Achieving Financial Goals Through Effective Budgeting

Non-profit organizations in New Zealand face unique challenges when it comes to Goods and Services Tax (GST). While they share many GST obligations with commercial enterprises, their charitable or community-focused missions create special considerations that require careful attention.

GST Basics for Non-Profit Organizations

Registration Requirements

Non-profit organizations follow the same basic registration threshold as businesses:

• Registration is required if taxable supplies exceed (or are expected to exceed) NZ$60,000 in any 12-month period
• Voluntary registration is possible below this threshold if the organization wishes to claim GST on expenses
• The registration threshold applies to the total value of all taxable supplies, not just commercial activities
• Some organizations may have both taxable and exempt activities

Non-profits should carefully assess whether their activities create GST obligations, as many exceed the threshold without realizing it.

Understanding Taxable vs. Exempt Supplies

For non-profit organizations, determining which activities are subject to GST is crucial:

• Standard taxable supplies (subject to 15% GST) include:
  • Sales of goods or merchandise
  • Admission fees to events
  • Membership fees that confer tangible benefits
  • Commercial services provided
  • Facility or equipment hire
• Zero-rated supplies (subject to 0% GST) include:
  • Exported goods or services
  • Supply of donated goods by a non-profit organization
• Exempt supplies (outside the GST system) include:
  • Donation income with no reciprocal supply
  • Financial services
  • Residential rent
  • Certain educational and health services

The distinction between these categories has significant implications for GST compliance and recovery.

Special GST Rules for Non-Profit Organizations

Donated Goods and Services

Non-profit organizations benefit from special rules for donated items:

• The supply of donated goods and services by non-profit bodies is zero-rated (subject to GST at 0%)
• This means GST doesn't need to be charged on these sales, but the organization can still claim GST on associated expenses
• This treatment only applies to genuinely donated items, not goods purchased for resale
• The goods must be sold in substantially the same condition as they were donated
• Common examples include opportunity shops, charity auctions, and similar fundraising activities

This provision significantly benefits organizations that rely on donated goods for fundraising.

Grants and Funding

The GST treatment of grants and funding depends on their nature:

• Unconditional grants with no specific supply in return are generally outside the GST system (not subject to GST)
• Grants that are effectively payment for services may be subject to GST
• Government funding may have specific GST treatment depending on the funding agreement
• The presence of a "supply" in exchange for the funding is the key determinant

Non-profits should review funding agreements carefully to determine the correct GST treatment.

Donations and Koha

Voluntary contributions receive special GST treatment:

• True donations with no expectation of goods or services in return are not subject to GST
• If donations are given in exchange for goods or services, they may be taxable supplies
• Koha (a gift or donation in M─üori culture) follows similar principlesÔÇöthe GST treatment depends on whether there is a supply in exchange
• The key test is whether there is a direct connection between the payment and any goods or services provided

Maintaining clear records of the nature of contributions helps ensure correct GST treatment.

Membership Organizations and GST

Membership Fees

The GST treatment of membership fees depends on what members receive in return:

• Membership fees that confer significant benefits or rights are generally subject to GST
• If membership primarily represents a donation with minimal benefits, it may be outside the GST system
• Mixed membership packages may need to be apportioned between taxable and non-taxable elements
• The test is whether there is a "supply" to the member in exchange for their fee

Organizations should analyze what members receive to determine the correct GST treatment of fees.

Not-for-Profit Clubs and Societies

Sports clubs, social clubs, and similar organizations have specific considerations:

• Club subscriptions are generally subject to GST if the club is registered
• Fees for participation in sporting or recreational activities are usually taxable supplies
• Bar sales and similar commercial activities are subject to GST
• Fundraising activities may have different GST treatments depending on their nature

Clubs should be particularly careful with GST on mixed activities, like social events with both commercial and community elements.

GST for Charitable Organizations

Registered Charities

Organizations registered with Charities Services:

• Are not automatically exempt from GSTÔÇöthe same registration threshold applies
• Benefit from the zero-rating of donated goods
• May have both taxable and non-taxable activities
• Must maintain clear records to distinguish between these activities

Charitable status affects income tax but has more limited impact on GST obligations.

Fundraising Activities

Different types of fundraising have different GST implications:

• Sales of donated goods are zero-rated (0% GST)
• Sales of purchased goods (e.g., chocolates, merchandise) are subject to standard 15% GST
• Charity auctions may involve both donated items (zero-rated) and purchased items (standard-rated)
• Raffles and lotteries have specific GST rules based on the prize value and ticket sales
• Fundraising events with an admission fee are generally subject to GST

Organizations should plan fundraising activities with GST implications in mind.

Non-Profit GST Concessions

Specific GST concessions for non-profit bodies include:

• Zero-rating of donated goods and services
• Ability to claim GST on expenses related to zero-rated supplies
• Option to form a non-profit "GST group" to simplify compliance
• Special rules for branches and divisions

These provisions recognize the unique position of non-profit organizations in the GST system.

Managing GST Compliance for Non-Profits

Accounting Systems

Effective accounting systems help non-profits manage GST:

• Systems should clearly distinguish between taxable, zero-rated, and exempt activities
• Chart of accounts should separate different types of income and expenses for GST purposes
• GST-exclusive accounting helps with budgeting and reporting
• Regular reconciliation identifies potential GST issues before they become significant

Many accounting software packages have specific features for non-profit GST management.

Apportionment of Input Tax

When a non-profit has both taxable and non-taxable activities:

• GST on expenses (inputs) that relate solely to taxable activities can be claimed in full
• GST on expenses that relate solely to non-taxable activities cannot be claimed
• GST on expenses that relate to both types of activities must be apportioned
• Several apportionment methods are available, including turnover-based calculations

Organizations should document their apportionment method and apply it consistently.

Record-Keeping Requirements

Good record-keeping is essential for GST compliance:

• Keep tax invoices for all purchases where GST is claimed
• Maintain records of the basis for zero-rating or treating supplies as exempt
• Document the nature of grants, donations, and other funding
• Keep records of apportionment calculations
• Retain all GST-related records for at least 7 years

Clear records are particularly important for non-profits due to their often complex mix of activities.

GST Strategies for Non-Profit Organizations

Registration Decisions

Non-profits should carefully consider whether to register for GST:

• If taxable supplies exceed NZ$60,000, registration is mandatory
• Voluntary registration may be advantageous if:
  • The organization has significant taxable expenses
  • Most activities are taxable or zero-rated
  • The administrative burden is manageable
• Remaining unregistered may be preferable if:
  • Most activities are exempt or non-taxable
  • The compliance cost outweighs the benefits
  • The organization lacks capacity for GST administration

This decision should be reviewed periodically as the organization's activities evolve.

Structuring Activities

Organizations can structure activities to optimize GST outcomes:

• Consider separating commercial activities from charitable activities through different entities
• Evaluate the GST implications of different funding models
• Structure membership packages with GST in mind
• Consider the timing of major purchases and fundraising activities

GST should be one factor in organizational planning, alongside mission effectiveness and other considerations.

Cash Flow Management

GST can significantly impact non-profit cash flow:

• Choose the most advantageous filing frequency (monthly, two-monthly, or six-monthly)
• Consider the accounting basis that best suits the organization (invoice, payments, or hybrid)
• Build GST obligations into cash flow forecasts
• Time major purchases and funding activities with GST implications in mind

Effective planning can minimize GST's impact on organizational liquidity.

GST for Specific Non-Profit Sectors

Sports and Recreation Organizations

Sports clubs and recreational groups have specific considerations:

• Membership and participation fees are generally subject to GST
• Grants for capital projects may have specific GST treatment
• Volunteer services are outside the GST system
• Fundraising events like tournaments or galas are usually taxable
• Bar and food sales are standard taxable supplies

Religious Organizations

Churches and religious bodies should consider:

• Donations during services are generally outside the GST system
• Fees for specific services (weddings, hall hire) may be taxable
• Religious education may have specific exemptions
• Sales of religious materials are generally taxable
• Mission activities may have different GST treatments depending on their nature

Educational and Cultural Organizations

Museums, galleries, and educational groups should note:

• Admission fees are generally subject to GST
• Educational services may have specific exemptions
• Gift shop sales are standard taxable supplies
• Grants and sponsorships require careful GST analysis
• Membership programs often involve taxable supplies

Social Service Providers

Organizations providing community and social services should consider:

• Government contracts often include GST
• Some health and welfare services may be exempt
• Subsidized services still attract GST on the amount charged
• Grants for service delivery may be subject to GST
• Donated goods used in service delivery benefit from zero-rating when sold

Common GST Challenges for Non-Profits

Distinguishing Donations from Payments

A frequent challenge is determining whether a payment is a true donation:

• True donations have no expectation of specific goods or services in return
• Payments that secure benefits are likely to be consideration for a taxable supply
• The presence of recognition or acknowledgment doesn't necessarily make a donation taxable
• The donor's expectation and the organization's obligation are key factors

Clear communication with donors about the nature of their contribution helps ensure correct GST treatment.

Volunteer and In-Kind Contributions

Non-monetary contributions create GST complexity:

• Volunteer services are outside the GST system
• Donated professional services generally don't trigger GST obligations
• In-kind donations of goods may have GST implications when later sold
• Bartered or exchanged services may create GST obligations

Organizations should document the nature of non-monetary contributions to ensure correct GST treatment.

Mixed-Purpose Expenses

Expenses that serve both taxable and non-taxable activities require careful handling:

• Apportionment is required for expenses that relate to both types of activities
• The apportionment method should be fair and reasonable
• Common methods include turnover-based or usage-based calculations
• Consistency in approach is important for compliance

Organizations should document their approach to mixed-purpose expenses.

GST Compliance Support for Non-Profits

Professional Assistance

Given GST complexity, non-profits should consider:

• Engaging an accountant with non-profit GST expertise
• Seeking advice when establishing new activities or funding streams
• Having periodic GST health checks to ensure compliance
• Investing in training for finance staff and volunteers

The cost of professional advice is generally GST-deductible and can prevent costly errors.

Resources for Non-Profits

Helpful resources for GST compliance include:

• Inland Revenue's guides for non-profit organizations
• Sector-specific advice from peak bodies and associations
• Accounting software with non-profit GST features
• Workshops and webinars targeted at non-profit finance management

These resources can help organizations build internal capacity for GST management.

Managing GST Audits

If subject to an Inland Revenue GST audit:

• Cooperate fully and professionally with Inland Revenue staff
• Have documentation ready to support GST positions taken
• Consider engaging professional representation
• Use the opportunity to improve systems and processes
• Address any identified issues promptly and thoroughly

A well-managed audit can actually strengthen GST compliance for the future.

Conclusion

GST for non-profit organizations presents unique challenges due to the diverse nature of their activities and funding sources. By understanding the specific rules that apply to donations, grants, membership fees, and fundraising activities, organizations can ensure compliance while maximizing legitimate input tax claims.

Effective GST management for non-profits requires clear systems to distinguish between taxable, zero-rated, and exempt activities, as well as good record-keeping practices. With proper planning and systems, GST compliance can be managed efficiently, allowing organizations to focus on their core mission and community impact.

While GST adds administrative complexity for non-profit organizations, the special provisions for donated goods and the ability to claim input tax credits on expenses related to taxable activities can provide financial benefits that support organizational sustainability.