What’s the buzz with tax and charities?
Tax Alert - June 2019
By Sarah Kennedy and Hua Lam
The tax treatment of charities and non-profit bodies (NPBs) has come under the spotlight lately, with the various happenings including:
- Department of Internal Affairs (DIA) review of the Charities Act 2005;
- The Tax Working Group (TWG)’s comments on charities;
- GST legislative changes to NPBs;
- A recent court decision in relation to “donations” which contribute to missionary work;
A broad review of the Charities Act 2005 is being undertaken with the aim of modernising the 14 year old Act. DIA issued a discussion document in February for public comment, in this they noted that while the fundamentals of the Act are sound, further work is needed to ensure that the Act continues to function appropriately for more than 27,000 diverse registered charities. Public consultation undertaken as part of the review covered a broad range of topics including key challenges and opportunities for the charities sector, whether the current registration and regulation system is working, how the Act is working for Maori charities and how the appeal process for Charities Services decisions works. The tax exemptions for registered charities and the definition of charitable purpose are outside the scope of this review.
In addition to the DIA review, the TWG noted in its final report that the charitable sector should be an area of future focus. The TWG recommended that the Government undertakes periodic reviews to ensure that the charitable rules work to achieve their intended social outcomes. The key questions noted were whether charities are distributing or applying sufficient surpluses from their activities to their charitable purposes and the perceived looseness of the treatment of private charitable foundations and trusts. The TWG provided its analysis to DIA to consider as part of the Charities Act Review. In addition, the 2018-2019 Tax Policy Work Programme includes reviewing the appropriateness of the tax exemption for significant businesses associated with charities and reducing the compliance costs experienced by small charities. The TWG also provided its analysis to Inland Revenue in support of this work.
Non-profit bodies GST legislative changes
A significant change to the Goods and Services Act 1985 has taken effect with retrospective application to 15 May 2018. This change means that if a NPB has claimed GST credits on the purchase or maintenance of an asset then, the future sale or other disposal of that asset will be subject to GST, even where that asset has not been used to make taxable supplies.
This will have a significant impact for some NPBs, so if you work for a NPB or are involved as a trustee or other advisor, make sure you have looked into these rules before the transitional election regime expires on 31 March 2021.
What you need to know
NPBs have until 31 March 2021 to decide whether to make an election to repay GST input credits previously claimed. The effect of making this election is to take an existing asset out of the GST base and ensure that GST output tax will not be payable if the asset is sold in the future, provided no further input credits are claimed in respect of thatasset in the meantime.
If the election is made then the amount of GST that is repayable will be the sum of:
- All input tax claimed in relation to the capital cost of the asset; and
- All input tax relating to the operating costs of the asset within the past 7 years (or a reasonable estimate of these costs if agreed with Inland Revenue).
- NPBs with significant assets should examine whether they hold any assets outside of their taxable activity and, if so, if there is any advantage in making the election and repaying input credits.
- NPBs can treat newly acquired assets as being outside of their taxable activity where the asset is not used in making taxable supplies and no input tax credits are claimed in relation to the asset or any costs of maintaining or improving the asset.
What you need to do:
Prior to 31 March 2021 NPBs need to:
1. Establish the breadth of their taxable activity and which assets are connected with the taxable activity
2. Determine whether it is likely that any assets held outside of the taxable activity will be disposed of at some future point and the likely GST status of any future purchaser. The focus should be on those assets that currently have significant value or those which are expected to appreciate over time and could be sold to non-registered purchasor (where GST will apply to the sale at 15%).
Below is an example of how a NPB may undertake this analysis:
- A building used solely as a hall as part of the NPB’s charitable purposes is not part of its taxable activity. However, the office building on the neighbouring site used to earn commercial rental income is part of the taxable activity.
- The NPB did not claim any GST input credits when the hall was purchased, but has been claiming GST input credits on its ongoing maintenance. The NPB estimates that $10,000 of GST has been claimed in respect of this maintenance in the last 7 years.
- The NPB is planning to sell the hall building at some point in the next few years once their new purpose built facility is completed. They are hoping for a sale price of $750,000.
- The hall is in a good school zone and the NPB determines that a non-registered person could purchase the property to build a private home. At a sale price of $750,000 (inclusive of GST – if any), the NPB would be required to return almost $98,000 on the sale to a non-registered purchaser if no election is made.
- The NPB chooses to instead to take advantage of the transitional provisions. They pay $10,000 to Inland Revenue in March 2021 and provide Inland Revenue with sufficient information to support this estimate. Using these provisions saves the NPB nearly $90,000 as no output tax will be payable on a future sale provided the NPB ensures that no further input credits are claimed.
- Compare the above scenario to one where the NPB decides to keep and renovate the dining hall rather than build a new facility. In that case, given the expected future outlay for renovations and the low likelihood of any future sale, the NPB chooses not to make an election so continues to claim GST input credits in relation to the property. In this case, the NPB has determined that the cash-flow benefit of the input credit claim for the renovations outweighs the contingent future liability in respect of a sale that may not happen for a number of years.
As you can see from this example, the best application of the rules is very fact dependent. Given the time it will take to identify the relevant assets, determine the future use, obtain the necessary support and liaise with Inland Revenue if appropriate, we recommend beginning the process now.
Inland Revenue wins legal fight against $1.7m of missionary “donations”
Inland Revenue won a High Court case denying tax credits for donations. The Court held that some of these did not qualify as charitable gifts and donation tax credits were not available. This case demonstrates Inland Revenue’s increased scrutiny as to whether a “donation” is a true donation. It is not always clear cut what payments are charitable gifts.
If you act for a donee organisation, you should only provide donation receipts for payments which are made voluntarily and for which the donor receives no material benefit or advantage even if this advantage is indirect. If you are claiming donation tax credits personally, make sure you only claim these in situations where no benefit or advantage is received.
The Church of Jesus Christ of Latter Day Saints sent young men and women to proselytise in different countries. As part of their mission application, New Zealand missionaries committed to raising a standard amount which was paid to a Trust. The standard amount was then used by the Trust to fund overseas missionaries’ essential costs (e.g. basic accommodation, food etc.) in New Zealand. Overseas church-related entities had a corresponding obligation to fund New Zealand missionaries’ costs while overseas.
The Trust issued donation receipts to those donors who included the missionaries themselves, their close and extended family and other members of the Church. Donors then used the donation receipt to claim tax credits.
The Court provided some detailed commentary regarding when a donation can constitute a charitable gift. In simple terms, a charitable gift means making a payment without expecting anything in return. Specifically, there must be a voluntary transfer of property owned by the donor to the donee and there can be no material benefit flowing to the donor as a result of the donation (there was a material benefit to missionaries, their parents and grandparents in this case).
The High Court agreed with the Commissioner’s decision to disallow claims for donation tax credits by a missionary and their immediate family. The Court held that the payments were made so that an overseas branch of the Church would pay the essential personal expenses of the missionary while on a mission. They were not gifts because they were not gratuitously made to the Trust, rather a payment was made so a benefit could be received.
However, the Court held that payments to the Trust by a sibling of a missionary, a more distant relative of a missionary, and other members of the Church were gifts as any benefit to these donors was minor or immaterial.
Edit: The Court of Appeal overturned the decision in the case discussed above. For more information about the Court of Appeal Case please refer to this summary: https://www.taxtechnical.ird.govt.nz/case-summaries/2020/csum-20-04
Tax Alert articles are general in nature; as always, please seek tax advice specific to your own circumstances.
June 2019 Tax Alert contents
- How are you affected by new individual tax assessment regime?
- Cautionary tale of GST in land transactions
- IR and ATO release administrative approach to determining residence
- KiwiSaver – flexibility, suspensions, and those over 65
- Tax Bill returns from the Finance and Expenditure Committee with modifications
- Depreciation myths debunked
- GST legislation one step closer to enactment
- GST obligation changes for digital services to Singapore
- Correcting errors under s. 113 update
- Snapshot of recent developments