The amount of the credit is one third of the amount of the donation, and is limited to the amount of a person’s taxable income. The claims process is straightforward; donation receipts can be uploaded to a person’s online ‘MyIR’ account, and they are processed by IRD at the end of the tax year. However, as with many tax rules, there can be complexity.
The Income Tax Act 2007 requires a donation to be a “…gift of money of $5 or more…”, but there is little guidance on the meaning of the phrase. It is generally understood to require the gift to be of money and not goods or services. However, confusion arises because monetary gifts can take various forms. A dispute on the issue has been making its way through the Courts.
The taxpayers, Mrs Roberts and her late husband, created the Oasis Charitable Fund in 2007. Soon after its creation they lent the charity approximately $1.7m. Between 2011 and 2015, they signed several deeds of gift progressively releasing the charity from the obligation to repay the loan. On each occasion they claimed donation tax credits for the debt forgiveness.
By forgiving a portion of the loan amount each year, the donation rebate claims were maximised because the annual amount was kept under the ‘donor’s’ taxable income. Meanwhile, the charity was able to receive the benefit of the cash up-front.
The Commissioner disputed the donation rebate claims on the basis that debt forgiveness is not a ‘gift of money’, however both the High Court and Court of Appeal subsequently ruled in favour of Mrs Roberts. The Courts analysed historic legislation, as well as various dictionary definitions, and concluded that the words ‘gift of money’ mean more than just cash.
The decision was applauded by charities and philanthropists alike, as the flexibility of loan forgiveness encourages donations. However, this has been short-lived. On the same day as the Court of Appeal decision (17 December 2019), the Revenue Minister announced that the Court decision was contrary to the policy intent. The Minister’s statement made clear that donation tax credits should be limited to gifts of cash or cash equivalents only (i.e. bank transfers / credit cards) and should not be available for either debt forgiveness or other gifts in kind.
The Income Tax Act will be amended to reflect this intent. The change will be backdated to 1 April 2008, unless someone has already taken a tax position based on the old wording.
The charitable sector will need to wait and see whether this rule change will influence donors, and have an impact on the overall level of giving across New Zealand.