Accounting 101 on operating charities
THE EDITOR, Sir:
Well-established companies with charities are better able to negotiate the onerous income tax form (Form IT12) than small charitable organisations that are not accustomed to proper accounting management.
The income tax form for registered charitable organisation consists of 11 pages. The form (IT02) for a trading limited liability company, by comparison, comprising three pages. Another curious observation is that by the third schedule of The Charities Act of 2013, registration as a charity is a perquisite for relief under the Income Tax Act, among other reliefs, while Section F Line 2 of the IT12 form calls for the computation of income tax.
So onerous is the IT12 form that the tax preparer must report funding details for international funding agencies by name and country, major foreign donors by name, local funding agencies by tax registration number (TRN), local companies and individuals over $999,999.99 by TRN, government subvention by TRN and department, in addition to investment income by type, and rental income by property. The charity is also required to document fees paid, such as management fees, professional fees, accounting fees, audit fees and legal fees by TRN and name of service provider.
Unless the charity captures the information in its routine accounting system, such a charity could find itself in a pickle when it is making a tax return on form IT12. Charities are well-guided to download the IT12 form and study the questions asked and practise to record data according to the schedules outlined.
Companies that develop a foundation as an adjunct to regular operations may be able to spare the resource of the accounting department to capture the required data. Individuals and social institutions like churches and community-based organisations must depend on volunteers who sometimes are not skilled in data-processing techniques to provide the information.
When, therefore, the numbers have to be audited, as required by the administrator of The Charity Act (Department of Co-operatives & Friendly Society (DCFS)) and the Income Tax Department, as required by Form IT12, auditors oftentimes have to perform accounting tasks and spend hours sifting through incomplete data to provide a fair view of the entity's activities.
This raises the question: Is Form IT12 meant to discourage tax evasion, or is it to frustrate the small community-based organisations? Perhaps there should be exemption from the requirement to file IT12. The DCFS, the organisation in charge of the act, can monitor this exemption by instructing charities that exceed the established threshold to file a return on IT12. Before you form a charity, seek advice on the accounting requirements.