Accounting for donations and in-kind support
Deductible Gift Recipient (DGR) status
I’ve had quite a few enquiries about how Charities or Not-for-Profit organisations can leverage their Deductible Gift Recipient (DGR) status to maximise the tax advantages for people who want to help them e.g. by providing in-kind support or making a donation. The general belief is that if someone gives you something for nothing they will be able to get a tax deduction for that, so ‘how do we do that?’ is the usual question.
To begin with, obviously you need to be endorsed by the ATO as a Deducible Gift Recipient if donors are to get a tax deduction. Just because you are a Charity, or a Not-for-Profit, or even a Public Benevolent Institution (PBI), doesn’t automatically mean you are also a DGR – although the first two are a condition you will need to satisfy. If you are unsure, look yourself up on the Australian Business Register’s ‘ABN Lookup’ to confirm your status.
So, how does claiming a tax deduction for donations work?
Donors are able to claim a tax deduction for gifts made, and the gift can be in the form of cash or property/goods. If the gift is cash then the deduction is straightforward - it’s the amount of cash received. Note: cash donations will (probably) need to be deposited into your nominated Gift Fund.
The amount of the deduction that can be claimed for gifts of property depends on the length of time the donor has owned the property before making the donation.
If the property item was purchased by the donor within twelve months of making the gift:
- the donor will get a deduction for whatever the item cost (and by implication an item that the donor got for nothing will result in a $0 deduction), or its market value on the date the gift was made, whichever is the lower amount.
If the property item was purchased by the donor more than twelve months before making the gift:
- and the property is valued by the ATO at more than $5000, the donor will get a deduction for the ATO valuation placed on the property;
- and the property is valued at less than $5000, the ATO position is less clear; where the property comprises listed shares the deduction will be the market value of the shares, a figure that can be readily ascertained. For other property it is more probable that the cost price will be the deduction allowed.
It will be the responsibility of the donor to obtain the necessary valuation.
How do you record non-cash donations in your books?
Suppose a painting is donated to your organisation. The donor purchased the painting 6 months ago for $5000. In this case, the donor will get a tax deduction for the lesser of the cost price or the market value at the time of the donation. When your organisation subsequently sells or raffles the artwork you would record the income as fundraising income (which for an income tax exempt charity or DGR would not attract a GST liability). NOTE: if the artwork was disposed of for more than $1000, a resale royalty may be payable.
The donor would record the donation as follows:
- Income (asset purchase) (Cr) $5000
- Donation expense (Dr) $5000
- Net income $0
and your organisation would show the painting as an asset, with the credit being the donation:
- Donation income (Cr) $5000
- Asset income (Dr) $5000
- Net income $5000.
If later down the track you decide to sell the painting and receive $6000 for it, you would record this income as follows:
- Income from sale (Cr) $6000
- Bank account (Dr) $6000
- Asset account (Cr) $5000
- Expense account (Dr) $5000
- Net income $1000.
Alternatively, a painting is donated by an artist to your organisation and they request a receipt. The artist will first need to obtain the market value or determine the material cost of the artwork e.g. $5000. If the artist wants to record a donation for that value, they would need to show the value as sale income at the same time as listing the donation expense:
The artist would record the following in their books:
- Income (sale) (Cr) $5000
- Donation expense (Dr) $5000
- Net Income $0
while your organisation would show the painting as an asset at that determined value, with the credit being the donation (as listed above).
How do you record in-kind support in your books?
In the case of in-kind support, the donor will typically provide goods or services to your organisation for either no cost, or for some reduced cost. The belief seems to be that this can be used to increase a tax benefit for the donor. It doesn’t happen that way, and the following example will show why.
Suppose I agree to do your audit for a reduced rate. In the normal course of events the fee would be, say, $5000. So I send you an invoice for $5000; your accounts show you’ve incurred audit fees of $5000, mine show income of $5000 and one offsets the other. But you’ve had a bad year and might be close to shutting the doors so I agree to do the audit for $1000.
I can then either show in my books income of $1000 and in yours you show an expense of $1000 or I can show:
- Income (Cr) $5000
- Sponsorship expense (Dr) $4000
- Net Income $1000
and in your accounts you would show:
- Income (in-kind support) (Cr) $4000
- Expenses (audit fee) (Dr) $5000
- Net Expense $1000
with the $4000 income and $4000 expense being an entry made in your books by your accountant.
It would be the same if someone did something for nothing; your accounts might show Income: In-kind Support $1500; Expenses: Consultants Fees $1500. One cancels out the other, which is why in-kind can never create a deduction bigger than the cash which actually changes hands.
That’s not to say it’s a pointless exercise to report in-kind support. Recording in-kind support in your financial statements quantifies the value of community and business support for your organisation, and demonstrates that value to government and others. It also shows that the percentage of funds received from government as a percentage of total income, is less than it would be if in-kind support was not included.
GST and in-kind support
The ATO considers that in-kind (or contra sponsorship) constitutes a taxable supply. Where both parties to the in-kind support are registered for GST the supply by one party is generally a creditable acquisition by the other so the GST is cancelled out. Where one party is registered and the other is not this can lead to an imbalance with the GST registered party being disadvantaged, and in that situation it’s probably something to think twice about.
Statement of in-kind support
If you are going to record in-kind support in your accounts, it needs to be done properly. To that end find attached a template that you can use to start recording this.
NOTE: In-kind is good but at the end of the day cash is better!
It is always advisable to speak to an accountant or financial advisor for specific advice about your accounting practices. If you require a referral to an arts accountant, contact Arts Law.
Brian Tucker is an Arts Accountant, Auditor, Advocate and Collector www.briantuckercpa.org
Related Arts Law resources: