Gifting and taxes feel like a minefield, but are they?

Ask an expert: Christchurch directors Dorian Crighton and Spencer Smith package up the answers to your gifting questions…

Time to read: 6 mins

Could you please discuss the difference between gifting and charitable gifting?

Gifting and charitable gifting both involve giving something to another person or organisation without expecting anything in return. However, there are key differences between the two. 

Gifting is typically an expression of personal affection towards the recipient(s) on special occasions. The gift may or may not have monetary value and can be anything from a physical object to an experience. There are usually no tax benefits or deductions associated with gifting, and the recipient is not required to report the gift as income. 

Charitable gifting refers to giving money or goods to a charitable organisation to support a cause or help those in need. The intention behind charitable gifting is to make a positive impact on society or support a cause. It can also be done through a planned giving programme, such as a bequest in a will, or a charitable trust or gift annuity. Charitable gifts may include cash, securities, real estate or other assets. However, be aware that only cash gifts to approved donee organisations currently provide tax benefits.

New Zealand abolished gift duty tax long ago, but is there anything I should still be aware of regarding gifting to close friends and family?

Yes, there is. One key consideration is the potential impact of gifting on any future entitlement to government benefits, such as residential care subsidies. Any gift may be counted as deprivation of assets, which could affect your eligibility for these benefits. It's important to consult with a financial advisor to understand the potential impact on your entitlement to government benefits. 

There is also potential for disputes or misunderstandings between family members regarding the intent and purpose of the gift. Make sure you communicate clearly with the recipient(s) about the purpose of the gift and any expectations you have. 

Additionally, if you are gifting assets that have appreciated in value, such as property or investments, the disposal (while free) may trigger tax implications for the donor. Your tax advisor can help you determine the tax implications of any gifting strategy.

Do these concerns manifest themselves in a Trust structure?

Yes, there is a difference between gifting out of a trust and gifting directly as an individual. 

When you gift out of a trust, the trust becomes the entity making the gift, rather than you as an individual. This means the gift is subject to the terms and conditions of the trust deed and any applicable laws and regulations governing trusts. For example, the trust deed may specify restrictions on how and when gifts can be made or gifting may require the consent of certain trustees or beneficiaries. 

In addition, gifting out of a trust can have tax implications, depending on the type of trust and nature of the gift. For example, the gift may be a distribution of beneficiary income, which is taxable in the beneficiary’s hands at their marginal tax rate. 

If it’s a charitable trust, the gift may be tax-deductible for the trust or company or give rise to a tax credit for the donor. For companies the deduction is limited to the amount of taxable income earned in the year of the gift. 

Debt forgiveness should be considered with care. Note that there is no debt forgiveness income where a person forgives a debt owed by a family trust in which they and their family are beneficiaries. But there is debt forgiveness income where a trust forgives a beneficiary. 

Gifting out of a trust can be a complex process, and it's best to consult with a trust lawyer or financial advisor to ensure that the gift complies with the trust deed and any applicable laws and regulations, and to consider potential tax and asset protection implications.

How are charitable donations determined – are there criteria that must be met?  

In New Zealand, charitable donations must meet certain criteria to qualify for tax benefits and be considered legitimate. The donation must be made in New Zealand dollars and must be for $5 or more. Inland Revenue have published a general guide (IR255) which is helpful. 

The other criteria are as follows:

  1. Donations can only be made to charitable organisations registered with the Charities Services, which means the charitable funds are applied wholly or mainly for charitable purposes in New Zealand.
  2. Non-resident charities generally cannot apply for registration with Charities Services, but they can apply to Inland Revenue for approved donee status.
  3. The donation must be made voluntarily and without any expectation of personal benefit or gain.
  4. The donation must be made with the intention of supporting a charitable purpose. This includes relief of poverty, or advancement of education, religion or any other purpose beneficial to the community.

Donations that meet these criteria may be eligible for a tax credit or deduction. In general, individuals can claim a tax credit for donations of up to 33.33% of the value of the donation (capped at a total of 33.33% of their taxable income), and companies can claim a tax deduction for donations to charities.  A receipt is required to claim the tax credit or deduction.

Note that not all donations are eligible for tax benefits. For example, donations made to political parties or candidates, or to promote a religious or ideological belief, are not considered charitable donations under New Zealand law.

And if you do donate, be sure to keep accurate records for tax purposes.

Can you comment on the formation of foundations or gift trusts and if these are proving popular with philanthropists?

Generally, it is wealthy and/or high-profile people who have set up foundations, and the benefits for the founders can be significant: 

  • While the wealthy are able to provide funding, high-profile people will usually have to use their position and influence to get others to support the charitable cause.
  • It is common for founders to be inundated with requests. A foundation can help give these requests the proper amount of care and attention.
  • In many cases, the founders will appoint people with better knowledge of the charitable sector, meaning those appointees can direct the foundation’s funds to where they will have the most impact.
  • Declining requests is never easy, especially where there is a clear need in the community. However, it is unrealistic to approve every request. A foundation can tactfully decline a request without that reflecting poorly on the founder.
  • A foundation can have an enduring good, sometimes for years after the founder’s death.

DISCLAIMER No liability is assumed by Baker Tilly Staples Rodway for any losses suffered by any person relying directly or indirectly upon any article within this website. It is recommended that you consult your advisor before acting on this information.

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