Donations the gift that keeps giving

The dollar that keeps giving. It’s a great concept. We should focus first on our own financial situation — that we can feed and house ourselves. But we might then consider how to support others in the community, perhaps through donations while we are alive, or a bequest in our will.

Community foundations are an option. Locally, that’s the Aoraki Foundation. A point of difference for community foundations is the ability to donate to them and the funds will stay local. My donation might be to one of its established funds, such as health, Age Concern or the general impact fund. If I choose to donate a larger sum, I can create my own endowment fund, perhaps to benefit disadvantaged children to play sports, provide maintenance dollars to community facilities, or benefit my favourite charities.

My donation is invested. Income is distributed, but the capital is maintained, thus allowing ongoing distributions. My gift will still be distributing in 100 years. Indeed, there will be a point in time where the funds distributed will match, and then exceed, the original donation. That feels very impactful.

The foundation model also works well for existing nonprofits with funds on hand, but not the investment expertise to manage them. By creating a fund within a community foundation, they can continue to have input into distributions, while delegating the investment and administration. As such these funds are called donor advised; in that they are a collaboration. Additional funds can be donated by the community, to grow the fund further.

The good news is that the New Zealand tax system supports and encourages donations by providing a tax credit of 33.33% of the amount donated, if it’s to an approved organisation (noting you can only claim up to the amount of your taxable income during the tax year). The IRD maintains a list of which organisations qualify. The Aoraki Foundation, as an example, is on that list.

Donating $100 qualifies for a $33.33 tax credit, meaning my donation has only cost me $66.67. I can maximise the outcome by then donating my $33.33 credit as well. I claim a new credit and so on.

How do you claim your credit? The IRD has the details on its website and tries to make it as easy as possible. If you have a myIR account then you submit your receipts and the IRD will do the rest. For those who haven’t yet caught up on the technology, the IRD still has form IR526, which you attach your receipts to and mail to them. Online providers such as Supergenerous are another option. They will complete the process for you, including the ability to regift your tax credit.

I can make direct donations, but the New Zealand tax system also supports payroll giving — donations directly from our pay. For every dollar donated, the 33.33 cent tax credit reduces the amount of PAYE paid.

Supergenerous suggests there is $1 billion dollars of donations waiting to be claimed. Even if the real number is a fraction of that, the potential for tax credits to be claimed and regifted to community organisations is significant. If you have missed filing claims for donations, the IRD allows you to go back up to four years.

You have to wait until the end of a tax year (March 31) to claim your tax credit for the prior 12 months. If you have any current donations in mind, making them before March 31, 2024 is a good idea.

For more information see this page - Give and get your tax back

This commentary was printed in the Timaru Courier on the 8th February 2024

Stephen McFarlane is a former Trustee and Chair of the Aoraki Foundation . He is the owner of financial planning firm Central Wealth Ltd. The opinions expressed are his own.