Private school payments

Two Questions We’ve Been Asked have recently been issued by IR, which look to explore and provide answers to the questions of:

  • when a parent’s payment to their child’s private school will qualify for a donation tax credit; and,
  • the GST treatment of payments parents make to private schools.

The QWBA’s are in two separate documents, although under the single reference of PUB00341.

With respect to the first question, a payment to a private school will qualify for a donation credit, being deemed to be a gift, when:

  • the school is a donee organisation;
  • the payment is $5 or more (and is money, rather than goods or services);
  • the parent makes the payment voluntarily to benefit the school either generally or for a specific purpose or project; and,
  • the parent or child gains no material benefit or advantage in return for making the payment.

With respect to the last bullet point, IR has previously issued Revenue Alert 14/01, following the discovery of situations where parents have made “donations” to private schools in substitution for paying no or low school fees. RA 14/01 confirmed that there are no donation tax credits for any payments paid by parents to private schools incorrectly described as “donations”.

Just as a refresher, an individual can claim a donation tax credit of one-third of the payment amount, but the sum of charitable or other public benefit gifts an individual taxpayer makes in a tax year must not exceed their taxable income for that year.

The 13-page QWBA in the main is dedicated to discussing the meaning of “gift”, which based on the case law has three basic criteria, being a payment of money of $5 or more:

  • made voluntarily; 
  • made by way of benefaction (ie, made to benefit the donee organisation); and,
  • where the payer receives no material benefit or advantage in return.

Post each of the three criteria being discussed in some detail, the QWBA concludes with seven examples to illustrate the commentary.

The answer to the second question is included in a slightly shorter document and concludes with the view that in most cases, a parent’s payment to their child’s private school will be subject to GST. The basis for this view is that private schools make taxable supplies of education and education-related goods and services to parents, and consequently, as the annual value of the school’s taxable supplies will likely exceed $60,000, schools will charge GST on these supplies at the standard rate of 15%.

There are however two exceptions to the standard rule, where:

  • an ‘unconditional gift’ a parent makes to their child’s private school is not subject to GST; or
  • some of the boarding fees a parent pays to their child’s private school can be subject to GST at what is, in effect, a reduced rate of 9%.

With respect to the last bullet point, generally, for stays in a school boarding house that will be longer than four weeks, the value of the supply of “domestic goods and services” is reduced to 60% of the consideration paid for GST purposes. This effectively reduces the rate of GST the school charges for that portion of the boarding fees from 15% to 9%.
The majority of the QWBA commentary surrounds the meaning of an unconditional gift, and then how supplies of domestic goods and services in a boarding house may be subject to a reduced rate of GST. The QWBA then concludes with six examples to illustrate the previous narrative.

If you would like to make a submission with respect to either QWBA, the closing date is 26th of September.