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RA 14/01

Revenue Alert

Revenue Alert RA 14/01 considers the tax treatment of payments to private education or childcare centres, including whether they are gifts or liable for GST.

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.

Issues: Donations tax credit - whether payments made to a private education centre or childcare centre are gifts and the donor entitled to a donations tax credit; whether payments are liable to GST

Many people make charitable donations each year and receive income tax credits accordingly. However, increasingly Inland Revenue is seeing situations where people are claiming tax credits for purported donations in situations where Inland Revenue considers the payments are not a gift as required by the law.

Any payment of $5 or more to a charity (or some similar public benefit entity) qualifies for a donations tax credit if it is a gift. A payment of money of is a gift when it is:

  • made voluntarily;
  • for no consideration;
  • the giver (or someone else) receives no benefit of a material character by way of return; and
  • the payment is made by way of benefaction where the charitable organisation suffers no countervailing material disadvantage.

When deciding whether a payment of money is a gift, the attributes listed above may be interdependent. The true nature of the payment can be determined only by considering the overall arrangements and transactions that gave rise to its payment. Individual circumstances must always be considered. When it is unclear whether a payment is a gift, attributes may need to be balanced to establish the reality of the payment.

Inland Revenue has been investigating arrangements where donations tax credits for donations have been claimed in circumstances where Inland Revenue considers a gift of money may not have been made. These arrangements involve re-characterising (as a gift of money) payments made to attend a private education centre such as a private school or childcare centre which would have not ordinarily been a donation, in order for the payer to receive a donations tax credit.

The payments are generally made to a charitable trust which either operates the education centre directly, or through an arrangement where the charitable trust arranges for an education centre to provide the education services.

In practice the majority of people who make the contributions in question are the parents, or close relatives, of the children attending the education centre. Under these arrangements the parents pay no or low fees for their child to attend a private education centre.

An income tax receipt for the contributions made to the charitable trust during the year is provided to the donor so that the donor can claim a donations tax credit.

Current view on donations tax credits

Inland Revenue considers that, in the absence of evidence of a contrary intention, the contributions made by the parents (or close relatives) in these cases are a substitute for fees and therefore not a gift. This view is based on the fact that the parents pay no or very low fees for the child care or private educational services received in circumstances where a private provider would otherwise have to charge fees for attendance. The payments are not made by way of benefaction. They are made in return for (or in the expectation of) the receipt of education services.

The purported donations are used to meet the running costs of the private education centre, which the education centre would otherwise have to recover from parents by way of attendance or tuition fees. These arrangements merely re-characterise the payments that the education centre relies on to meet their normal running costs. The payments are incorrectly described as "donations" to enable the purported "donor" to make a donations tax credit claim they may not otherwise be entitled to.

GST on supply of private education services

An associated issue is the GST treatment of the payments received by the private education provider. As the payments are made by parents (or close relatives) in return for (or in the expectation of) education services Inland Revenue considers the payments are "consideration" for a supply of services under the GST Act and so are liable to GST.

Inland Revenue does not consider that the money received is an "unconditional gift". Under the GST Act an "unconditional gift" is a payment made voluntarily to a non-profit body and for which "no identifiable direct valuable benefit arises or may arise in the form of a supply of goods and services to the person making that payment, or any other person where that person and the other person are associated persons".


The following are examples based on some of the arrangements that have been identified so far. There may be other arrangements which involve re-characterising fees as donations.

Example 1  

A childcare centre is owned by a trust registered with the Department of Internal Affairs-Charities Services. In order for a child to attend the childcare centre the parents must first pay an enrolment fee. They are then required by the trust to make a contribution of a fixed amount (described as a "donation") per child for each year the child attends the childcare centre. The contribution may be made as a lump sum or by regular payments. No other fees are charged for attendance. A receipt is issued after 31 March each year for the contributions made, to enable the parents to claim a donations tax credit.

Assuming a contribution of $100 per week for 48 weeks, the income tax effect of the above arrangement is:

$4,800 @33.3 c/$ = $1,599.98 income tax credit.

The payment to the trust is not considered to be a valid gift as the money was paid to the trust in return for childcare services.

For GST purposes, the trust treats the contributions as being unconditional gifts and so no GST output tax is paid. Inland Revenue considers that as an identifiable direct valuable benefit arises from the payment, being the provision of childcare services, the payment is not an "unconditional gift" for GST purposes and the payments are subject to GST.

Assuming a contribution of $100 per week for 48 weeks, the GST effect of the arrangement is:

Unpaid GST output tax on $4,800 = $626.09 *.


Example 2  

A trust which is a registered charity is established to provide funding for a number of private schools around New Zealand whose values are consistent with the aims of the charity. Funds are raised by asking for contributions from the community to help pay the running costs of the schools which the trust chooses to support. In practice, the requests for contributions are aimed at, and the bulk of the contributions come from, the local school community (the parents and other family members or friends of the children attending (or likely to attend) the schools). These contributions mean that fees which the parents may otherwise have to pay for having their children attend one of these schools are either not necessary or are greatly reduced.

Donors to the trust are able to direct where their contributions are spent. Donors are provided with a receipt each year showing the amount of contributions they have made for the year. These receipts are intended to enable the parents to claim donations tax credits.

Assuming the school funding contributions requested by the trust are $10,000 per year for each child, the income tax effect of this arrangement is $10,000 @ 33.3 c/$ = $3,330 tax credit.

Inland Revenue considers that an objective view of the circumstances of this arrangement leads to the conclusion that the payments were made to the trust by the payer with the expectation that education services would be provided in return. As such, Inland Revenue considers that the payments to the trust are not gifts of money for which a donations tax credit can be claimed.

Where a member of the school community (who does not have a close association with a child who attends or is expected to attend the school) makes a donation to the trust for the benefit of the local school Inland Revenue considers that it is more likely that this is a gift of money for which the donations tax credit can be claimed.

Although this example (unlike example 1) involves a separate trust interposed between the parent and the private school, Inland Revenue considers that the payments made in this type of arrangement may still be made in respect of the supply of educational services and therefore subject to GST.

Assuming the school funding contributions requested by the trust is $10,000 per year for each child, arrangements such as these could have the following GST effect:

Unpaid GST output tax on $10,000 = $1,304.35 .*

* The GST effect in examples 1 and 2 only identifies unpaid output tax. Inland Revenue acknowledges that the education centres will be able to make input tax deductions for GST incurred in providing the education services. However, enquiries made to date indicate that the education centres are already claiming those input tax deduction. Therefore the GST at risk in these examples is the unpaid output tax.

Current status

Inland Revenue has commenced investigations into a number of taxpayers who have entered into childcare or private school funding arrangements like those described above.

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.

If any taxpayer has taken a position which is incorrect for GST, either by treating the contributions as not being subject to GST as unconditional gifts, or not returning output tax as required, that position will be corrected.

Late payment penalties and use of money interest may be applied to taxpayers entering into the types of arrangement described in this Revenue Alert.

Shortfall penalties may also apply, although these may be reduced where a voluntary disclosure is made.

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 Standard Practice Statement 09/02 Voluntary disclosures (May 2009).


Legislative references Sections LD 1 and LD 3 of the ITA 2007; Section 2(1) of the Goods and Services Tax Act 1985
Date issued: 16 May 2014
Authorised by Graham Tubb
Group Tax Counsel
Investigations and Advice
Contact (via email) [email protected]
Media queries: Lorna Milton
[email protected]
04 890 4630
029 890 4630