2011 Revenue Alert considers charitable donations and arrangements entered into to get a tax credit where there has not been a true gift of money.
A Revenue Alert is issued by the Commissioner of Inland Revenue, and provides information about a significant and/or emerging tax planning issue that is of concern to Inland Revenue. At the time an Alert is issued, risk assessments will already be underway to determine the level of risk and to consider appropriate responses.
A Revenue Alert will identify:
- the issue (which may be a scheme, arrangement, or particular transaction) which the Commissioner believes may be contrary to the law or is inconsistent with policy;
- the common features of the issue;
- our current view; and
- our current approach.
An Alert should not be interpreted as being Inland Revenue's final position. Rather, an Alert outlines the Commissioner's current view on how the law should be applied. For any Alert we issue it is likely that some investigatory work has already been carried out.
If people have entered into an arrangement similar to the one described or are thinking about it, they should talk to their tax advisor and/or to Inland Revenue for advice about tax implications.
Issue: Donations Tax Credit - Arrangements entered into to get a tax credit where there has not been a true gift of money.
Many people make charitable donations each year and receive tax credits accordingly. However, increasingly Inland Revenue is seeing situations where people are claiming tax credits for "donations" in situations where 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:
- Be made voluntarily;
- Provide a material benefit to the recipient without imposing a countervailing detriment;
- Be for no consideration; and
- Provide no material benefit or advantage to the giver in return.
Inland Revenue has been investigating arrangements where tax credits for donations have been claimed in circumstances where a true gift of money has not been made. These arrangements involve recharacterising (as a gift of money) actions which would have not ordinarily been a donation, in order to receive the donations tax credit from Inland Revenue.
A common feature of these arrangements is that the payment of money is made on the understanding that the donor will receive something in return for the payment of money eg the purchase of property.
In many such cases the money is paid back to the donor or an associate within a short period of time (often a matter of days). We consider that a payment in those circumstances is not a gift.
We are also seeing cases where donations tax credits are being claimed where the money being donated does not even belong to the donor.
Payments made under these arrangements are not a charitable or other public benefit gift, and do not qualify for a tax credit. These payments of money are made in circumstances where the person (or an associate) expects to receive a material benefit or advantage in return.
The following are some of the arrangements we have identified so far. There will be similar arrangements where the payment would not be a gift of money.
A person has a loan outstanding to a charitable organisation which that organisation is unable to repay. Instead of forgiving the loan the person pays the organisation an amount of money 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 for the amount given to the charitable organisation.
A variation of this example involves the person first purchasing a debt owed by a charitable organisation so that this kind of arrangement can be put in place.
The payment to the charitable organisation is not considered to be a valid gift as the money was only paid to the charitable organisation on the understanding that it would be used to repay the debt.
Another example we have seen involves situations where a person intended to make a gift of property (e.g. a motor vehicle) to a charitable organisation. Instead of gifting the property to that organisation (which would not qualify for the tax credit) the person makes a gift of money to the organisation which the charitable organisation then uses to purchase the property from them. The person claims a donations tax credit for the amount of money given to the charitable organisation. In some cases the arrangement also enables the charitable organisation to claim a second-hand goods input tax credit for GST purposes on the purchase of the property.
It is not considered that this example involves a valid gift as the person only paid the money to the charitable organisation on the understanding that the property would be purchased from them. That is, the money is returned so that under this arrangement there is no gift of money.
It is also considered that the claiming of a second-hand goods input tax credit by the charitable organisation could be tax avoidance.
We are also seeing examples where charitable entities are avoiding their GST liability, as well as helping to generate donation tax credits for individuals in circumstances where the money being donated really comes from a fundraising event and may not even 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 (generally closely associated with the charitable organisation) under the understanding that the person will then "donate" that money to the charitable organisation. The charitable organisation will not have to account for any GST on the fundraising event, and the donor will claim a donations tax credit in respect of that money and typically this will also be given by the person to the charitable organisation.
In this example it is considered that taking into account the whole arrangement, there is not a valid gift for the purposes of claiming the donations tax credit as the money paid to the charitable organisation was not the donor's.
Where Inland Revenue 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 will also consider the imposition of monetary penalties.
It is our view that some of these arrangements may in extreme cases amount to fraud and we will consider prosecution where appropriate.
If you consider that our concerns may apply to your situation, we recommend you discuss the matter with your tax advisor or with us, and consider making a voluntary disclosure
Guidelines for making a voluntary disclosure are contained in our booklet Putting your tax returns right (IR280) and our Standard practice statement: SPS 09/02 Voluntary disclosures:
References to consider
The following related references will assist taxpayers with determining whether their arrangement is subject to the avoidance provisions in the Revenue Acts.
|Legislative references:|| Income Tax Act 2007 - LD 1, and |
Income Tax Act 2007 - LD 3
|Date issued:||2 August 2011|
|Authorised by|| Graham Tubb |
Group Tax Counsel
Legal & Technical Services
|Contact (via email):||[email protected]|
|Media queries:|| Barbara Crocker |
(04) 890 1698