Tax dilemma: Tips as char­i­ta­ble do­na­tions

Jamaica Gleaner - - BUSINESS - Ever­ald De­war GUEST COLUMNIST

ATAXPAYER 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’.

AP­PROVED CHAR­I­TIES

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 non-tax­able.

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.

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