Question
We are a not-for-profit membership based organisation.
As a result of COVID-19 we have not been able to deliver our usual services to members and are considering refunding fees and, if so, how we treat membership fees already levied and paid.
We understand it is possible for the member to be offered the opportunity to leave the fees with our organisation by way of a donation. Is this possible and does this mean the member can claim a tax deduction for the donation?
Answer
One of the many effects of COVID-19 has been to cause member-based organisations to consider how to handle membership fees where the ability to provide the normal services to members has been cancelled/curtailed.
For many organisations, refunding membership fees is a preferred option however it raises commercial difficulties in terms of ensuring the organisation has sufficient funding to continue to operate/meet commitments.
A common response has been to offer members a full or partial refund of membership fees and request the member to instead donate all or some of the refunded amount to the organisation.
This approach makes excellent sense however the following tax considerations arise:
- Is the donation tax deductible? – Unless the organisation is a Deductible Gift Recipient (DGR) and endorsed by the ATO as such the answer is no. Only a gift to a DGR will give rise to a tax deduction to the donor and the amount must be a gift (ie the donor does not receive a material benefit in return). The ‘offer’ to the member to make the donation should be considered to make sure the ‘donation’ is truly a ‘no strings attached’ donation. One work around for organisations in the sports sector (and possibly available for other sectors) is that it may be possible (where the organisation is not a DGR) for the member to be encouraged to donate the membership refund to a DGR (such as the Australian Sports Foundation which provides this possibility). The organisation registers a project with that DGR and the donor nominates that project as the preferred beneficiary of the donation. Whilst the other DGR is not committed, it would ordinarily direct the donated monies to the nominated project;
- Sponsorship? – Where a ‘donation’ of refunded membership fees would not give rise to a tax deduction for the member, consideration could be given as to whether a new category of ‘sponsorship’ could be created that may allow certain members (eg those that run businesses) to sponsor the organisation and receive a tax deduction that way. Again, the amount of the sponsorship must reflect the a fair value of the sponsorship benefits received; and
- GST – Ordinarily membership fees are subject to GST. However gifts/donations are not. Care needs to be taken to ensure an ‘adjustment’ is made for any GST included in the membership fee amount refunded to a member and that any ‘donation’ of the refunded monies is not treated as consideration for a supply.