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Donations – an unconditional gift?
The Inland Revenue issued its latest Revenue Alert on 22nd May 2014 (RA 14/01) which identifies possible issues surrounding the legitimacy of donation tax credits being claimed by certain taxpayers.
The focus is primarily on payments made to private education centres although the general concepts outlined in the Alert are applicable to any payment claimed to be a donation and upon which a subsequent tax credit is claimed.
Presently any payment of $5 or more to a charity (or some similar public benefit entity) qualifies for a donation tax credit provided it satisfies the definition of being a gift. For an individual, the refundable credit is then 33 1/3% of the gift amount (subject to limitations surrounding the level of taxable income of the payer).
To be a gift, the payment must be:
- made voluntarily
- for no consideration
- the payer (or someone else) receives no material benefit in return, and
- the payee suffers no material disadvantage from benefiting from the payment
In essence therefore a donation should be seen as being an unconditional gift – the payer not attaching any conditions to the payment for their benefit.
Inland Revenue’s concern is where payments being made to a private education centre such as a private school or private childcare centre have been re-characterised as a gift of money when the true nature of the payment is not so.
The payments in question are generally being made by the parents or close relatives of the children attending the centre and in return the parents are then paying very low/no fees for their child for the education services provided by the centre.
Inland Revenue has advised that unless contrary evidence can be provided by the parent/education centre, they will treat these re-characterised payments as simply being substitutes for fees otherwise payable by the parents and consequently not being in the nature of gifts which qualify for a donation tax credit.
Identified taxpayers will have their credit entitlements reassessed and as a result will be exposed to penalties and use of money interest charges.
An associated issue is the GST consequences of the receipts for the education centre. Inland Revenue’s treatment of the payment amounts as a substitute for attendance fees will trigger a GST output tax liability for the recipient. As these payments are often made to charitable trusts which either operate the education centre directly or arrange for education services to be provided by an education centre, the GST output tax issue may either result in a reassessment of previously filed GST returns of a GST registered organisation or require a previously unregistered organisation to register (possibly backdated registration) if the amounts received exceed the required registration annual turnover threshold of $60,000. Either scenario may subsequently result in exposures to penalties and use of money interest.
If you are making payments to a private education centre upon which a donation tax credit is being claimed and you would like to confirm the correctness of your entitlement to claim, please do not hesitate to contact one of our team.