Charity as income
Narda Graham, Guest Writer
It took many by surprise when the tax authorities recently classified donations to charitable foundations as 'income'.
In theory, this is not inappropriate or problematic.
Under Jamaican income tax law, the tax authorities may approve an organisation as 'charitable', which will make the income of that charity exempt from income tax. However, what is problematic and needs the urgent attention of Parliament is the absence of a legislative or regulatory framework that comprehensively covers the qualifications for charitable status, the governance and accountability of charities, and the tax exemptions and incentives from which charities may benefit.
In this way, Jamaica will begin to support the important role played by charities in strengthening the fabric of our society.
Unlike, for example, the United Kingdom's Charities Act, the Jamaican law in relation to charities is found in a few bits and pieces in tax statutes such as the Income Tax Act and the General Consumption Tax Act.
The Income Tax Act provides that the income of any corporation or association organised and operated exclusively for religious, charitable, scientific, or educational purposes, is exempt from income tax, as long as none of its net income benefits a private stockholder or individual. However, it lies within the absolute discretion of the commissioner of taxpayer audit and assessment to determine if an organisation "comes within the meaning" of the exemption provision.
It is, therefore, unhelpful that there is no definition in Jamaican law of "charitable purpose". In order to obtain the benefit of the exemption, an organisation must apply to the newly renamed Tax Administration Jamaica (TAJ).
TAJ apparently has internal guidelines developed by reference to United Kingdom case law, which its staff uses to decide whether an organisation qualifies, but these guidelines are not published.
It is undesirable that an organisation basically should be groping in the dark for charitable status, revising and resubmitting its articles to the tax authorities several times, hoping that they may deem fit to grant the exemption - which, in fact, they may not do in their absolute discretion.
INADEQUATE TAX INCENTIVES
Similarly, also under the Income Tax Act, donations not exceeding one-twelfth of the donor's income, which are made to charitable organisations approved by the minister of finance, may be deducted when the donor calculates his or her taxable income, thus resulting in a lower tax liability for the donor. This is intended to encourage and, for some donors, does encourage charitable donations.
However, the application for donations to be tax deductible must also be made to the Ministry of Finance, even if Tax Administration Jamaica has already conferred charitable status on the organisation for the purpose of income-tax exemption.
Moreover, a non-governmental organisation may wait over a year before receiving a response from the ministry to an application.
Further, while donations by living persons to charities are, at least theoretically, deductible from taxable income, there are no provisions in Jamaican law granting tax deduction for a gift to an approved charity named in a person's will. On the testator's death, such a bequest is subject to the same rate of taxes as any other of the testator's gifts. Thus, another opportunity is lost to fund charitable organisations and to encourage persons to leave gifts in their wills to their favourite charity.
DIFFICULTIES WITH REFUNDS
Some charities have endowment funds comprised of donations from corporate and other donors, and finance their activities on an on-going basis with the interest earned from the investment of the principal amount of the donations.
Charities are prohibited from drawing on the principal, except in specified circumstances, while the funds are held in trust for the specific purposes of the charity.
Despite the income-tax exemption for charities, financial institutions usually deduct withholding tax at source when making interest payments. A charity usually does not receive a refund of the taxes withheld until months later, and in the interim its charitable operations and activities are negatively affected because, very often, these refunds are the lifeblood of funding the operations of the charities.
Additionally, for a charitable organisation to obtain a refund of or relief from GCT or customs duty, it is required to make ad hoc applications to the taxation authorities or the Ministry of Finance in respect of the particular purchases or imports.
Being granted charitable status under the Income Tax Act does not mean that the organisation is thereafter exempt from other taxes.
All of the foregoing points to the need for:
1. the passing of a comprehensive Charities Act, that should cover all issues relating to the qualification requirements, governance, taxation and regulation of charitable organisations;
2. the establishment of a Charities Commission, which should serve as a "one-stop shop" to approve charitable status and the relevant exemptions, in addition to monitoring and regulating charities; and
3. in the interim, the immediate publication by TAJ and the Ministry of Finance of all the guidelines and requirements that currently govern the granting of charitable status, to bring transparency to the process.
These improvements would make more resources available to support the good works of charities, give more certainty to their start-up operations and sustainability, and encourage a greater number of international charities to work in collaboration with local charities for the betterment of our society.
Narda Graham is an attorney with the law firm DunnCox in Kingston. Email email@example.com