New Zealanders are a generous lot, and many of us like to give back to our communities, charities and not-for-profit organisations by way of donation. Donations come in several forms including donations of cash, donations of trading stock and donations of our time/services. This article will look at each type of donation and discuss what donations are tax deductible and the rules around this.
Donations of cash by individuals
Inland Revenue Department (IRD) incentivises individuals by allowing a donation tax credit of 33.33 cents in every dollar for cash donations of $5 or more. The tax credit is subject to several caveats, including:
The cash donation must be made to a charity or organisation that has been approved by the IRD. The approved donee list is updated regularly and can be found here .
Individuals can only claim on donations up to the value of their income in the tax year they make the donation. Any donation made more than their taxable income will be disallowed..
Donations that are more than an individual’s income can be split with their spouse or partner up to the value of the spouse’s income.
The donation cannot provide any direct benefit to the individual or their family.
The donation cannot be given, bequeathed, done or appointed by will or made by way of a full or partial debt forgiveness.
Individuals must keep receipts from the approved charity or organisation as evidence of the cash donation.
Donations to most schools and religious organisations qualify for the donation tax credit. When donating through crowdfunding platforms such as Givealittle, only the donations to organisations that have been approved by the IRD can be claimed for a tax credit. Givealittle do provide a customised annual tax receipt which you can request via their website which details the donations you have made that are eligible for the donation tax credit.
The tax credits on donations are claimed via an IR526 tax credit form that we prepare as your accountants when we prepare your annual tax return. There is a four-year limit for claiming donation tax credits (i.e. you can submit the donation within four years of 1 April following the end of the tax year you made the donation).
Steve makes an annual cash donation of $1,000 to the National Heart Foundation. Steve knows the National Heart Foundation is an IRD approved donee. Steve’s income is $70,000, so he will qualify for a tax credit of $333.33.
Ian’s income is $1,000. His wife Janet has an income of $10,000. Ian donates $2,000 to the Royal Forest & Bird Protection Society who he knows is approved as an IRD donee. Because Ian’s income is only $1,000, he can only claim the donation tax credit up to $1,000, so will receive a tax credit of $333.33. Ian can split the remaining donation amount of $1,000 with Janet. As her income is $10,000, she can claim the remaining $1,000 and also receive a donation tax credit of $333.33.
Donations of cash by companies
The legislation for companies claiming donations of cash to a charity or organisation as a tax deduction are similar to individual.
For the donation of cash to qualify as a tax deduction for a company, it must:
Be made to a charity or organisation that has been approved by the IRD
Be no more than the company’s net income.
Have a copy of the receipt for the donation.
There is a separate section in the company tax return where details of donations claimed as a deduction are disclosed.
Big Dog Pet Food Ltd has a net profit for the year of $150,000. It has made a donation of $20,000 to SPCA Waikato who are an IRD approved donee. Big Dog Pet Food can claim the $20,000 as a deduction as the donation is less than their net profit of $150,000.
Donations of trading stock
Prior to 17 March 2020 any donations of trading stock for less than market value resulted in the business being taxed on the deemed profit margin for the trading stock donated. During the COVID-19 pandemic, many businesses wanted to support their communities and donate excess stock due to lockdown restrictions to charities and other organisations. Many businesses did not realise that they still had to pay tax on the market value of the donated stock and businesses were essentially being penalised for being socially responsible and helping their communities. This created a significant disincentive to donate trading stock.
The government recognised the disincentive and changed the legislation to include an exception for trading stock donated to IRD approved donee organisations, public authorities (such as hospitals) and non-associated persons. This means the deemed income does not have to be returned as if you sold the stock and the donation qualifies for an income tax deduction. You must be able to show you have a business reason for donating the stock (for example for marketing purposes to increase your customer loyalty and brand awareness.)
Unfortunately, this concession is only a temporary relief and only applies to trading stock donated from 17 March 2020 to 31 March 2024. The government has yet to indicate whether they will extend this further.
John is a farmer and wants to support the local foodbank which is an IRD approved donee. In January 2024 John has some excess livestock on his farm, so rather than giving cash to the foodbank which would qualify for a 33% donation tax credit, he gifts a steer to the local butchery who will process it into meat for the foodbank. John does not need to return the income on the market value of the steer as the donation of the steer qualifies for the concession. An income tax deduction will also be allowed for the cost of the steer.
Yummy Food Ltd are in the business of selling food. They want to help out their local marae with its upcoming community Christmas lunch so on 24 December 2023 donate food (trading stock) to the marae that cost $1,000 and has a market value of $4,000. The marae is a registered charity with IRD approved donee status. Yummy Food Ltd can claim the cost of the food as an income tax deduction and doesn’t need to return the $3,000 deemed profit ($4,000 market value less $1,000 deduction) as the trading stock donation qualifies for the concession.
Donations of time/services.
Another common form of donation is donating our time or donating services, this is generally known as volunteering. Unfortunately, businesses are unable to claim any tax deduction for donating their time or donating specific services. This is mainly due to the difficulty in assigning a value to that time or the services provided. You have chosen to freely donate your time to support a charity or organisation and you can’t assign a value for that.
Mary owns a public relations and marketing business. She wants to help out the local church to market a gala where all proceeds will help underprivileged children access healthcare. Mary spends 20 hours of her personal time creating a marketing plan for the gala. Mary is unable to claim a tax deduction for the time she spends as she has freely chosen to donate her time and it is difficult to assign a value to this.
When making a cash donation, for the donation to qualify for the donation tax credit as an individual or for the donation to qualify as a tax deduction for a company, the organisation being donated to must be an IRD approved donee.
The donation tax credit is limited to the value of an individual’s gross taxable income and a tax deduction is limited to a company’s net income. Always keep receipts for the donation.
Donations of trading stock must also be made to IRD approved donees and a deduction for the cost of the stock with no requirement to return the deemed income is only available for donations of trading stock made during the period 17 March 2020 to 31 March 2024 (for now). No tax deduction is available for donations of time/services.
Contact Tim Doyle or Jane Evans today to discuss donations (or any other matter) on 07 823 4980 or email us. Our office is in Cambridge, NZ, but distance is no problem. We have many international and national clients.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.