Arts charities could face fewer donations
Officials are backing the Government’s changes to its tax credit applied to charitable donations, while warning it could reduce “very high-value donations” to some organisations relating to the arts and culture.
The donation tax credit allows individuals to claim 33% of every dollar donated, up to the level of their taxable income. The Government’s change, to be enacted between 2027 and 2028, allows the credit to be applied to donations up to $100,000 per year.
Officials noted the value provided by charitable organisations that received donations while acknowledging its cost. In the 2023-24 tax year, about $350 million was paid in donation tax credits to about 350,000 people who donated more than $1 billion.
Officials did question the value of the existence of the tax credit, citing New Zealand-specific literature that suggested donors weren’t all that responsive to it as donations would have been made irrespective of tax settings.
“The research concluded that if donations are not highly responsive to subsidies, the policy would be considered an inefficient use of government funds.”
However, submissions received by Inland Revenue (IRD) also stressed tax benefits supported donation levels and warned reducing support could reduce funding for charities.
Officials did express concern expenditure on the tax credit – growing at an average of 2.6% per year – was growing “not as a result of more taxpayers using the scheme but because it is being used by a very few” and noted introducing a lower maximum entitlement threshold, as has been done, would “improve expenditure discipline”.
Several options were considered, including retaining the current settings, setting a cap at either $4500, $15,000 or $100,000, or lower the rate of the tax credit to 25% while retaining the taxable income cap.
Under the option chosen by the Government, officials believed just 0.1% of donors would be impacted but acknowledged those donors represented 10% of all donations submitted, totalling $103m.
Inland Revenue didn’t expect education or religious organisations to be impacted by suspected charities involved in the arts could see a reduction in support.
Officials endorsed the option’s bolstering of tax integrity as well as being fiscally sustainable. It was expected to reduced Crown expenditure by $19m per year when fully implemented.
It was accepted the trade-off was reducing the incentives for “very high-value donations”, particularly from high-wealth individuals, potentially impacting the level of donations to “certain arts, cultural or specialist charities”.
It was recognised Inland Revenue’s ability to comprehensively analyse the policy was constrained by the Budget’s confidentiality and the “limited information on donor price sensitivity and behaviour”.
“Some of the effects and impacts described may be under- or overstated.”
IRD keen to tighten tax rules for companies making loans to shareholders
Officials welcomed the Government’s changes to tax rules applying to companies making loans to its shareholders, citing the billions of debt held by shareholders which might not be taxed appropriately.
The Government announced outstanding loans made to shareholders would be taxed as income six months after a company had been liquidated or otherwise removed from the Companies Register.
“It is unlikely such a loan will ever be repaid, so is effectively income to the former shareholder,” Revenue Minister Simon Watts said.
“Not taxing it is unfair to all the other New Zealanders who pay income tax and contribute to the costs of public services.”
Inland Revenue would also be tasked with improving record-keeping of shareholders’ loans in an effort to support tax compliance.
In a regulatory impact statement, officials at Inland Revenue assessed six options to address the issue and favoured the response adopted by the Government.
The analysis supported the six-month timeframe as providing greater certainty of how outstanding loans would be taxed while affording an “adequate grace period” so companies that were accidentally removed from the Companies Register and then reinstated weren’t impacted.
It acknowledged the effectiveness of the change would depend on Inland Revenue having accurate data and being aware of loans owed by removed companies.
The change would increase the Government’s tax take by $146m over the four-year forecast period and then $38m annually subsequently.
Officials pointed to the scale of the debts. According to Inland Revenue data from the income year ending March 2024, approximately 119,000 companies were owed a total of nearly $29 billion by shareholders who were natural persons or trustees.
While about half of companies had outstanding balances of less than $50,000, about 12,000 had a loan balance of more than $50,000. About 5530 companies owed more than $1m and 543 owed more than $5m.
Savings found in stopping Working for Families overpayments
The Government is seeking to simplify Working for Families residence requirements to make it easier to determine when a family is no longer eligible for payments.
The Inland Revenue Department (IRD) says the current requirements are “complex” meaning it’s difficult to determine when someone exits the scheme, particularly in terms of their tax residence.
Officials say the changes will reduce the incidence of overpayments being made to families who no longer meet residency requirements.
The preferred option was to remove a tax residence rule and allow for a six-week travel period before payments stop as well as longer periods of absence for specified reasons.
That would come with a cost of $3.66m over the forecast period for the IRD and Customs to implement the changes.
“A small group of customers would have payments stop sooner than under the status quo. This primarily includes those who have permanently moved overseas, as well as a small number who travel overseas for more than six weeks at a time.”
That reduction in payments is estimated to be about $27.8m over the four-year forecast period.
“It could also create some additional burden on customers to learn the new rules and for a smaller group to apply for any exemptions.”
On top of these savings, a benefit would be easier for the IRD to administer and for customers to understand “which could reduce the amount of customer contact and follow-up that is currently required under the status quo”.
Legislation to automate decisions made by MSD
Budget night legislation also includes a bill to implement a change promised in last year’s Budget to save $225.9m over four years by automating processes at the Ministry of Social Development (MSD).
This means that some MSD checks will be done by computers, potentially with the aid of artificial intelligence (AI), rather than humans. A disclosure statement introduced with the bill says it will allow MSD to “approve the use of an automated electronic system” to “make any decision, exercise any power, comply with any obligation, or take any other related action under any specified provision with appropriate safeguards”.
This would be a significant broadening of the use of automation by the MSD. Green Party social development spokesman Ricardo Menéndez March, who spotted the changes said the bill “risks giving power over people’s livelihoods and ability to survive to AI”.
“These changes aren’t about efficiency, but a cover to get rid of jobs and risks ruining lives,” he said.
A statement from the time the initiative was proposed last year said it would “support people’s timely access to public services, through changes to operational practice, systems and legislation”.
A regulatory impact analysis says the Government wants to automate low-value work to allow staff to do more “high-value” tasks like helping people on a benefit into work. Automated decision-making is already legal but these law changes will expand its use.
They said it was important to keep up with automation work to keep costs under control. Officials said that currently, approvals for the Winter Energy Payment were done automatically. If this changed to a fully manual process, it would require 600 new staff.
Officials cautioned that without appropriate safeguards, automated decision-making could hit disabled people. The Government is keen for automated decision-making to request medical certificates for disability benefits, and to stop benefits if the medical certificate is not provided or if the beneficiary does not have a good reason for not being able to receive it.
The bill requires beneficiaries to provide a medical certificate or other medical evidence before MSD can grant a medical benefit.
Officials warned some disabled people may struggle to meet these requirements, running the risk their benefits would be cut unnecessarily. They say there will still be some discretion built into the system.
The new regime includes safeguards like a requirement on the part of MSD to notify beneficiaries when a decision is made about their benefit.
The bill increases the number of benefits that MSD must review every year. Several benefits are already reviewed regularly. The legislation adds several other benefits to the list. These benefits are:
Orphan’s benefitOrphan’s benefit – overseasUnsupported child’s benefitSupported living payment – overseasWidow’s benefit – overseasNew Zealand Superannuation – overseas Veteran’s pension – overseas Special benefitChildcare assistance – childcare subsidyChildcare assistance out-of-school care and recreation subsidy