Make your Zakat Count

One of the five pillars of Islam, Zakat, is a way of purifying one’s wealth, freeing one from the love of possessions by encouraging humility and discipline. An essential principle of Islam is that everything belongs to Allah (swt). We do not own our wealth, but have been entrusted with worldly possessions by Him.

Zakat means ‘purification’ and ‘growth’. Possessions are purified by setting aside a portion for those in need and, like the pruning of plants, this cutting back encourages new growth.

There are two types of Zakat, both of which are compulsory for Muslims who qualify. Zakat al-fitr is a fixed small amount, and must be paid during Ramadan, before the Eid prayer on Eid ul-Fitr. The amount you have to pay for Zakat al-mal depends on the size of your wealth and savings. While it can be paid at any time during the (Islamic lunar) year, on savings held during that year, many Muslims find it convenient to pay it during Ramadan, at the same time as Zakat al-fitr.

The annual payment of Zakat is different from any charitable gifts given out of kindness or generosity, otherwise known as sadaqah. Zakat is a mandatory religious obligation, whereas sadaqah is voluntary, but strongly encouraged. Zakat al-mal forms the systematic giving of 2.5% of one’s net wealth each year, benefitting targeted recipients on a sustained basis.

In the Quran (Surah at-Taubah, ayat 60), Allah (swt) says, “Alms [Zakat] are only for the poor, the destitute, the orphans, those appointed to collect them, those whose hearts have to be reconciled, for (the freedom of) slaves, for those in debt, for (those striving in) the path of Allah and for the traveller. An obligation imposed by Allah. And Allah is Knowing and Wise.”

From this Quranic verse ordaining Zakat, scholars have identified eight classes of recipient (asnaf):

1. Masakeen ‘The destitute’

2. Fuqaraa ‘The needy or poor’

3. Amil Zakat ‘The alms collectors’

4. Fi sabi lillah ‘In the path of God’

5. Gharimun ‘People burdened with debt’

6. Ibn as-sabil ‘The wayfarers’

7. Riqab ‘People in bondage or slavery’

8. Muallaf ‘Those who have inclined towards Islam’

In practice, we have charities in our own community here in Auckland that fall inside one or more of these categories, so your support of them legitimises your Zakat.

To take a varied sample, they would include, for example:

• Mount Albert Islamic Trust’s support for an orphanage in Sri Lanka (iccct.org)

• Working Together Group’s project to establish New Zealand’s first Islamic orphanage/foster home (www.wtg.org.nz)

• Fatimah Foundation’s work in helping needy families (www.fatimahfoundation.org.nz)

You can make your Zakat work harder by donating your Zakat to a registered charity, such as those above. The New Zealand government encourages charity by giving donors a tax credit on the donations they make to registered charitable organisations. The laws about this are as follows:

• The organisation must be registered as a Charitable Organisation with the Charities Commission (CC). A list of registered charities is given on the CC website (www.charities.govt.nz).

• It must also be recognised by the Inland Revenue Department (IRD) as a donee organisation. An organisation which is a Charitable Organisation may not necessarily be recognised by the IRD as a donee organisation. A list of donee organisations is given on the IRD website (www.ird.govt.nz/donee-organisations/donee-organisations-index.html).

• The donation must be more than $5.

• The amount you can claim is the lesser of (a) 33.3% (one third) of the total donation, or (b) 33.3% (one third) of your taxable income. Thus, for instance, if you have donated $200 and have a taxable income of $100, then your tax credit will be 33.3% of $100, and not $200. The rate of credit is 33.3%, and is not related to the income tax rate of the donor.

• To be eligible to claim the donation, you should have a taxable income during the tax year in which you have made the donation; should have been resident in New Zealand; should be an individual and not an entity such as an organisation or a company; and should hold a valid receipt issued by a donee organisation. 

• The claim should be made on IRD form IR526 (“Tax credit claim form”), downloadable from the IRD website (www.ird.govt.nz).

Here is how it works:

• Imagine you want/have to give $81 away in Zakat al-mal.

• You give it to an organisation registered as a charitable organisation with the CC and as a donee organisation with the IRD.

• The charitable organisation issues you with a tax receipt.

• You declare this on IRD form IR526.

• The IRD gives you 33.3% back ($27).

• However, now you have not given away $81 in Zakat; you have only given away $54 ($81 - $27). So, you must give away the $27 that the IRD returned.

• You give that $27 to a CC- and IRD-registered charitable organisation, declare it (along with any other donations in that year), and the next tax year the IRD gives you $9 back.

• You then have to give away that $9 as Zakat.

And so on, year after year. Each year, by giving your Zakat to a registered Muslim charity (that is involved in one of the eight asnafs), your donation is compounded. Your original $81 donation has become over $117 ($81 + $27 + $9 + subsequent declarations)!

You do not win or lose: you have given away $81 in Zakat, although you will, insha Allah, be rewarded for having fulfilled your Zakat obligation. The IRD loses over $36, because they are willing to give tax credit on any charity donation. The Muslim charity you have donated to wins, because it receives over $117.

This Ramadan, consider giving your Zakat to a registered Muslim charity.

This article is an excerpt from ‘Rocket Science’, the newsletter of Mount Albert Islamic Trust & is reprinted with their permission. www.mtalbertislamiccentre.org