Many of our clients make charitable donations each year and claim tax deductions accordingly.
Any payment of $5 or more made 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.
The IRD have recently announced that they intend to look at donations for child care and private education providers very carefully. They are concerned that some of these donations are not gifts as required by law.
The IRD have singled out payments made to attend private education centres. These centres include private schools or childcare centres. The payments made would have not ordinarily been a donation. The IRD’s concern is that payments are being re-characterised in order for the payer to receive a donations tax credit.
How does it work? The payments are generally made to a charitable trust. The trust either operates the education centre directly or arranges for an education centre to provide the education services on their behalf.
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. The IRD maintains that the payments are really fees masquerading as donations.
The IRD have started to investigate taxpayers who have made such payments and claimed them as donations. Where the IRD believes that the payment is not a bona fide donation, they intend to claw back any tax credit given. Shortfall penalties would also apply.
The department is silent on what action if any it intends taking against the private education centres. We think it is a little unfair for taxpayers to shoulder the blame in these situations when they may well have genuinely believed that the payments were donations.
If you are concerned that your donations have been made to a private educations centre, please contact us for advice. We may elect to make a voluntary disclosure on your behalf to limit any action by IRD.