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When a gift is not a gift?

The IRD have recently clarified the position that a tax rebate applied for annually is only able to be given when cash is made as the donation and not for goods or services in kind. An example that has been recently published by the IRD to highlight this position is artwork. A taxpayer purchases a piece of artwork at a Charity Auction which is then gifted back to the local library as a gift to the Council.

The donation made to the charity is not tax deductible as a donation must be given with no expectation of receiving anything in kind, and the gift of the painting to the Council Library is also not tax deductible as it is a donation of goods and not cash.  If the artwork was $1,500, which was paid to the charity for the piece of art and was done by way of a cash donation, you would be entitled to a $500 rebate (representing one 3rd of the donation); however, as it is for the purchase of a piece of art there is no deduction for the donation. Also, because cash has not been given there is no deduction for the donation to the Council.

 

Therefore, if you wish to get rid of those unwanted Christmas gifts it is better that the gift is sold for cash and the cash is subsequently given to a charity as you would then be entitled to the one third rebate.
 

For businesses who supply a good or service for a donation (to further the good cause) you will find that you don’t get the direct benefit of the deduction, rather it is absorbed within the normal cost of business in the provision of the goods or services. For example, if you are a retail business and you donate $1,000 worth of goods to a local charity to be auctioned, as they are charitable gifts you don’t get the $1,000 receipt (thereby not giving you the 1/3rd rebate) instead the $1,000 is deducted from your trading profit and gives you a 28% reduction in your tax.  So, while not a direct tax benefit there is an indirect tax benefit through the reduction of profit.


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