Ceiling on donation tax credits

Budget 2026 introduced a new ceiling to limit donation tax credits

The Taxation (Budget Measures) Bill (No 3) (the Bill) implements this through an amendment to section LD 1 of the Income Tax Act 2007, to provide a maximum threshold of $100,000 of gifts qualifying for the donation tax credit (resulting in a maximum annual tax credit of $33,333.33).

The explanatory note to the Bill states that:

• current settings allow donation tax credits at a rate of 33⅓% of qualifying gifts made, with the total amount of gifts limited to the taxpayer’s taxable income
• the change continues to support charitable giving across a broad donor base while managing the Government’s expenditure on the donation tax credit
• the new limited will apply to gifts of money made on or after 1 April 2027.

The accompanying Regulatory Impact Statement (the RIS) frames the issue in the following terms:

• the existing donation tax credit settings result in Crown expenditure of around $350 million
  per year. The empirical evidence is mixed on whether such a tax credit is cost effective in
  encouraging charitable giving.
• Inland Revenue is of the view that the literature is not conclusive and
  donor responsiveness, especially for large donations, is very dependent on the specific
  donor, which has raised questions about when the donation tax credit incentivises
  donations.

From a tax integrity perspective, the concern has been that the donation tax credit can be misused for aggressive tax planning. The RIS provides the following example:

“… donors can receive tax credits well in advance of funds being applied for charitable purposes or derive private benefit (for example, through loans received back from the charity). Inland Revenue has observed an increase in such behaviour, which may be facilitated by New Zealand’s comparatively generous settings.”

As also noted in the RIS “The donation tax credit currently operates as an open-ended subsidy, limiting the Government’s ability to manage costs. On current trends, expenditure on the donation tax credit is growing at an average of 2.6% a year. Reintroducing a lower maximum entitlement threshold would improve expenditure discipline.”

Inland Revenue expects the administration cost connected with the change to be around $1.5 million over the forecast period 2026/27 to 2029/30.

The forecast savings are $19 million per annum once fully implemented and the expectation is that the impact on the “giving behaviour” of the New Zealand population will affect 0.1% of the donating population. It will be interesting to see whether this forecast is correct and what impact there might be on larger one-off lifetime donations that form part of a wider philanthropic policy.

References:

• The Taxation (Budget Measures) Bill (No 3) Government Bill 320-1
• Regulatory Impact Statement: Taxation and the not-for-profit sector: Changing donation tax credit policy settings
• Bloomsbury-Associates – The Future of Charitable Giving 2025
• Regulator stewardship review findings and response
• Taxation and the not for profit sector
• Targeted policy consultation on not-for-profits