Everald Dewar | Tax dilemma: Tips as charitable donations
A taxpayer approached me recently for help. It appears that the Tax Administration Jamaica (TAJ) made a full enquiry into his affairs. It raised assessments to include 'undeclared tips'.
What happened was the taxpayer maintained a charity box next to the checkout counter at his business. Customers proffering tips were requested to put the money into the charity box instead.
The taxpayer does not physically receive these donations and they were not recorded in the sales. Every month he banks the 'tips' from the charity box and draws a cheque for the amount to a recognised charity for which he also does voluntary work.
The tax agent, having used the lodgements to verify total sales, contended the tips constituted receipts of the business and that what the taxpayer does with the money was entirely his choice.
The weakness here is that even if the taxpayer did not receive the tips, they were in fact processed through his bank account.
The tax agents did not connect the explanation about the charity box and the cheque drawn to the charity; instead they saw the lodgement as throwing up unreported receipts and part of the trading income.
I explained that the taxpayer received the money as an agent of the charity and would have committed a fraud if he had not passed it on circumstantial evidence showed this to be so. But it all came down to the subjective judgement of the taxpayer's credibility. The tax agent did not believe him.
I then suggested that the donation made to the charity be allowed as a deduction. This, too, got a blow the TAJ's decision was that it is not allowable as it was paid to a charity that was no longer an 'approved charity'.
The Income tax Act grants tax exemption to charitable organisations. It also allows a taxpayer to claims a deduction up to 5 per cent of its income in donations made to approved charities.
The main purpose of a charity is: to relieve poverty, the advancement of education, religion and any purpose beneficial to the community the latter includes health, amateur sports, animal welfare, human rights, among others. Therefore, any organisation that seeks to be registered must have one of these as its purpose and objective.
In the past charitable organisations, such as schools and churches, made application to the TAJ to be registered for tax exemption. But if these charities imported goods they would have to seek exemption from the Ministry of Finance for such taxes as GCT and customs duties. These waivers were granted on a discretionary basis.
The Charities Act of 2013 is administered by the Department of Co-operatives and Friendly Societies with oversight by the Ministry of Industry and Commerce. It established rules to regulate and improve the management of charities. Other legislation harmonising charitable organisations grants relief from GCT, customs duties, transfer tax, property tax and stamp duty.
Approved charities, therefore, would not need to make separate applications for these exemptions.
All charities wishing to get these benefits must now apply for registration under the Charities Act. Many members clubs, societies or associations would not qualify as charities. These associations are persons joining together to assist each other, and although they do some charitable work would perhaps not be able to register as charities as defined in the Charities Act.
In 1986, Blue Cross made a claim for tax exempt status on the basis that it was a charity. The question was whether it was providing help with medical expenses to the public or just its members. It was disqualified as a charity. So, too, would many associations. There are certain aspects of their operations that have to do with the membership conducting business with themselves on a mutual basis. That aspect would not be subject to tax.
Getting back to our taxpayer, tips are always taxable. The key point is that a tip must be voluntary.
Many restaurants and hotels play a role by including the tip on customers' bills. Some have Approved Gratuity Schemes that make it nontaxable.
Perhaps my advice-seeking taxpayer should avoid lodging the tips to the business bank account in the future. But it may be difficult seeing how else the money could be sent to the charity.
Perhaps he should lodge the amount straight to the charity's personal account.
What then is the solution? Well, sometimes the pragmatic solution may be based on a commercial decision that is, whether the cost of disputing will be more expensive than the cost of a settlement. That's for the taxpayer to decide.
- Everald Dewar is senior taxation manager at BDO Chartered Accountants in Kingston. firstname.lastname@example.org