Many people make charitable donations each year and receive tax credits accordingly. However, Inland Revenue (IR) is seeing many situations where people are claiming tax credits for ‘donations,’ although they have not made a true gift of their own money.
Any payment of over $5 to a charity (or some similar public entities) can potentially qualify for a donations tax credit if it is a gift.
To be a gift it must (1) be made voluntarily (2) provide a material benefit to the recipient without imposing a countervailing detriment (3) be made for no consideration and (4) provide no material benefit or advantage to the giver in return.
We have found arrangements where tax credits for donations have been claimed in circumstances where a true gift of money has not been made.
A common feature of these arrangements is that the payment is made on the understanding that the donor will receive something in return (for example, purchase of property).
In many such cases, the money is paid back to the donor or an associate within a short period. We consider that a payment in these circumstances is not a gift.
We are also seeing cases where tax credits on donations are claimed, but the money donated does not even belong to the donor.
Here are examples of arrangements we have identified so far.
Example One
A person has extended a loan to a charitable organisation, which the latter is unable to repay. Instead of forgiving the loan, the person pays the organisation an amount equal to the debt in the form of a ‘donation’, on the understanding that the money will, in turn, be used to repay the debt. The organisation repays the debt and the person claims a donations tax credit.
A variation of this example involves the person first purchasing a debt owed by a charitable organisation to put in place this kind of arrangement.
The payment to the charitable organisation is not a valid gift, as the money was given only for repayment of the debt.
Example Two
We have seen situations where a person intended to make a gift (a motor vehicle for example) to a charitable organisation. Instead of gifting it to the organisation (which would not qualify for the tax credit), the person pays money to the organisation, which in turn uses it to purchase the vehicle. The person claims a donations tax credit.
In some cases, the arrangement also enables a charitable organisation to claim second-hand goods input tax credit for GST purposes or for avoiding tax.
We do not consider this as a valid gift as the person only paid money on the understanding that it would be used to purchase a vehicle.
Example Three
We have also noticed charitable entities avoiding their GST liability, as well as helping to generate donation tax credits for individuals in circumstances where the money donated comes from a fundraising event and hence does not belong to the donor.
Under this arrangement, fundraising is done on behalf of the charitable organisation. The money raised is then passed to an individual on the understanding that the person will ‘donate’ that money to the charitable organisation.
The charitable organisation will not have to account for GST on the fundraising event, and the donor will claim a donations tax credit.
We believe that no valid gift has been made for the purposes of claiming the donations tax credit, as the money paid to the charitable organisation was not that of the donor.
Voluntary Disclosure
If IR considers that donations tax credits have been claimed in situations where a true gift of money has not been made, we will recover the excess tax credit from the person making the claim and consider imposition of monetary penalties.
It is our view that some of these arrangements may amount to fraud and hence we may also consider prosecting the concerned.
If you think any of the above may apply to you or your organisation, we recommend that you discuss the matter with your tax advisor or with us, and consider making a voluntary disclosure.
It is voluntary disclosure when you tell us that you have made a mistake before we find out in some other way. The advantages of a voluntary disclosure are that you will not be prosecuted in court (if you contact us before we notify you of a pending tax audit or investigation) and any shortfall penalty will be reduced.
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Abdul Rafik is Inland Revenue’s Community Relationships Advisor based in Auckland. He is happy to answer readers’ queries, which should be sent to
venkat@indiannewslink.co.nz
