Photo: RNZ
Consultation on the tax settings for charities and not-for-profits should ask more questions about the donation tax credit, one tax expert says.
An issues paper was issued on Monday, asking questions about charities' exemption from tax, and other issues.
Since 1940, income derived from charity business activities has been tax exempt, as long as the charity's work is in New Zealand.
But the issues paper noted that New Zealand is an international outlier and most countries have restricted the commercial activities that charities can engage in, or can be given tax-free status.
Robyn Walker, a tax partner at Deloitte, said the paper raised many questions and it was not clear yet what changes were likely to be proposed in response.
The paper mentions Inland Revenue's review of the donation tax credit in recent years, which was intended to look at whether the regime was operating as intended and was fit for purpose.
The credit gives taxpayers back 33.33 cents as a credit for every $1 donated.
But Walker said the review highlighted a number of issues that were worthy of further investigation.
It showed that only 57 percent of respondents were aware the credit existed, and among those under 30 that dropped to 36 percent.
Only one in five people who made donations claimed the credit for all the money they donated.
The paper's suggestions included the proposal the credits could be delinked from income tax to allow them to be made in "real time", and that Inland Revenue could collect information from the organisation receiving donations and streamline the process,
Inland Revenue said these recommendations required system, administration, and policy changes, which would have to be considered against other priorities.
Walker said there were clear issues with the donation credit, such as the fact that people who donated to someone collecting on the street could not usually get a credit, while people who made regular donations from a bank account most often could. Some church donations might also not be able to provide the receipt required for the donation.
She said, with questions about whether the credit was effective in stimulating donations, she was surprised there was not more scrutiny.
There was a delay in the charitable impact of the government's spending on the credit because people could get the credit when they made the donation but then there would be some time before the charitable activity happened.
There could be liability issues for the government if the amount of money being donated to charities generally was increasing but the number of people claiming credits decreasing.
Since 2019, changes made to simplify the process mean claims can be made by submitting receipts through MyIR.
In 2023, the average donation credit claimed was $897, up from less than $600 in 2012.
In the 2023 tax year, 352,300 people claimed the credit, a 4.9 percent decrease from the 2022 tax year. It is down from nearly 400,000 in 2012.
For the 2023 tax year there was a total of $949 million in donations for which donation tax credits (DTC) were paid.
The review cited research that found for every $1 in credit given by government, reported donations increase by $0.40 to $0.70 on average.
"It's surprising that more attention hasn't been given to whether the donation tax credits regime is fit for purpose given some of the comments in the regulatory stewardship review about inefficiency and the fact that the existence of the credit only has a small impact on the level of donations made. Reviewing whether this regime should still exist may provide a much lower compliance cost solution to some of the issues identified in the Issues Paper," Walker said.
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