01 August 2011

Treating Donations to Charity Equally and Equitably

When a person makes a donation to an Institution of Public Character (commonly referred to as a charity), a Government approved museum or a prescribed educational or research institution, he/she is entitled to a tax relief equal to 250 per cent of the amount donated.

An approved donation of, for example, $1,000 reduces the donor's chargeable income by $2,500.

For an individual donor, the impact of this depends on his/her chargeable income.

If the donor's chargeable income exceeds $320,000, for which the marginal tax rate is 20 per cent, the net (i.e., after-tax) outlay to the donor is $500.

If the donor's chargeable income is between $30,000 and $40,000, for which the marginal tax rate is 3.5 per cent, the net outlay to the donor is $912.50.

If the donor's chargeable income is less than $20,000, for which the marginal tax rate is zero, the net outlay to the donor is $1,000.

This appears to be an anomaly.

Firstly, a donation is a donation.  The tax relief results in an inverse relationship between the net outlay of a donation and the donor's marginal tax rate.  Why should a donation of any given amount become an outlay that is smaller after tax for a high-income donor than for a low-income donor?

Secondly, this distortion has been magnified as the tax relief was raised over the years.  The tax relief was doubled to 200 per cent of the amount donated in 2002, and to 250 per cent in 2009.  The 250 per cent tax relief, which was applicable for two years initially, was recently extended to 2015.

Thirdly, a donation of any given amount forms a bigger part of the donor's chargeable income and may be a bigger sacrifice, the lower the donor's chargeable income.

The existing tax relief should be replaced by a tax rebate of a fixed percentage of the amount donated.

The Government should consider giving individuals who do not pay income tax a cash amount equal to the tax rebate.  Such individuals will then derive some monetary benefit which they did not enjoy previously, but they will not be getting more benefit from their donations than the wealthy.

In this way, all donors will be treated equally and equitably.

Such change should not discourage donations by the wealthy — if the donations are truly from their hearts.

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