13.1 Charities and other non-profit bodies carry on a wide range of activities. If they are registered for GST purposes they must generally account for GST in relation to those activities much like any other business. They may claim credits (input tax credits³²) for GST incurred on goods and services they acquire, and must charge GST (output tax) on goods and services they supply, in relation to those activities. The current legislation is, however, unclear with regard to the activities of charities and other non-profit bodies involving non-taxable supplies, such as collecting donations.

13.2 This chapter contains proposals to provide certainty for charities and other non-profit bodies in claiming credits for expenses incurred in making non-taxable supplies and determining the supplies for which they must charge GST.

Current treatment

13.3 The Goods and Services Tax Act 1985 does not specifically define "charities" for the purpose of GST. Instead the Act includes a definition of "non-profit bodies" which includes all charities as well as other non-profit bodies. Table 1 sets out the activities of charities and other non-profit bodies and their current GST treatment.

13.4 Table 1 shows that in relation to non-taxable supplies, other than exempt supplies, credits are being allowed in relation to activities for which no GST is charged. However, it is not clear from the legislation whether or not this practice is correct.

Taxable supplies

13.5 A person who carries on an activity involving the supply of goods and services in exchange for payment may register for GST purposes. Therefore charities and other non-profit bodies making taxable supplies are entitled to register for GST purposes and be subject to the normal GST rules, meaning they are able to claim credits on goods and services acquired but are required to pay GST on goods and services supplied. If a person or entity has a turnover of greater than $40,000 in any 12-month period it is required to register for GST. A charity or other non-profit body that carries on a taxable activity but makes supplies for less than $40,000 may register for GST purposes if it wishes. In practice, many non-profit bodies carrying on taxable activities have registered voluntarily.

Exempt supplies

13.6 Registered persons charge GST on goods and services they supply but are able to claim credits for the GST incurred in relation to goods and services acquired in making supplies. Non-registered persons or persons supplying only exempt goods and services do not charge GST on these supplies and are not entitled to credits for the related GST they incur.

Non-taxable supplies

13.7 Under the current GST legislation there is some doubt as to whether credits are available in relation to activities that do not involve the supply of goods and services in exchange for payment (non-taxable supplies). For example, although fund-raising activities are a necessary aspect of sustaining the income of a charity or other non-profit body, genuine donations are a gift rather than a payment for the supply of goods and services and, for this reason, are not subject to GST.

Current practice

13.8 Inland Revenue's policy is to deny credits for expenditure relating to exempt supplies but to allow credits for expenditure relating to taxable and non-taxable supplies. Most charities and other non-profit bodies incur expenditure in excess of the value of their taxable supplies, which results in their receiving refunds of GST rather than paying GST. The government considers that the uncertainty as to whether or not current practice is correct is undesirable. It is therefore proposed that the legislation be amended to make it clear.

13.9 Clarification is also needed as to which supplies of charities and other non-profit bodies attract GST.

Proposals

Claiming credits

13.10 The GST Act would be amended to clarify that GST-registered charities and other non-profit bodies are entitled to claim credits in relation to all their activities. These activities would include the collection of donations, but exclude supplies of donated goods and services or any other supplies which are specifically treated as exempt supplies. The definition of "input tax" would be amended to specifically allow charities and other non-profit bodies to do this. This will provide much needed certainty for charities and other non-profit bodies in relation to their GST obligations.

Charging GST

13.11 In the GST Act, an "unconditional gift",³⁴) such as a donation, is excluded from the definition of "consideration" (payment), and so does not provide the necessary linkage to a supply. Hence GST is not payable in respect of genuine donations.

13.12 The Court of Appeal in Commissioner of Inland Revenue v New Zealand Refining Co Ltd established that "a linkage between supply and consideration is requisite to the imposition of the tax."³⁵) This indicates that the exclusion for unconditional gifts is unnecessary as genuine donations would not have a sufficient linkage with a supply to meet the definition of consideration. The definition of "consideration" should be amended accordingly by removing the unnecessary reference to "unconditional gift". In making the distinction between what is and what is not an unconditional gift, reliance will, therefore, be on the ordinary principles set out in the GST legislation (that is, whether there is a link between the supply and the consideration) rather than on the legislative definition of "consideration", which has proved at times to be difficult to interpret.

13.13 Genuine donations to charities do not involve a taxable supply of goods or services, and no GST should be charged. This also includes donations given in exchange for an item such as a sticker or flower, where there is no fixed minimum charge required for the item to be given. However, any payment which is in return for a supply of goods or services would be viewed as consideration for a supply and not a genuine donation. When a basic minimum charge is stipulated in return for goods and services, such as a voucher booklet offering a variety of discounts, the supply should be subject to GST by reference to that minimum charge. To the extent that an amount in excess of the stipulated amount is provided to the charity or non-profit body, that excess would be a genuine donation and not subject to GST.

13.14 Clarifying in the legislation the requirement for a link between consideration and supply would necessitate a review by Inland Revenue of its policy in this area. This could include more detail as to the type of donations that are regarded as consideration for a supply. This would make it easier for charities and other non-profit bodies to identify which supplies should have a GST component, and which supplies should not have a GST component.

Specific issues for consultation Do you agree that GST registered charities and other non-profit bodies should be able to claim input tax credits for expenses incurred in making non-taxable supplies? Do you agree with the proposed removal of the definition of "unconditional gift", placing reliance on the ordinary principles set out in the GST legislation?

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