to $1,890, i.e. a refund of $630. The coalition Government at the time removed this limit and increased the threshold to the amount of taxable income, to incentivise individuals to give charitably.

For the average New Zealander, limiting donation claims to the amount of a person’s taxable income is of no consequence. However, some high net worth individuals make donations that exceed the amount of their taxable income, thereby entitling them to large refunds.

For example, a large donation could be made to help fund an important capital project of a charity, such as the construction of a new building for the homeless. The question then becomes how to structure a large donation, to ensure a donation rebate can be claimed.

The problem lies in the legislation itself. Although the regime is to incentivise charitable giving, the legislation can be narrow in scope. The donation claim is restricted to monetary gifts made in an income year, while assets, such as ‘food’ donated to the homeless, does not qualify for the tax credit.

The High Court decision in Roberts v Commissioner of IR examined a donation rebate that was in the form of a loan forgiveness. Mrs Roberts had made a cash loan to a charity of $1.7m. The loan was subsequently being forgiven across multiple years and claimed as a donation rebate.

IR considered that a ‘debt forgiveness’ was not a charitable gift within the meaning of the current legislation because it was not a ‘cash’ gift.

Judge Coleman decided in favour of Mrs Roberts and confirmed that a monetary gift did not require cash payment, if it was a gift of a specific sum and was not a chattel or property item. Judgement was upheld for Mrs Roberts.

The forgiveness approach is no different, for example, to Mrs Roberts making the loan and then making cash donations in future years that are used by the charity to repay her loan. In substance, cash has been paid by a private individual to a charity – being the purpose of the regime.

In a surprise move, when the Taxation (Annual rates for 2018-19, Modernising Tax Administration, and Remedial Matters) Bill was reported back from the Finance and Expenditure committee (FEC) on 18 January, IR had included a recommendation that the current legislation be amended to prescribe that donations need to comprise a “gift of money”, thereby legislating against the decision in Roberts.

By recommending the change at such a late stage of the enactment process, it skips the public consultation phase. IR has justified the change by asserting that the 2007 re-write of the Income Tax Act changed the meaning, and it is merely changing it back.

Rather than accepting IR’s view, it would been nice if the FEC had looked at the issue more ‘charitably’.

Do you have questions on gifts or donations and how you manage these? Contact a Moore Stephens Markhams advisor to discuss.