IRD after tax-dodge fundraisers at sausage sizzles

Sausage sizzles and other fundraisers could have their money taken off them in a new drive to clamp down on wrongfully claimed tax credits.

The Inland Revenue Department warned this week that it would pursue people claiming charity-donation tax credits despite not giving a true gift of their own money.

Some community groups which depend on small fundraisers have suggested the IRD's energies were best focused at the other end of society.

IRD chief tax counsel Graham Tubb said the department had been noticing an emerging trend of charitable groups giving their takings from events to an individual - usually associated to the charity - who then gave it back as a "donation".

This allowed them to avoid their GST liability and also meant the individual could claim a donation tax credit, even though the money came from a fundraising event and not the donor's pocket. This tax credit was often passed on to the charity as well.

"Inland Revenue does not regard these payments as gifts or donations and therefore they are not eligible for any credits," said Mr Tubb.

The IRD said some cases were misunderstandings, but it planned to recover ineligible payments and impose penalties for those that flouted the rules.

"It is Inland Revenue's view that some of the arrangements may amount to fraud, and prosecution may be undertaken where appropriate."

Mad Butcher owner Sir Peter Leitch, who regularly donated space and products for sausage stalls, said unless the IRD could show there was widespread routing of the system, their actions seemed an overreaction.

"I've got to know the people over the years and I've never encountered this," he said.

"You'll always get cheats, always. But the people that cheat are a rarity.

"I would say that the taxman would be better served on something more important, because at the most [the charities] might make $400 or $500 a day.

"The type of people that are doing this are battling to raise money for kid's uniforms or a kid's camp.

"Over the years, we've allowed charities to do hundreds and hundreds of barbecues outside our shops.

"A lot of those people, we were their last line of hope. They don't make a fortune."

The IRD could not confirm how widespread the tax opportunism was, because it did not keep data on the incidents.

The IRD planned to crack down on several other tax arrangements it had observed among charities. Any payment of more than $5 to a charity can potentially qualify for a donations tax credit, as long as it is a gift.

Charity tax cheats

Example 1: A charity is struggling to repay a loan to a person. That person gives the amount of the debt to the charity in the form of a "donation", with the understanding it will be used to repay the debt. The charity repays the debt and the person claims a donations tax credit, despite it not being a valid gift.

Example 2: A person intends to give a piece of property, such as a car, to a charity. The person instead gives the charity money, and the organisation "buys" the car from the person. The person illegally claims a donation tax credit for the supposed donation.

Example 3: Charity gives money raised from a fundraiser, such as a sausage sizzle, to an individual associated with the organisation. The individual "donates" the money to the charity. The charity evades their GST liabilities, and the individual claims a tax credit for their "donation".