GST and Donation issues for Charities
IMPORTANT: This post is specific to New Zealand. If you are not a New Zealand business/taxpayer then it is probably not applicable to you.
We have a number of Charity clients who are GST registered. The number one issue we have to deal with for these clients is sorting out what income streams should be subject to GST. Just because you are a Charity doesn’t mean that all your income is exempt from GST.
This has become relevant recently as the IRD has begun challenging a number of scenarios in this space. In particular, the IRD has published a Revenue Alert looking at private schools and kindergartens that required parents to make a “gift” to the school or related foundation. The school, therefore, didn’t charge GST on the “fees” and the parents claimed a tax credit on the “gift.” The IRD is investigating and reversing lots of these, and tax fraud charges are likely to those who promoted the arrangement! I tell my clients that they should treat all receipts as GSTable UNLESS they can prove that it is not. There is an alarming trend among charities (and this includes Churches, where honest and ethics are supposed to be virtues) to reliable a receipt as a “donation” and therefore grant a tax credit to the “donor” and avoid having to pay GST by the Charity (forgive my rant, but which part of claiming the input tax credit for the organization and then failing to pay the output tax credit is ethical?).
The technical terms that we need to consider here are “consideration” and “unconditional gift.” Section 2 of the Goods and Services Tax Act 1985 defines these as follows:
- consideration, in relation to the supply of goods and services to any person, includes any payment made or any act or forbearance, whether or not voluntary, in respect of, in response to, or for the inducement of, the supply of any goods and services, whether by that person or by any other person; but does not include any payment made by any person as an unconditional gift to any non-profit body
- unconditional gift means a payment voluntarily made to any non-profit body for the carrying on or carrying out of the purposes of that non-profit body and in respect of which no identifiable direct valuable benefit arises or may arise in the form of a supply of goods and services to the person making that payment, or any other person where that person and that other person are associated persons; but does not include any payment made by the Crown or a public authority
The two key phrases here are “voluntarily made” and “no identifiable direct valuable benefit.” In the case of the childcare/school scenario that IRD is currently investigating there is a clear violation of both phrases: the payments were not voluntary (no payment = no admission) and there was a clear and direct valuable benefit to the donor (his/her child got educated).
So here are some common scenarios I see (and my process for advising):
- A charity runs an event and charges a “gold coin donation” for entry.
- Admission to an event is a direct benefit. If the donation is required for entry it is not a donation. The fact that a “gold coin” is stated means that a price has effectively been set for admission.
- My advice: If you have set a price (including a range, such as “gold coin” then it is GSTable. If you would have let people in whether or not they paid the fee, then change your wording accordingly. If you state “a gold coin donation is encouraged” and follow this up with a voluntary bucket at the door (no enforcement) then it looks more like a donation.
- A church sends a team to another city for a summer missions project. Each team member is required to raise $1000. A father makes a donation towards his child’s target.
- This is trickier. The payment is voluntary, but only to a point (if the child does not raise the money will she be able to go?) While you may argue that there is no direct benefit (it is all done for charitable purposes) we all know that there is huge personal growth that happens on these projects (otherwise we would just send the cash and get locals to do it). On the surface it would appear that the payment is not a donation and maybe GSTable.
- My advice: disconnect participation from fundraising. Select the team – and then fundraise for the team (not for individuals). There is still a probable benefit for the donor if a family member is on the team – there is no way around that. If you are satisfied that the charitable outcomes outweigh the personal outcomes then you may be able to treat it as a donation.
- Note: foreign missions trips would be zero-rated for GST purposes, but you still have the issue as to whether it is a donation.
- A charity has a facility and often rents it out. A group offers to use it in exchange for a donation.
- A direct benefit is obvious. The question here is whether the payment was made voluntarily. If the policy is that all outside groups must pay something (even if the amount is not set) then it can not be treated as a donation. However, if your practice is to allow all comers to use the facilities without charge, and some make a donation out of gratitude, then it will be a donation (in my experience, the later scenario is rare).
There are many other scenarios. If you aren’t sure please contact your accountant or send us an email. If your charity would like an accountant that is experienced in the real-world issues of running a charity then please request a consultation. Call for a booking on 04-831-1232.