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Tax obligations cover charitable trusts

Charitable purposes include advancement of religion, advancement of education, relief of poverty and other purposes beneficial to the community.

Many people are confused over the Goods & Services Tax (GST) in relation to charities.

This is a tax on the supply of goods and services.

Registering for GST is not compulsory unless the entity is carrying on a taxable activity and its total turnover exceeds $60,000 over the previous 12-month period or is expected to exceed $60,000 in the next 12 months.

If the total turnover exceeds the above limit due to a one-off capital grant, there is no requirement to register for GST. In order to calculate the threshold of $60,000, income not liable for GST or exempt income need not be included.

Thus, income from donations, residential rent, interest or dividends need not be considered. If the entity has branches, the total turnover of all the branches must be considered to calculate the threshold.

However, it is advantageous to register voluntarily as the entity would be entitled to GST refunds. This is because all the income received by the charitable entity may not have GST included.

Taxable Activities

A charitable entity can register for GST and effectively claim GST input credits only if it is conducting a taxable activity.

A taxable activity implies any activity carried on continuously or regularly by any person, whether or not for a pecuniary profit and involves or is intended to involve, in whole or in part, the supply of goods and services to any other person for a consideration and includes any such activity carried on in the form of a business, trade, manufacture, profession, vocation, association or club.

There are two essential requirements to conduct a taxable activity. They are (a) the activity must be carried on continuously or regularly (b) the activity must involve the supply of goods and services for consideration.

The purpose or amount of supply is immaterial. The activity carried on may not be for profit. An entity could be carrying on a ‘taxable activity’ for GST purposes and may not constitute a business as in the case of charities.

GST applications

Charities are not required to account for GST on donations they receive, since they are regarded as ‘unconditional gifts,’ and excluded from the definition of ‘consideration.’

A charity will not be considered to be carrying on a taxable activity if its sole income is receiving donations.

Charities may be involved in activities such as sale of books, cultural programmes, weddings and hall hire. These will be considered as a part of taxable activity.

A person receiving a direct benefit in the form of a supply of goods and services against the donation loses the status of unconditional gift and will therefore be subject to GST.

Charities and other non-profit bodies making taxable supplies are entitled to register for GST purposes and be subject to the normal GST rules. They would therefore be able to claim credits on goods and services acquired but are required to pay GST on such goods and services.

Statutory Amendments

Following a discussion document, the Government amended section 3A(4A) of the GST Act and introduced a clause stating that if a supply of goods and services acquired by a non-profit body is not acquired for the principal purpose of making exempt supplies, the supply is treated as being acquired for the principal purpose of making taxable supplies.

Thus, if an entity has a taxable activity, it is entitled to an input deduction on all expenditure that meets the other criteria of the GST Act.

Editor’s Note: Vijay Talekar is Director of Tax Experts Limited, Chartered Accountants. The above response should be taken only as a guide and not as specific advice. Mr Talekar absolves himself, along with the management and staff of Tax Experts Ltd and Indian Newslink of any responsibility or liability that may arise from the above responses. Readers should seek professional advice before acting upon any information contained above. Mr Talekar can be contacted on phone: (09) 2792987. Email: vijay@taxexperts.co.nz

Website: www.taxeperts.co.nz

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