Political Donations and Tax Deductions

We recently published an article exploring different approaches to political donations and tax deductions. Specifically, we compare the approaches of Australia and Aotearoa New Zealand, and ask why political donations are tax-preferred in Australia but not in New Zealand.

In a robust democracy, the funding of political parties and candidates is crucial for reaching voters and communicating policies. The debate over the source and purpose of this funding is a testament to its importance.

Despite the potential for controversy, it is widely accepted that political parties require funding. The ideal funding system would be equitable and transparent, promoting electoral engagement while safeguarding the government’s integrity. The regulation of political party funding and the role of the tax system in achieving these goals are key aspects of our discussion.

New Zealand compared to Australia

New Zealand and Australian political parties are funded differently.

In New Zealand, political parties in Parliament receive state funding to support parliamentary operations (for example, communications or general office expenditure). For non-parliamentary operations, such as campaigning and policy development, there is only one form of state funding: the election broadcasting allocation. This is available only in an election year and political parties can use it for campaign advertising. For all other non-parliamentary work, parties need to raise their own funds. Currently, the primary mechanism for doing this is through private donations.

While a tax credit is available for a donation to an approved charity in New Zealand, political parties – or organisations set up to support political parties – cannot be a charity. In addition, deductions are not available for donations to political parties.

In Australia, individuals (but not companies) are incentivised to make moderate donations to federal or state political parties and independent candidates or members, as this expenditure may be claimed as a tax deduction. There is a maximum deduction value of A$1,500 for contributions to a registered political party plus a further A$1,500 for contributions to an independent candidate or member. A membership subscription to a registered political party is also allowed as a tax deduction for an individual.

Unlike New Zealand, additional state funding is provided to registered political parties based on the number of votes received in an election, plus some expenditure reimbursement.

There are several well-established issues relating to political donations.

Perhaps the most important is the potential for donors to influence policy due to donations made to political parties. However, this issue primarily relates to larger payments and the A$1,500 cap for tax deductions in Australia is unlikely to result in influence. There is also an issue around who can donate, as this is typically those with higher disposable incomes.

In Australia, political parties have been shown to rely on a small number of major donors. In 2020-21, 39% and 57% of the Coalition’s and Labor’s declared donations, respectively, came from five donors, generating the claim that these donors can achieve significant access and influence. Notwithstanding this potential, these large donors are primarily companies, so they are ineligible for the tax deduction. In New Zealand, most large donations come from individuals rather than companies or other entities.

There are also good reasons for encouraging political donations through tax incentives. They can encourage small donations, diversify the funding base, and encourage political engagement. Encouraging smaller donations may reduce reliance on large donations, where there is the potential for, or the perception of, influence on policy decisions.

The tax system and political party funding

Providing tax concessions for political donations is essentially an extension of state funding. The tax system can support political donations in several ways. The two primary methods are tax deductions and tax credits. Tax deductions allow the donor to treat the donation as an expense, reducing taxable income. Tax credits offset income tax that is due to be paid.

There are several other ways that the tax system is used to support political parties. For example:

• in Italy, taxpayers can donate 0.2% of their income tax as a contribution to an eligible political party;
• in Portugal, political parties are exempt from corporate income tax and several other taxes;
• in Finland, donations received by political parties and candidate support groups are exempt from tax; and,
• in Greece and Malta, political parties also have a tax exemption.

In other situations, countries use the tax system to place constraints on political donations:

• in Lithuania, the total amount of political donations by an individual must be less than 10% of the donor’s previous annual income;
• in Bulgaria, donations are prohibited from persons registered in a preferential tax regime;
• in Cyprus, entities with outstanding tax obligations cannot make donations greater than €5,000 per annum; and
• in Spain, a political party must be up-to-date with payment of tax and social security obligations to be eligible for state funding.

We conclude that the different policies on tax concessions for political party donations are aligned with the countries’ different approaches to using the tax system to influence behaviour.

New Zealand’s method follows its characteristic approach to using, or more specifically not using, the tax system to influence behaviour, except in a small number of situations.

Australia has shown a greater tendency to use the tax system to change behaviour or facilitate pro-social behaviours, such as working or saving for retirement. Australia has also demonstrated a greater appetite for state funding for political parties, leaving them less reliant on donations despite the presence of tax incentives to encourage these.