When it comes to GST, charities and non-profit bodies (NPBs) are often favoured compared with other taxpayers. NPBs can claim GST on most of their expenses, which is often greater than the GST they have to return on the on the goods and services they sell. This means they often receive GST refunds.
Inland Revenue (IR) is is now planning to close a loophole that enables NPBs to claim GST on goods and services purchased, while not having to return the GST if these goods and services are later sold.
First, some background.
GST differs for NPBs compared with other entities in a couple of ways. When an NPB receives donated goods or services and then on sells them, the sale is not subject to GST. These sales are defined as a GST “exempt activity”.
GST-registered NPBs do, however, have to return GST on other services or goods they regularly sell that are not the sale of donated goods or services. The supply of these goods and services will usually be part of the NPB’s “taxable activity”.
The other way in which NPBs differ is that GST can be claimed by NPBs in respect of any activity that is not a GST-exempt activity. This means, for example, that NPBs can claim GST on the costs relating to fundraising, distributing funds, or providing goods or services.
The effect of these differences is concessionary for NPBs because it can allow almost full GST claims even if very few sales are made by the NPB as part of its taxable activity.
This is evidenced by the fact that of the total 19,000 NPBs that are registered for GST, 7000 have registered voluntarily.
IR is not proposing to put an end to this concessionary treatment. It is more concerned with a related advantage NPBs can avail themselves of.
This advantage arises due to the fact NPBs can claim GST on goods and services acquired in relation to activities that do not form part of the charity’s taxable activity, while arguably not having to return GST if they later dispose of such goods and services.
The advantage is best illustrated by the example of Home-In-The-City.
The government considers this asymmetry in treatment a significant fiscal risk. Rather than disallowing NPBs to claim GST on goods or services that do not relate to their main taxable activities, IR instead proposes to treat them as part of the taxable activity if they are later sold by the NPB, thus causing them to be subject to GST.
The GST liability will also be crystallised in circumstances where the good or service is not strictly sold. For example, if the NPB winds-up and deregisters from GST and gives the remaining assets to another charitable cause, or if the asset is written off and insurance proceeds are received.
Many NPBs not familiar with the nuances of the legislation will have assumed that if they claimed the GST on the acquisition of a good or service, then they would be liable for GST on the disposal.
However, others that are aware of the inconsistency may have claimed GST, not expecting to have to return it when the goods or service is later disposed of. To mitigate the impact, IR proposes to allow a 12-month grace period in which the GST claimed can be repaid to IR.
For NPBs with assets that are appreciating in value, it may be advantageous to repay the GST claimed on the acquisition, rather than pay a greater amount of GST when the asset is ultimately disposed of.
IR has signalled that the changes will apply retrospectively from 15 May, 2018. The sale of assets before this date will not be affected, nor will NPBs be able to alter the positions they have taken before the date.
The comments in this article are of a general nature and should not be relied on for specific cases, where readers should seek professional advice.