Charity sector faces double whammy of credit cap, reduced support

New Zealand's charitable and philanthropic sector says the government's decision to cap the donation tax credit comes at a tricky time, when charities are already facing other funding restrictions and pressures.

The cap, which takes effect from April next year, means that individuals will only be able to claim back their 33 percent donation tax credit on up to $100,000 of charitable donations, or a maximum rebate of 33.33 percent.

In a regulatory impact statement (RIS), Inland Revenue (IR) said the credit was designed to encourage or reinforce charitable giving but it could be better targeted. It said the government spent about $350 million a year in tax credits but IR took the view that there was not conclusive evidence that it led to more giving.

It said the donation credit could be misused by those claiming the credit in advance of the funds being applied to charitable purposes, or deriving a private benefit from the donations. It said spending on the tax credit was growing at 2.6 percent a year and a cap would tackle that.

About 8 percent of donations by value go to schools, 63 percent to religious entities and 29 percent to other charities, including animal welfare and the arts.

The RIS said about 350 people would be affected by the $100,000 cap but they would represent 10 percent of donations claimed, or about $103m.

Jonathan Ande, regulatory affairs and policy direction at the Fundraising Institute Australasia, said consultation since the change was announced had resulted in "overwhelming" feedback that it would change donor behaviour.

"There are concerns that it's going to weaken the confidence of donors and it could lead to some of them delaying their gifts or reducing commitments that they have to giving to their organisations. There's also concern that the $100,000 cap could start to be perceived as the ceiling.

"Once charities are not able to gather or raise as much funds as they would normally, then the community is affected and there are different causes that different charities represent, whether it's funding medical research, whether it's disability support, whether it's in children and family services or animal welfare or responding to emergencies.

"There are a whole host of things that will likely be affected by this. and while some organisations might have government funding, not all charities do. So they really rely on donations from the public or from other generous people."

Robyn Scott, acting chief executive of Philanthropy New Zealand, said many charities were experiencing reduced funding already. "Charities are under even more pressure now, we've seen a reduction in the ability of the government to fund contracts and we're in really constrained economic times.

"The demand on food banks and charitable services has gone up exponentially in the last couple of years. This is the time we really want to be encouraging generosity, not discouraging it."

She said the arts sector received gifts that were the difference in allowing things to happen.

"We have already heard through organisations that donors have already contacted them to tell them that this will affect their ability to give because what's not really being discussed in the public domain is that not all of those people who claim the rebate [do so] in order to get it. They factor the rebate into their giving. It means in many instances they're able to give more because of the rebate."

She said one youth disability organisation had told her that one of their donors had said they would cut their annual donation from $180,000 to $100,000. "It's hard for donors to speak out about this ... because they look mean spirited and then people accuse them of only being motivated to give for particular reasons."

Simon Bowden, head of philanthropic services at Forsyth Barr, said he was with a donor this week who gave away all her income and lived on the tax credit.

He said a number of donors had accepted the government was under constraint and unable to support organisations like the arts in the same way, they had seen more demand on charitable funding and had stepped up.

"They're increasing the donations they're making to the organisations they care about to make a change. They almost felt they were doing this in partnership with government, and then to have the tax credit in that environment has broken that partnership. They feel quite surprised, startled, and as if they've sort of been abandoned."

He said there was a disconnect between the IR perspective that the credit was a fiscal cost and the charitable sector thinking it was a stimulus. "The people who've got a high ability to give have inspired the ones that have a lower ability to give but they're all doing the same thing. This essentially could break down that important fundraising mechanism, an important part of our culture."

Simplicity economist Shamubeel Eaqub said research indicated that people who gave large sums of money were the most price-responsive group.

"At these levels the cap is self-defeating, each dollar of tax revenue saved destroys more than a dollar of charitable giving. My analysis of charities services data suggests that the sector contributes around $2 for every dollar of government funding into the sector. Why would they want to risk reducing donations?"

He said it would leave New Zealand with a low cap by international standards.

Deloitte tax expert Robyn Walker said the Budget had drawn a line under a number of tax issues that had been hanging over the sector.

"While there has been quite vocal concern over the decision to place an upper cap on the level of donation tax credits available, it's not clear what the impacts will be. That is, whether donors are highly motivated by the existence of the tax credit, such as donations fall away from current levels. When looking at the fiscal projections from the Budget, the expectation is that donations will continue to be made at levels which exceed the maximum cap.

"It is worth noting that it is only the donation tax credit mechanism which has had a cap imposed. Businesses are still able to make donations, with the cap being set at the level of net income of the business. Trustees are also able to make distributions of beneficiary income to tax-exempt beneficiaries without a cap. An upcoming change is to ensure that the charitable distributions are actually transferred in cash within six months of balance date.

"While much attention has been put towards the cap on donations, a change which has received less attention is the decision to improve and streamline the ability for donors to actually transfer the tax credit back to the charity to claim. It's possible, that if well designed, this change could result in more donations coming from the 99.9 percent of donors who are not impacted by the cap. This change is intended to apply from 1 April 2028 and now is a great time for the charitable sector to work alongside Inland Revenue to try to design a user-friendly system to try to maximise the number of credits being donated."

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