Parents’ payments to private school were not unconditional gifts, but were consideration for the supply of education services and subject to GST

Summary

The disputant challenged the assessments for goods and services tax (“GST”) made by the Commissioner of Inland Revenue (“the Commissioner”) for the seven six-monthly GST periods (“the relevant tax periods”).

The disputant argued it was not liable to pay output GST on payments made by parents at one of their schools, as those payments were charitable donations and therefore were unconditional gifts. However, the Commissioner argued those payments were consideration for the provision of education services by the disputant and therefore liable for output GST. The Taxation Review Authority (“the Authority”) found in favour of the Commissioner.

Impact

The decision will be applicable to a wide range of pre-schools and private schools which may have been treating parent payments as donations when the payments are consideration for educational services.

Facts

The disputant was established under a Deed of Trust and was registered with Charities Services as a charity whose sector of operation was recorded as “education, training and research” with the charitable purpose of advancement of education. The disputant operates a primary school (“the School”).

The School was treated as a private school under the Education Act 1989 and thus received minimal state funding. The majority of funding for the School came from payments made by parents.

It was accepted that the disputant was registered for GST purposes and that it supplied education services in the course or furtherance of a taxable activity.

Decision

Were the payments consideration under the GST Act?

The Authority found that to constitute “consideration”, it was not necessary that the supply be to the person providing payment, however there must be a sufficient connection (linkage or nexus) between the supply and the payment. This is highlighted by the reciprocity found in the expression “in respect of, in response to, or for the inducement of” in s 2.

The Authority found that the s 2 definition of “consideration” clearly includes voluntary payments. There is no requirement for there to be “legally enforceable” reciprocal obligations as to hold such would be inconsistent with the definition.

Details of the School’s funding model as contained on its website, information sheets, and contribution forms sent to current and prospective students’ parents conveyed a clear expectation that parents would pay the amounts requested, or what they were able to afford, and the payments would be used to pay the School’s operating costs including salaries.

In 2013, a scholarship fund was introduced which allowed parents who were unable to commit to making payment of the required amount ($5,000), to meet the remaining amount. However, the Authority found that the concept had been introduced as another way to obtain contributions which may have been less embarrassing for those who did not pay the amount required.

Only six children (two from one family) were identified as having attended the school where either no parent contributions were paid or were not paid for substantial periods of time in the years from 2003 to 2015. In addition, financial contributions from parents ceased or substantially reduced when their children left the School.

Overall the Authority held there was a supply of education services by the disputant to the parents’ children and a payment made by parents to the disputant in connection with the supply of those services. This connection, the Authority said, was sufficient to satisfy the definition of “consideration” in s 2.

Were the payments unconditional gifts made to the disputant?

Consideration does not include any payment made as an unconditional gift, as defined in the GST Act. The Authority considered the decision of Judge Barber in Case U37 (2009) 19 NZTC 9,353 involving a religious organisation which had received payment from the lessor of premises occupied by the organisation. Barber J found that for there to be an unconditional gift, payment (to a non-profit body) must be voluntary and no direct valuable benefit may arise in the form of goods and services to the payer, or if such benefit does arise, it must not be conditional or dependant on that payment (at [42]). The Authority considered that Judge Barber had contemplated that the benefit must not be conditional (contingent) or dependent (reliant) on the voluntary payment in order to be an unconditional gift.

In this case, the Authority found that owing to the School’s communications with parents, those parents were left in no doubt as to the cost of running the school and the need for contributions to be made by them at a level they could afford, in order to meet operating costs.

Whilst children were not excluded from attending the School if their parents were unable to make the contribution (meaning attendance was not “conditional” on making a contribution), the Authority found that the supply of education services by the disputant was “dependant” on the parents’ contributions. If such contributions were not made, the School would not have been able to operate. Furthermore, the Authority found that parents received a direct and valuable benefit because of their contributions being the provision of education for their children.

Accordingly, the Authority found that the contributions made by parents were not unconditional gifts for the purposes of the GST Act.