January 2014 Newsletter
Warped Tax Thinking– Taxpayer not missing out because of NFP tax exemptions.
Latest Spreadsheet Update – There’s no reason to be stuck with a messy bookkeeping system.
GST on Donated Assets – Think before you sell.
The Road to 2016 – This month: should you do cash reporting just because you can?
Is Tax Exemption a Privilege?
The fact that Charities and other not-for-profits are exempt from income tax is a bone of contention for some, and is often given as the reason why not-for-profits should be publicly accountable. It is considered a special privilege granted to those who want to do good or something useful for another reason than money.
NFPs that run high surpluses and have a lot of cash are therefore eyed with suspicion, and occasionally there are calls for this income to be taxed because it is not being applied for ‘good’. Personally, I think that we need legislation to deal with excessive reserves and force such Charities or NFPs to apply them – but taxing this money is still wrong.
A not-for-profit is not comparable to a for-profit company. The profits and reserves (equity) of a company sooner or later must end up in the hands of private individuals, because that is the whole point of doing business or investing in them. Company income tax prevents income to make it into the pockets of private individuals tax-free. Company tax is reclaimable by the individual when they receive a share of the company’s profit (called ‘imputation credits’ on dividends).
The surpluses and reserves of Charities and tax-exempt not-for-profits can never make it into the hands of private individuals. The only way of distributing money to private individuals for a NFP is through wages/salaries or contracts, all of which are taxed. Picture yourself and a group of friends paying money regularly into a joint bank account to save up for a trip away together. Come 31 March, you’ve saved up a lot of money, but haven’t spent any yet. Nobody would advocate that this ‘profit’ should be taxed. You’re already taxed income would be taxed again because you’re not spending it right away. And, unlike company tax, it would not be reclaimable.
NFPs are about collecting money from a variety of sources to put towards a certain project, activity or outcome. ‘Surpluses’ and ‘reserves’ are temporary accumulations of money that, by law, cannot ever be income for a private individual. This is not a privilege, it is avoidance of double-taxation, and it’s time to put that one to bed.
Accounting 4.0 – Our Spreadsheets Keep Getting Better
Our spreadsheets have come a long way since we first put them out in 2011, and we’re proud to continue to be able to offer the not-for-profit sector a free accounting solution for small and medium-sized organisations. We expect to release the new versions in late February. If your own system is a bit messy, or you are struggling with Xero, MYOB or whatever else you are using, come along to our February workshops about the new spreadsheets to see if they’re for you.
What’s new in 4.0
- Perpetual: These one’s just roll over into the new financial year: just enter a new financial year start- and end-date.
- Comparative data from previous year: Reports now create the comparative data for the previous year, required by the new financial reporting rules for charities.
- Complete grant reporting: A side-effect of perpetual spreadsheets, complete grant reports can now be created for expenditure from specific grants even if it crosses financial years.
- Cash Flow report: A mandatory report for all charities from 2016, this can now be created on the click of a button.
- Annoyances tidied up: Due to your feedback, some things have been made easier. The Transactions sheet now highlights money in and money out in different colours, sorts itself by date through a keyboard shortcut, and transfers between bank accounts no longer need two entries.
A radically simple new Tier 4-compliant spreadsheet.
Alongside our powerful 4.0 sheet we will release a minimalist, macro-free spreadsheet for small organisations who want nothing else but integrate their day-to-day cashbook with the required Tier 4 financial reports, using only the minimum categories required by the Standards. .
GST on Donated Assets
It’s not just the government selling assets, sometimes not-for-profits do it too!. But before applying GST to the money received from the sale, pause a minute and determine whether this particular asset was bought or donated. This is an important distinction, because the sale of donated goods does not attract GST, saving you 15%. Yippee!
The Road to 2016
Monthly feature to prepare for the new Financial Reporting Standards for Charities.
Reverting to Cash Reporting?
When thinking about what Tier to report under many organisations will find that they are eligible to report under the ‘cash-based’ Tier 4, even though they have always used accrual-based Financial Statements.
Charities with less than $125,000 in operating expenditure per year can use Tier 4, which exempts them from producing an accrual-based “Statement of Financial Performance” (or ‘Statement of Funding’ as we prefer to call it) and a Statement of Financial Position (Balance Sheet) that balances. They are not exempt from making accruals: Accounts Receivable, Payable, unspent grants, prepayments etc still all have to be reported, but they do not have to be added into the respective income/expenditure accounts.
There are both advantages and disadvantages to changing from accrual to cash-based Statements of Funding. The key advantage is if an organisation is using an external accountant. Instructing them to prepare Tier 4-compliant statements removes the need for what accountants call ‘journal entries’, including applying depreciation to assets and other sometimes quite time-consuming accounting practices. This means the accounting bill should come down. A cash-based Statement of Funding is also more within reach of an accounting layperson to produce themselves.
There are two main disadvantages. Firstly, of all the tiers this one requires the most detailed disclosures about assets, liabilities, grants and anything else loosely connected with money, which adds to the workload and, if done by an external accountant, may more than negate any gains made through the otherwise less involved accounting. Remember that the new reports don’t feature in any accounting software your accountant is using, and will therefore have to be created manually.
Secondly, a cash Statement is less accurate than an accrual Statement. Accrual accounting removes the timing effect of payments: in cash accounting an organisation can show a large excess of income one year, and an excess of expenditure the next solely because some large bills were paid late, or income was received in advance, or similar. This is toxic for good decision-making. However, in most not-for-profits this distortion is insignificant. For heavily grant-dependent organisations it can even be argued that cash-reporting is more reflective of the situation because it shows how all the grant money that was received, including the previous year’s figures, not only the portion of grants that were expended (as in accrual accounting).
It is difficult to make an overall recommendation, as every organisation’s needs are different. CCA will be running a presentation on this and other aspects of the decision on which Tier to report under: ‘Spot Your Tier’ on 26 February (see here for more info), which may be helpful. Switching to ‘cash’ reporting under Tier 4 is probably advantageous in these situations:
- You are using an expensive accountant and want to try doing it yourself.
- You are using your own spreadsheets or manual ledger system rather than accounting software packages.
- You tend to have high audit bills.
We would not recommend cash reporting if:
- A large portion of your income/expenditure is through trading, i.e. selling services or goods.
- You receive significant government funding and your financial year does not align with the government’s (30 June).
- Your main purpose is, for example, organising annual events and you frequently make large pre-payments (such as for venue hire) or incur large bills that fall into a different financial year than the event.