How to Claim GST on Business Expenses Effectively

Non-profit organisations (NPOs) in New Zealand face unique considerations when it comes to GST. Whether you're a charity, sports club, cultural organisation, or community group, understanding your GST obligations is essential for proper financial management.

GST Registration for Non-Profit Organisations

Compulsory Registration

Non-profit organisations follow the same basic registration threshold as businesses. You must register for GST if:

• Your organisation's taxable supplies exceed (or are expected to exceed) NZ$60,000 in any 12-month period

For non-profits, "taxable supplies" can include:

• Membership fees (in many cases)
• Goods or services sold (merchandise, event tickets, etc.)
• Grants or subsidies that are directly linked to the supply of goods or services
• Fundraising activities involving the supply of goods or services

Voluntary Registration

Even if your organisation's turnover is below the $60,000 threshold, you may choose to register voluntarily. This can be advantageous if:

• You have significant expenses that include GST
• You want to claim back the GST on these expenses
• You want to appear more established to funders or supporters

However, voluntary registration also means you'll need to charge GST on your taxable supplies and comply with all GST requirements, which increases administrative work.

Branch Registration

Larger non-profits with multiple branches can choose to:

• Register as a single entity (where the parent organisation accounts for GST across all branches)
• Register branches separately (where each branch manages its own GST)

The appropriate approach depends on your organisation's structure and the degree of financial independence of your branches.

What Counts as Taxable Supplies for Non-Profits

Membership Fees

Membership fees are generally subject to GST if they give members specific benefits or entitlements, such as:

• Use of facilities
• Participation in activities
• Discounts on goods or services
• Magazines or publications

However, if membership is essentially a donation with no significant benefits in return, it may be exempt from GST.

Grants and Funding

The GST treatment of grants depends on whether there's a direct link between the funding and the supply of goods or services:

• Unconditional grants/general funding: Not subject to GST if there's no direct connection to a supply of goods or services (e.g., a general donation to support your organisation's mission)
• Conditional grants/contract funding: Subject to GST if provided in exchange for specific goods or services (e.g., a government contract to provide community services)

The distinction can be subtle, so it's important to carefully analyse the nature of each funding arrangement.

Fundraising Activities

Most fundraising activities involving the supply of goods or services are subject to GST, including:

• Sales of merchandise
• Raffles and lotteries
• Fundraising dinners or events where tickets are sold
• Auctions

However, pure donations with no goods or services provided in return are not subject to GST.

GST Exemptions and Special Rules for Non-Profits

Donated Goods and Services

The sale of donated goods or services by a non-profit organisation is exempt from GST. This important exemption applies when:

• The goods or services were gifted to your organisation
• The donor did not expect to receive anything in return
• Your organisation sells these donated items

This means opportunity shops or charity auctions selling donated items don't need to charge GST on these sales, even if the organisation is GST-registered.

Charitable Donations

True donations, where the donor receives nothing significant in return, are not subject to GST. This includes:

• Cash donations
• Bequests
• Grants without specific service requirements

However, if the donor receives goods, services, or significant recognition in return, the transaction may be subject to GST.

Non-Profit Bodies Exemption

There's a special exemption for non-profit bodies that can apply to certain supplies made to members. This exemption covers:

• The provision of facilities, advantages, or privileges to members
• Where these are provided primarily to members in the course of the organisation's activities

This can include club facilities, sporting equipment, or similar benefits provided to members as part of their membership.

Practical GST Management for Non-Profits

Separating Taxable and Non-Taxable Activities

Non-profits often have a mix of activities, some subject to GST and others exempt. It's important to:

• Clearly identify which activities are taxable and which are exempt
• Keep separate records for each type of activity
• Apply the correct GST treatment to each transaction

This separation helps ensure you're claiming the correct amount of input tax credits and charging GST appropriately.

Apportionment of GST on Expenses

If your organisation has both taxable and exempt activities, you may need to apportion your GST claims on expenses:

• Expenses used solely for taxable activities: claim 100% of the GST
• Expenses used solely for exempt activities: claim 0% of the GST
• Expenses used for both: claim a percentage based on the proportion of taxable to exempt activities

The apportionment method should be reasonable and used consistently. Common methods include:

• Revenue-based (proportion of taxable revenue to total revenue)
• Time-based (proportion of time facilities are used for taxable activities)
• Usage-based (proportion of usage for taxable purposes)

GST and Volunteer Expenses

If volunteers incur expenses on behalf of your organisation:

• You can claim the GST on these expenses if the volunteer is reimbursed and provides valid tax invoices
• No GST claim is available for honoraria or flat-rate allowances where no specific expenses are being reimbursed

Good record-keeping for volunteer expenses is essential to support these claims.

Common GST Scenarios for Non-Profits

Fundraising Events

For fundraising events like galas, dinners, or concerts:

• Ticket sales are generally subject to GST (if you're registered)
• You can claim GST on related expenses (venue hire, catering, etc.)
• Items sold at auction are subject to GST, unless they were donated (in which case they're exempt)
• Sponsorship is typically subject to GST if the sponsor receives advertising or other benefits

When pricing tickets, remember to factor in the GST component if your organisation is registered.

Membership Organisations

Sports clubs, professional associations, and similar membership organisations should consider:

• Whether membership fees include taxable benefits or are essentially donations
• How to apportion GST on facilities used by both members and the public
• The GST treatment of competitions, events, and tournaments
• Special rules that may apply to non-profit body membership benefits

Government Funding and Grants

For organisations receiving government funding:

• Determine whether each funding agreement creates a taxable supply
• Look for specific clauses about GST in funding agreements
• Consider whether funding is for a specific service (likely taxable) or general support (possibly not taxable)
• Check whether funding amounts are stated as GST-inclusive or exclusive

Government agencies are usually clear about the GST status of their funding, but it's important to confirm this for each agreement.

Record Keeping for Non-Profit Organisations

Good record keeping is essential for GST compliance and is particularly important for non-profits that may have complex funding and activity structures.

Essential Records

Maintain thorough records of:

• All income sources, clearly categorised as taxable or non-taxable
• Tax invoices for all expenses
• Donor information and donation records
• Grant agreements and related correspondence
• Minutes of meetings where financial decisions are made
• Calculations used for GST apportionment

Accounting Systems

Consider using accounting software designed for non-profits that can:

• Track different types of income (taxable, exempt, zero-rated)
• Manage GST calculations automatically
• Generate GST return information
• Produce reports for board members and funders

Options like Xero and Moniaro Books have features suitable for non-profit organisations, and some offer discounted rates for registered charities.

Retention Period

GST records must be kept for at least 7 years from the end of the tax year to which they relate. This applies even if your organisation deregisters from GST.

GST Returns and Compliance

Filing Frequency

Non-profit organisations can file GST returns on a:

• Monthly basis (if annual turnover exceeds $24 million, or by choice)
• Two-monthly basis (most common)
• Six-monthly basis (if annual turnover is less than $500,000)

The six-monthly option can reduce compliance costs for smaller organisations.

Accounting Basis

There are three accounting bases available:

• Invoice basis: Account for GST when invoices are issued or received (most common)
• Payments basis: Account for GST when payments are made or received (often simpler for small organisations)
• Hybrid basis: A combination of the above for different types of transactions

The payments basis is often preferable for non-profits as it aligns GST payments with cash flow.

GST Refunds

Many non-profits find they receive GST refunds rather than making payments, especially if they:

• Have significant expenses with GST
• Generate substantial exempt or zero-rated income
• Receive grant funding stated as GST-inclusive

These refunds can be an important source of cash flow for your organisation.

GST and Charities

Registered charities have the same basic GST rules as other non-profits, but with some additional considerations.

Charitable Status and GST

Being a registered charity with Charities Services doesn't automatically exempt your organisation from GST. You still need to:

• Register for GST if your taxable supplies exceed $60,000
• Charge GST on taxable supplies
• Account for GST according to standard rules

However, charitable status may affect which of your activities are considered taxable.

Donations vs. Grants

For charities, it's particularly important to distinguish between:

• Donations: Unconditional gifts not subject to GST
• Grants: Funding that may be subject to GST if linked to specific deliverables

The documentation and conditions attached to the funding are key to determining its GST treatment.

Gift Aid and Tax-Deductible Donations

While not directly a GST issue, it's worth noting that:

• Donors to registered charities can claim income tax credits for their donations
• This is separate from GST considerations
• Your GST registration status doesn't affect donors' ability to claim these tax benefits

GST Deregistration

When to Deregister

Your organisation might consider deregistering from GST if:

• Your taxable supplies fall below $60,000 and are expected to stay below this threshold
• The administrative burden of GST compliance outweighs the benefits
• Your funding structure has changed significantly

Deregistration Process

To deregister:

• Complete the GST deregistration form (IR315)
• Provide an explanation for deregistration
• Submit a final GST return

Deregistration Adjustments

When deregistering, you may need to:

• Account for GST on assets retained by your organisation (effectively treating them as sold at market value)
• Make final adjustments for any outstanding GST matters
• Ensure all records are complete and archived for the required 7-year period

Common GST Pitfalls for Non-Profits

Misclassification of Income

A common error is incorrectly classifying income as taxable or non-taxable. Be particularly careful with:

• Grants and sponsorships
• Membership fees
• Fundraising activities
• Cost-sharing arrangements

Missing Input Tax Claims

Don't overlook potential GST claims on:

• Volunteer expenses
• Home office expenses for staff working remotely
• Mixed-use assets (with appropriate apportionment)
• Imported services (reverse charge mechanism)

Governance Understanding

Ensure your board or committee understands:

• Basic GST principles relevant to your organisation
• The financial implications of GST for budgeting and pricing
• Their governance responsibilities for tax compliance

Providing regular GST updates at board meetings can help maintain this awareness.

Conclusion

GST for non-profit organisations involves some unique considerations, but with good systems and understanding, it can be managed effectively. By clearly identifying which activities are taxable, maintaining thorough records, and applying the special rules available to non-profits, you can ensure compliance while maximising legitimate input tax claims.

Remember that while GST compliance is important, it's just one aspect of good financial management for your organisation. Integrating GST processes with your overall financial systems will help ensure your non-profit can focus on its mission while meeting its tax obligations.