BY TONY FULLER, TaxTeam

Many local authorities will have some form of interest in a charitable trust. It is often thought that donations to charities are not subject to GST – this may well be the case more often than not, but not exclusively. In this article, we explore some issues to consider around GST and charities.

In relation to a charitable trust, a local authority may:

► Be the settlor;

► Be the trustee or, more likely, have the right to appoint trustees;

► Have some responsibility for preparing the trust’s GST returns, and/or

► Make donations to the trust.

In the GST context, the critical issue when paying a charity is whether the donation is an “unconditional gift” to a non-profit body (most charities will be non-profit bodies). This is because “unconditional gifts” are not subject to GST.  In the context of an unconditional gift, it is important for charities (and sometimes the donor) to consider:

A. Whether the donation is made voluntarily by the donor; and

B. Whether the charity provides a benefit to the donor (or a person associated with the donor) in the form of goods and/or services, whereby the benefit is:

► Identifiable; and

► Direct; and

► Valuable.

If the donation is not made voluntarily or B applies, 3/23 of the donation amount may need to be paid to the IRD as GST output tax if the charity is GST-registered, or is required to be GST-registered.

When B may apply

Examples of when GST may apply because B applies include where a GST-registered charity raises funds by:

► Holding events for which an admission or participation fee is charged;

► Selling goods; or

► Providing services in the nature of the lease of land and/or buildings.

If the donor is GST-registered, as is the case with local authorities, the amount donated could be grossed up by 15% to negate the impact of GST.

On-supplying donated goods and services

Importantly, the on-supply by a charity of donated goods/services is not subject to GST. This is the case where a charity raises funds by, say, selling sausages, and the sausages have been donated to the charity – selling the sausages to the public would not be subject to GST.

In contrast, if the charity had bought the sausages, the sale proceeds would be subject to GST if the charity is GST-registered or required to be GST-registered. In these circumstances, any GST that the supplier of the sausages charges is recoverable by the charity.

Alteration to the donated good/service

To take our example even further, things get difficult from a GST perspective if the GST-registered charity supplies the donated sausage wrapped in bread, and the bread has been purchased by the charity. In these circumstances, the IRD takes the view that the supply of the sausage (let’s call it a hotdog now) may be subject to GST.

Based on old tax publications, we understand that the IRD will concede that the supply is not subject to GST in these circumstances if the cost of the purchased components of the supply is less than 5 per cent  of the proceeds received from the sale. For example, if the hotdog is sold for $2, its sale should not be subject to GST as long as the aforementioned piece of bread cost less than 10 cents. If the supply in this example is not subject to GST, no GST can be claimed in relation to the bread.

The key messages

► As a donor and/or a person with another form of interest in a charitable trust, local authorities should consider whether donations to the trust are subject to GST.

► As an interested party, local authorities may wish to confirm that donated goods and services are being treated correctly for GST purposes if and when they are on-supplied by the trust.

► The issues discussed above may also apply to trusts that are not registered charities.