10.1 At present, the general rules that provide donors with rebates and deductions for their donations cover only charitable purposes within New Zealand. Specific parliamentary approval is required on a case-by-case basis for charities whose charitable purposes extend outside New Zealand. The over forty organisations that have such approval are listed separately in section KC 5(1) of the Income Tax Act 1994.

10.2 Reasons for this restriction are a combination of concern about to what purposes donations might be put, as well as acknowledging that the tax assistance is a specific government expenditure decision and should be consistent with New Zealand's overseas aid programme.

10.3 Accordingly, over the years a set of criteria has been established for approving organisations seeking donor status with charitable purposes outside New Zealand. The funds have to be applied towards either:

• the relief of poverty, hunger, sickness or ravages of war or natural disaster; or
• the economy of developing countries (recognised as such by the United Nations); or
• raising the educational standards of a developing country.

10.4 Specifically excluded have been charities formed for the principal purpose of fostering or administering any religion, cult or political creed.

10.5 The rules differ in respect of the income tax exemptions. Under section CB 4(1)(e) of the Income Tax Act, funds from business activities of a charity in New Zealand must be applied to charitable purposes within New Zealand.²⁷ However, there is no such restriction on the tax exemption under section CB 4(1)(c), the general income tax exemption for charities. There seems to be no good reason for treating one form of funding differently from another.

Proposal

10.6 The approaches to all forms of tax assistance to charities with overseas purposes would be standardised. The criteria currently used in respect of donee status, described earlier, would be applied in determining eligibility for both the income tax exemptions and for donee status.

10.7 This means that in respect of the general income tax exemption (CB 4(1)(c)), the eligibility criteria would be tightened, because income applied for some overseas purposes would no longer be eligible for the exemption. However, the eligibility criteria would be liberalised in respect of a charity's business activities (CB 4(1)(e)) because income applied for some overseas purposes would then be eligible for the exemption.

10.8 For a charity to comply with this requirement, the overseas charitable purposes of the organisation would have to be approved, as currently happens with donee organisations.

10.9 All charities would be required to report how much they were distributing overseas. If a charity did not meet the criteria in relation to its overseas purposes, but was also undertaking charitable purposes within New Zealand, the amount of income that would be exempt would be determined by apportionment.

10.10 There is no intention to tax the donation income of an entity when it becomes taxable in respect of income it applies overseas.

Advantages

10.11 A common set of criteria would apply to both the tax exemption and the rebate and deduction rules for donations. Also, charities operating as a business would receive increased support as they would be eligible for the exemption in respect of income applied for some overseas purposes.

Disadvantages

10.12 Charities currently operating overseas might receive less government support (as they could be taxed on some part of their income) if they did not meet the criteria. As well, obtaining approval would create compliance costs for those charities currently operating overseas.

Specific issues for consultation What would be the best method for approving organisations with overseas charitable purposes?

Home | Contents | Previous | Next