Grants and subsidies are essential for not-for-profits to fund their initiatives, but the associated tax implications can be complex. While not-for-profits that are registered charities are exempt from paying income tax on most types of income, this does not automatically exempt them from GST obligations.
The income tax liability from a grant depends on several factors, including the purpose of the grant, its source and the organisation’s tax status. More about income tax for not-for-profits
Let’s break down these rules so you can better manage your organisation’s finances and avoid unexpected tax issues.
Income tax on government grants and subsidies
Government grants and subsidies are voluntary payments made by central or local government to support public interest objectives, such as industry development, community programs, or disaster relief. Specific tax rules known as ‘grant provisions’ apply to these payments made to businesses and organisations, including not-for-profits.
- Grants for projects that support your activities. These are generally not taxable and the related expenses are non-deductible. However, sometimes the word “grant” is used to describe other payment types, like a donation or a payment for services, which are treated differently for income tax. Because of this it is imperative you refer to the paperwork you will have received from the payer to ensure you have accounted for the payment correctly.
- Grants for deductible expenses or depreciable property: The grant itself is non-taxable, however, you cannot claim a tax deduction for the expenses funded by the grant. For instance, if your organisation receives a grant to purchase computers for a community learning program, you don’t include the grant in your income, but you also can’t claim depreciation on the grant-funded portion of the cost.
- Grants to replace lost income or supplement income: This grant is generally taxable. For example, if your not-for-profit is provided funding by the government to cover income lost due to a natural disaster, you need to include this payment as income in your tax return.
Income tax on non-government grants and subsidies
Non-government grants and subsidies come from organisations that are not part of local or central government, such as charities, banks, or industry groups. These grants are subject to ordinary tax rules, which means their tax treatment depends on the purpose of the payment.
- Grants for operational expenses or lost income: These are typically taxable. For example, if a private foundation provides a grant to cover your organisation’s rent expenses, this income is taxable, and you can claim a deduction for the rent paid.
- Grants for capital expenses: Generally not taxable. For example, if an industry group provides funding to renovate your community centre, this grant is not taxable. However, you need to apply the capital contribution rules, which may reduce the amount of depreciation you can claim on the renovated building.
- Grants for depreciable property: Generally not liable for income tax. A depreciation loss may be available, however, capital contribution rules may apply.
GST on central government grants
Most central government grants are subject to GST if your organisation is GST-registered. This means that you need to account for GST on the grant in your GST return, provided that:
- The grant is from central government (e.g., from a government department).
- You are, or are liable to be, GST-registered.
- The grant is used for a taxable activity, such as running a community service program.
Example: Your not-for-profit receives a $50,000 grant from the Ministry of Social Development to deliver a youth mentoring program. If you are GST-registered, you will need to include GST on this grant in your GST return, effectively treating $6,521.74 as GST payable and $43,478.26 as income.
If the grant is delivered through a partner agency, it’s essential to clarify whether the grant is considered to be from the government or the agency itself for GST purposes.
GST on local government and non-government grants
Unlike central government grants, local government and non-government grants are usually not subject to GST and you generally do not need to include this grant in your GST return, even if you are GST-registered.
However, there are exceptions. If the grant is given in exchange for providing goods or services, then it may be subject to GST. For example, if a charity provides a grant for your organisation to deliver a training workshop to their team, and you are GST-registered, you will need to account for GST on this grant.
Key steps to ensure compliance
- Identify the nature of each grant: Determine if the grant is from a government or non-government source, and review the terms to see if it’s for operational or capital expenses. The best way to do this is to refer to the paperwork received along with the funds.
- Check your tax status: Ensure your organisation is correctly registered for income tax exemptions, if applicable. This will help you understand which grants are taxable.
- Confirm your GST obligations: If you are GST-registered, include GST on government grants used for taxable activities. For non-government grants, only include GST if the grant is for goods or services you provide.
- Consult a tax professional: If you’re unsure about the tax treatment of a grant, seek advice from an accountant who understands not-for-profit tax rules. This will help you avoid costly mistakes.
By carefully reviewing each grant’s purpose and source, and applying the correct tax rules, your organisation can focus on its mission while ensuring compliance with tax obligations. Please get in touch with us for help.
