GST Proposal an Unfair Impost for Charities

The Government’s Tax Reform Proposal has stated that Public Benevolent Institutions (including charities) will be better off under the GST because their non-commercial activities would be GST free and they would benefit from a reduction in input costs due to the elimination of wholesale sales tax and the ability to claim input tax credits. Our analysis suggests that the application of the GST to the “commercial activities” of charities will cause most of them to become tax collecting, tax reporting and taxpaying entities. It also means that the much of the value added to the community through philanthropic efforts will be subject to a Goods and Services Tax; thus transgressing a core ethic of the Australian taxation system, that the public purse should not profit from philanthropic endeavours. Charities as Tax Collectors Charities currently enjoy exemption from federal government taxes including income tax, wholesale sales tax and fringe benefits tax. Hence their current level of tax collection and reporting activity is minimal. They are also generally exempt of state taxes. Under the tax reform proposals, Donations will remain GST free; as will income from providing health, education and child care services; which are GST free whether or not they are provided on commercial terms. However, it is likely that other forms of fundraising revenue will be viewed as commercial activities since they can be viewed as competitive activity with commercial organisations and that the “donor” receives a benefit or service as a result of the gift. This would appear to cover sponsorships, membership fees, lotteries and merchandising. For example, the tax reform proposals specifically state that membership fees of community and sporting organisations will attract GST, as would corporate sponsorships sourced by the arts. Service fee income (such as counselling fees and employment services) would also be seen as commercial as they are in competition with commercial operators. These forms of income are a considerable proportion of the income of many organisations and are generally of growing importance to the charitable sector. Residential rental income (which may also be viewed as commercial income) falls into the category of input taxed. This means that no GST will be payable on rent, however no input tax credits can be claimed on inputs to provide the rental accommodation. Investment income would be GST free as it would not be seen as commercial income. A Complex Reporting Process The government’s proposal gives rise to 3 forms of income for GST purposes GST free, subject to GST and input taxed. Tax accounting and reporting will vary for each of these 3 forms of income and all expenditure inputs would need to be matched (or apportioned) with the relevant form of income. While no GST needs to be collected for GST free transactions (eg. donations), relevant inputs will need to be matched with this income so that GST paid on these inputs can be claimed for refund. All transactions on commercial income subject to GST (eg. merchandising) will need to be separately recorded, accounted for and receipted with the amount of GST levied on each transaction. Relevant inputs would also need to be matched with this income so that GST paid on these inputs can be claimed for refund. Again, while no GST needs to be collected for input taxed commercial transactions (eg. rental accommodation), relevant inputs will need to be matched with this income so that GST paid on these inputs is not claimed for refund. GST returns would then need to be remitted, with tax (nett of input tax credits) owing to the tax office. If tax credits exceeds tax collected then a refund will be paid by the tax office. The above represents an onerous tax collection and reporting process. It also means that many charities would need to vastly improve their accounting systems to separately account for income and expenditure to the degree required for their GST reporting responsibilities. The Equity Issue Commercial forms of fundraising and service provision are of growing importance to Australian charities. They add considerable value to our community in providing services which are of lesser appeal to for profit organisations and they raise funds which are otherwise not available from government or through business investment. Yet the economic value added in this process is largely through the efforts of volunteers, employees (who accept lower salaries than in the commercial sector), professionals (providing their services on a pro bono basis) and business (in gifting goods and services). The GST model proposed will tax this economic value added, which largely comes about because of the benevolence of those involved. This cuts across the ethic that philanthropic activity should remain untaxed. The Government should rethink the application of the GST to charities. It will impose an unwarranted level of red tape and transgress an important principle underlying the Australian taxation system. Michael Walsh Principal