How New Zealand Schools Cope with the Tax System

James Ryan Senior Fellow Accounting Department Waikato Management School The University of Waikato Private Bag 3105 Hamilton 3240

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Abstract How New Zealand Schools cope with the Tax System

Tomorrow’s Schools was set up over 20 years ago when the then Minister of Education stated that it would result in “more parental and community involvement”. Schools for a number of years had to seek funding from non government sources (locally raised funds) . This paper discusses the Goods and Services Tax (Gst) aspects relating to the locally raised funds and some school expenditure. It also discusses the Fringe Benefit Tax (Fbt) aspects that are relevant for schools, and finally Schedular Payments withholding tax (previously known as withholding tax) aspects relating to payments made by schools are dealt with. The conclusion is that the funding of schools by the government has meant that a number of schools have had to seek funding from other revenue streams. How the schools account for the Gst on these revenue streams is an area that schools need support in.

   

How New Zealand Schools Cope with the Tax System Introduction From the early 1940’s the New Zealand education system was based on central administration and central funding. The philosophy behind this was to provide free and equal education without interference from politics. This centralised system was changed in the 1960’s when ten education boards, throughout new Zealand, were established. The children born after the second world war were starting to place pressure on these ten education boards and in 1962 the Commission on Education advised that the bureaucratic structure of the Education Boards was not responding quickly enough to the needs of the individual schools. There were several reports to the New Zealand government recommending change, however one of the more influential reports produced was the Picot Report ( Department of Education 1988) which recommended that the government devolve decision making to the schools and their communities. Each school would then receive adequate funding to enable the achievement of their educational goals. In 1988 the then Prime Minister of New Zealand, David Lange, took parts of the Picot Report and implemented them under the banner of Tomorrows Schools. In 1989 the New Zealand government changed the educational administration from a centralised system to a decentralised system for state and integrated schools. The schools have been under financial pressure and have been dissatisfied with the amount received from the Government for operational funding (Schagen and Wyllie 2009). In a pilot survey of schools (2005 & 2006 years) for the Ministry of Education the local funds were seen as a reason most schools were not making operating deficits for 2005 and 2006 (Ministry of Education Pilot Survey of School Finances June 2008).Schools have been involved with sourcing local funds and from 2006 to 2007 the local funds dramatically increased by 11% or $56.7 million (NZ Education Review 2008). The local funds are from activity recoveries, parent donations, PTA donations, grants, rent from school houses, facility hire and fundraising activities This paper deals with the Gst implications of the above funds and will also review various school expenditure items from a Gst point of view. In addition a number of schools have provided employees with benefits e.g. the private use of a school car and the private use of school laptop computers. The Fbt implications on these benefits are reviewed.

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Finally schools make payments to various contractors for work completed for the school. These payments range from making payment based on an invoice (including tax invoices) for work completed, to payments made to school volunteers to recognise the work completed despite the fact that the volunteer did not request any payment for the work. Methodology I was previously (1997 - 2000) a board of trustee member for a Waikato secondary school and I realised that the school needed help with understanding why the tax system dealt with certain issues in certain ways. From the 2001 year I have facilitated a 3 hour tax session for school administrators that has focused on Gst, Fbt, PAYE and schedular payments tax. Tax Sessions for Schools The Inland Revenue Department (Ird) had issued a Public Ruling in July 2003 BR Pub 03/04 (reissued as BR Pub 09/01 in March 2009 which reviewed the Gst treatment of payments made by parents or guardians of students to state and integrated schools. The main issues identified by participants as causing uncertainty (in the tax session for schools) were as follows:

60% 50% 40% fundraising activity recoveries grants

30% 20% 10% 0%

Graph Number 1 These issues identified in graph number 1are also dealt with in the discussion that follows.

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The Gst System and Schools School Receipts The Gst system in New Zealand is based on the taxing of the supply of a good or service by the school (registered person) in the course or furtherance of the school’s taxable activity. Therefore generally speaking whenever the school makes a supply then Gst is added at the rate of 12.5% and the person who is invoiced will therefore pay the amount of the supply plus the Gst (i.e. the consideration) to the school and the school will then on pay the Gst to the government. The school boards of trustees must provide education (as set out in the national education guidelines) and New Zealand citizens and residents have the right to free education (section 3 of the Education Act 1989). It follows therefore that the school can not charge the parent/guardian of the child for the education of that child. The fact that the provision of education (national education guidelines) is free in New Zealand will therefore mean that any payment made by the parent/guardian to the school for the delivery of education is a donation and as such will have no Gst component.

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The following diagram may help with the process of deciding whether or not the payment by the parent/caregiver is a “donation” or not.

The delivery of “Education” to school students, who are NZ residents or citizens, is free

Does the payment relate to the delivery of a National Education Guideline?

NO

YES

Donation (no Gst) payment cannot be enforced.

Gst and payment can be enforced

Parents may be entitled to make a claim (From IRD) for charitable tax credit. The exceptions to this are discussed below

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The easiest method of dealing with the Gst treatment of payments received from parents/caregivers is to take examples of schools requests for payment and then using the Gst system check to see if the school will need to account for Gst on these payments. Just as important here is to realise that if the payment made by the parent/guardian is a donation (i.e. no Gst from the school point of view) then the parent may be entitled to a receipt from the school which will then allow the parent/guardian to claim a tax credit (subpart LD of the Income Tax Act 2007).

Activity Recoveries What does the term “activity recoveries” actually mean? If the focus of this request for payment is for the delivery of the NEG then clearly this will be a donation and there will be no Gst in the amount. It therefore follows that this amount would be a donation from the parent/caregiver and that person may be entitled to claim the tax credit from the government. Where the activity recoveries payment includes a take home component e.g. food for a cooking course then there is the potential for the cost of the food to be consideration for the payment if the child or the parent/caregiver actually takes home the food or if the food is consumed. If the food is consumed or taken home by the student then the amount that relates to the cost of the food will have Gst included in it. The reason for this is that the parent/caregiver has received consideration (the food) for that part of the payment. As the parent/caregiver has received consideration for that part of the payment this will have the effect of changing that part of the payment for the food from a donation to an enforceable payment by the school. The same reasoning is applicable to the cost of wood for a woodwork course and also the cost of a workbook that the child has chosen to take home.

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The remaining issues mentioned on page one are now analysed from a Gst point of view.

Parent/caregiver Donations This amount is clearly a donation (as the delivery of education is free) and therefore there will be no Gst component in the payment and a donation tax credit is available for the parent/caregiver. PTA Donations Where the PTA has been set up as a separate entity to the school and the PTA has been involved in fundraising activities and it now wants to make a donation to the school then the receipt by the school of this donation will have no Gst in it. The reason for this is that the donation has occurred and the members of the PTA are not receiving a direct identifiable benefit. An example could be that the PTA has completed fundraising activities and it donates the money to the school for the purpose of assisting with the building of a swimming pool. In this example the amount given to the school remains a donation despite the fact that the PTA has specified that the donation be used for the school swimming pool. The reason for this is that the members of the PTA could very well be parents of a child at the school and therefore they are receiving a benefit for that child however the swimming pool is not just for that child, the swimming pool is for the benefit of the entire school and therefore there is no direct identifiable benefit to the parents of that child. Another issue that should be considered is that care must be taken regarding the total supplies made by the PTA. Section 51 of the Gst Act deals with when an entity must register for Gst purposes. In any 12 month period the total value of the supplies for the PTA cannot exceed $60,000 (before 1 April 2009, the threshold was $40,000).

Grants It should never be assumed that a grant has no Gst attached to it. Grants received from various entities should always be checked for Gst. The details for Gst could be advised in the application form, an attachment to the cheque received or perhaps in a letter from the entity paying the grant. If there is no information then the best

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way to deal with the issue is to contact the entity paying the grant. As the amounts of the grants are normal significant care must be taken by the school. Within the Income Tax Administration Act 1994 section 141A (2) there is a penalty (for not taking reasonable care) of 20% of the Gst not accounted for. Rent From School Houses Where an employee (e.g. Principal) rents a school house for the market value (PAYE would be an issue to be reviewed if the market value was not being paid by the principal) the rent received by the school is an exempt supply (no Gst in this transaction) as per section 14 (1)(c) of the Gst Act 1985. However the flow on effect must be borne in mind for any expenditure that relates to the house. Any direct expenditure relating to the house e.g. repairs and insurance is not able to be claimed as per section 3A(1)(a) of the Gst Act 1985. The issue here is that the expenditure on the house (e.g. repair of the floor of the house) must be principally for the purpose of making taxable supplies and as the rent is an exempt supply then there can be no Gst claim by the school on this expenditure. Facility Hire If the school hires out the school hall (as an example) then the amount that is charged for this supply must have Gst added to it as per section 8 of the Gst Act 1985. Fundraising Activities There are many issues to be reviewed under this heading and this paper only reviews five of the most contentious issues. (a) Fundraising by a student or parent for travel overseas by the student e.g. for a school sports trip. Take the example of fundraising by means of say a clean up of a rugby stadium after a rugby match. The issue is that if it is the school that has contracted with the rugby stadium then there is provision within the Gst Act section 14(1)(b) that states that a supply by a non profit body (e.g. a school) of a donated service will be an exempt supply. This treatment is correct where the child donates a service to the school and the school receives payment from the rugby stadium. However there is an issue if the service is not donated, that is the money is held in the school accounts for the child. In this situation there is clearly not a donated service as the money is held for the benefit of the child.

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Where the school has not contracted with the rugby stadium that is, the individual people (the students doing the work) have contracted with the rugby stadium, then this is a different situation. In this situation the people doing the work are earning income in their own names and this raises a separate issue of income tax for those people. (b) Fundraising where there is a school fair. If the proceeds from the school fair include proceeds that have arisen due to the fact that donated goods (e.g. parents have donated cakes) have been sold then the supply will be an exempt supply and therefore there is no Gst in the transaction. The same situation exists where say one of the parents is an optician and the optician donates a free eye examination and this service is auctioned. Once again the supply will be an exempt supply which has been sold and there will be no Gst. (c) The drama teacher holds a year 13 drama evening. The drama students have already been assessed for their drama performance and the drama teacher holds an evening performance of various performances by the students. The charge for viewing these performances is agreed as a gold coin. Gst will have to be accounted for in this situation as the school has made a supply (drama performances) and the people watching the performance have received consideration for the gold coin. (d) The school buys boxes of chocolates and the students sell these to the community. The school has made a taxable supply and there will be Gst on the sale of the boxes of chocolates. (e) If the school runs a raffle then Gst must be accounted for on the amount received from selling the raffle tickets less the cost of any cash prizes.

School Expenditure and Gst The Gst system is based on the certain fundamental issues. (a) One of these issues is that no claim (except second hand goods) for Gst on expenditure is able to be made with out a tax invoice (section 20 (2)(a) of the Gst Act 1985). The Gst Act goes on further to say that for expenditure of $50 and less no tax invoice is required (section 24 (5) of the Gst Act 1985),

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therefore a credit card print out would be acceptable in this type of situation and even a note written by the teacher would be acceptable. (b) Public Service Mileage rates (psmr). Where the school reimburses a person for the school use of a private car and the reimbursement is on the basis of psmr then there will be no claim for Gst. The reason for this is that the psmr included in it depreciation of the car and interest for the purchase of the car. (c) Expenditure that really belongs to the PTA e.g. the school pays for a raffle prize which is for the PTA and the school pays for it and claims Gst. In this situation there is clearly a problem. The expenditure does not principally relate to the taxable activity of the school and therefore the school cannot claim the Gst. The people involved with the PTA want to benefit the school however if the school claims the Gst in this situation then the penalty sections of the Tax Administration Act 1994 e.g. section 141A (2) could be imposed by the Inland Revenue Department i.e. 20% of the Gst claimed by the school. (d) Expenditure items in the name of another person and this expenditure is for the benefit of the school. There are a number of situations where e.g. an employee has an invoice in their own name and the school has reimbursed those employees for the expenditure. In these cases the tax invoice will be in the name of the employee, can the school still claim the Gst involved with the transaction? Section 60(2) enables the school to claim the Gst as it effectively treats the employee (in this case) as an agent for the school. (e) There are a number of other expenditure items that should be reviewed for Gst purposes however this is more an individual issue for the school concerned. (f) Boarding Hostels The final issue that needs to be reviewed is the schools that receive payment for boarders. The Gst Act as per Section 10(6) enables the Gst rate set by schools for their boarder’s hostels to be set at a rate lower than 12.5%. Over the past five years the writer has been involved in negotiations with the Inland

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Revenue Department (on behalf of a number of schools). As a result of the negotiations the Gst rate has been reduced in each case, the lowest agreed Gst rate for a boarder’s hostel has been 8.55%.

The Fringe Benefit Tax System and Schools Fringe benefit tax (Fbt) is a tax on employers under subpart CI of the ITA. The intention of this regime is to tax non-cash benefits provided to employees. Section CE 1 operates only to tax “employment income”. The distinction between “employment income” and “fringe benefit” normally centres on one question i.e. “in whose name is the invoice”. If the invoice is in the name of the employee and the employer pays it or reimburses the employee then we are dealing with “employment income”. If the invoice is in the name of the employer and the employee receives a benefit then we are dealing with “fringe benefits”. The rate of the (Fbt) varies according to the marginal tax rate of the employee and can be 61% or at a rate based on the remuneration for the employee. Employers have the option of paying Fbt at a flat rate of 61% for all fringe benefits or the employers can choose the multi rate system. The multi rate system has the effect of taxing fringe benefits that are able to be attributed to individual employees at rates that reflect the employee’s marginal tax rate. The fringe benefit tax guide (IR 409) advises taxpayers to consider various factors when deciding whether to pay FBT at the 61% rate. What fringe benefits could a school provide to its employees? I have identified an interesting change in the tax legislation which may mean that state and state integrated schools may not be liable for fringe benefit tax on the \benefits given to the school employees. However in the mean time these are the issues that school should review. (a) Motor Vehicle The obvious benefit is a car owned by the school which the employee can use for private use. Section CX 6 of the Income Tax Act 2007 states that this benefit will be a fringe benefit as the board of trustees of the state school is a public authority and does not meet the definition of a charitable organisation for fringe benefit tax purposes.

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If the marginal tax rate of the employee is 38% then the employer’s fringe benefit tax rate will be 61%. There are a number of ways that the amount of fringe benefit tax payable by a school is able to be lowered. (b) Laptop Computers The private use of a laptop computer by an employee of a school could be caught within the fringe benefit tax system (as an unclassified benefit section CX 2(1)(b)(ii)). This type of benefit is excluded by section CX 21 as long as the cost of the laptop is no more than $5,000. Schedular Payments and Schools (Schedular Payments was previously known as withholding tax payments) Where a person (who is not an employee) provides a service to the school care needs to be taken that the payment for the service is not liable for schedular payment withholding tax. Schedule 4 of the Income Tax Act 2007 sets out the types of payments which might be subject to this tax. Some of the important payments are for work completed e.g. •

Non-residential cleaning, gardening, vermin or weed destruction

•

The supply of labour to building projects

•

Entertainers including non-musical entertainers These payments to non-employees are able to be exempt from the withholding payment tax as long as the Commissioner of the Inland Revenue Department has issued that person a certificate of exemption and that certificate is current. Conclusion State and state integrated schools have a number of tax issues that require identification and correct processing. Although schools are not business’s the volume of transactions are equivalent to many small to medium business. The tax implications require careful consideration. It could well be that the school is paying too much Gst and Fbt and continuing education would help ensure that the up to date legislation is being used. The flow on effects for the schools may well assist in maintaining a positive cash flow.

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References Department of Education. Administering for Excellence: Report of the Taskforce to Review Education  Administration (The picot Report), Government Printer, Wellington, 1988.  Education Act 1989,   Goods and Services Tax Act 1985,   Income Tax Act 2007,   Inland Revenue Department. Public Ruling BR Pub 09/01.  Lange, D. Tomorrow’s Schools, August 1988.  Ministry of Education. Pilot Survey of School Finances, June 2008.  NZ Education Review, 5th September 2008.  Schagen, S and Wylie, C. School resources, culture and connections.  Tax Administration Act 1994. 

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