why do charities not have to pay tax

Why Do Charities Not Have To Pay Tax?

So I was talking to my friend about how religious organisations do not have to pay tax in the US and we were wondering if this was also the case in Singapore. I decided to look into it and noticed that religious organizations are actually charities. Did you know that schools are also registered as charities? So I decided to broaden the scope to include all charities.

What gives charities their tax-exempt status? Where do charities get their funds from? Why is a misuse of funds more serious for charities than a normal business? We will take a look at these and more below.

What Gives Charities Their Tax-exempt Status?

In order to gain tax-exempt status, organizations will need to apply to be a charity. Your organization needs to fulfil one or more of the following purposes to benefit the local community. They are mainly classified into four categories, poverty relief, education, religion and others.

singapore ipc charitable purposes examples

Source: Charity Portal

A definition of a charity is to help those that are in need. As compared to poverty relief and education, it is relatively less obvious that the advancement of religion is to help those that are in need. However, it can be argued that religion can encourage “morally correct” actions and promote stability in the country, which fulfils the role of a charity, which is to benefit the local community.

A charity is given tax benefits as its purpose is for the benefit of the local community, any tax levied on it is taking away funds from doing good.

Institution Of Public Character

In order to issue tax-deductible receipts, charities need to apply to be an Institution of Public Character, which has additional reporting requirements. If a charity is able to get IPC status, tax deductions are given to donors to encourage giving back. These charities will also need to serve the Singapore community as a whole and not be limited to specific groups like race, belief or religion.

Charities IPCs
Organisations that are established for exclusively charitable purposes and carrying out activities to achieve these purposes Charities that gain IPC status get to issue tax deductible receipts to donors to claim tax relief.

An “ordinary” charity does not need to have an IPC status, however, then they will not be able to give out tax-deductible receipts. All IPCs are charities but not all charities are IPCs.

The Singapore government uses a combination of tax-funded welfare and charities to fulfil our nation’s charitable needs. If everything is to be funded by our tax dollars, our tax rate might be significantly increased.

250% Tax Relief On Donations To IPCs

If you donate to a charity with IPC status, you will be able to claim a 250% tax deduction on the amount donated. Unlike other forms of tax deductions, there are no limits to the amount of tax deduction one can receive. If you donate S$10 million, you will be able to deduct S$25 million from your income to be taxed. Please note that if you receive a benefit in return (e.g. advertisement) for your donations, only the difference between the two values can be claimed as tax deductions.

Remember to do your research and check out how charities make use of their funds. Search for the charity on the Charity Portal and we can look at their

  • Organization profile
  • Financial information
  • Annual report
  • Governance evaluation checklist

You will be able to see the IPC status of a charity under the “Organization Profile” tab.

If you are looking for avenues to make donations, you can visit Giving.sg and filter the charities based on the charitable cause.

Statistics Of Charities

For more statistics, we can refer to the annual reports here.

Number Of Charities

Out of the 2576 charities registered on the charity portal, here is the breakdown by category as of early June 2022. Religious charities make up a major portion of the charities.

Category No. of charities

(June 2022)

Arts & Heritage 165 (6.4%)
Community 95 (3.7%)
Education 233 (9%)
Health 194 (7.5%)
Others 255 (9.9%)
Religious 1,156 (44.9%)
Social & Welfare 409 (15.8%)
Sports 69 (2.7%)
Total 2,576

Since I started doing my research on religious organizations before broadening the scope, I don’t want to waste the data so here are the statistics for the religious organizations and their GST registration status as of early June 2022. Being GST registered means that they have over S$1 million in business activities that are not directly related to the charity.

Religion No. of organizations GST registered
Buddhism 172 13
Taoism 178 2
Christian 717 25
Hindu 40 11
Islam 13 6
Others 36 3

Total Donations, 2019

Charities received S$3.2 billion of donations in 2019. Religious organizations received a 19% increase in annual donations in 2019 compared to 2015 while charities in other sectors received about the same amount. Religious organizations got the most donations out of all the categories.

Charity Number (2019) Donations (S$mil)
Arts & Heritage 161 (7%) 77.2 (2.4%)
Community 93 (4%) 43.5 (1.3%)
Education 126 (5.4%) 483.7 (14.9%)
Health 147 (6.3%) 417.2 (12.9%)
Others 225 (9.7%) 372.7 (11.5%)
Religious 1,072 (46.2%) 1,343.1 (41.4%)
Social & Welfare 427 (18.4%) 494.4 (15.2%)
Sports 70 (3%) 13.6 (0.4%)
Total 2,321 3,245.4

Total Receipts, 2019

The amount of donations received (S$3.2 billion) is dwarfed by the total receipts (S$20.8 billion) which includes government grants and other income. Education got a dominating amount of receipts that are non-donations.

Charity Number (2019) Receipts (S$mil)
Arts & Heritage 161 (7%) 1,156 (5.5%)
Community 93 (4%) 981 (4.7%)
Education 126 (5.4%) 10,997 (52.9%)
Health 147 (6.3%) 2,142 (10.3%)
Others 225 (9.7%) 1,181 (5.7%)
Religious 1,072 (46.2%) 1,884 (9.1%)
Social & Welfare 427 (18.4%) 2,261 (10.9%)
Sports 70 (3%) 177 (0.9%)
Total 2,321 20,779

Number of IPCs vs Charities, 2019

Out of 2,576 charities, there are 646 (25%) of them that have an IPC status. If you notice, there are no religious organizations in the breakdown as IPCs cannot serve a specific group (e.g. religion, race).

Charity Number (2019) IPC Status
Arts & Heritage 161 (7%) 77 (11.9%)
Community 93 (4%) 83 (12.9%)
Education 126 (5.4%) 42 (6.5%)
Health 147 (6.3%) 86 (13.3%)
Others 225 (9.7%) 62 (9.6%)
Religious 1,072 (46.2%) 0 (0%)
Social & Welfare 427 (18.4%) 246 (38.1%)
Sports 70 (3%) 50 (7.7%)
Total 2,321 646

Where Do Charities Get Their Funds?

Charities not only get their funds via donations. The funds can be classified into restricted and unrestricted funds. Restricted funds have to be used for the purpose that they are donated while unrestricted funds can be used to fund any activities that forward the charitable purpose.

Here are the different sources of funding a charity gets.

Donations

This is the form of funding that we are most familiar with. Donations can be made in cash or in-kind (e.g. computers, furniture).

Government Grants

The government also hand out grants to charities. Grants given can be in an area where the government wants to support like the arts, sports and education or grants can be given to help improve the internal processes to allow the charity to perform better.

Charities will usually want to spend the maximum they can on their beneficiaries if possible so they might be reluctant to spend on improving their capabilities. This is where the 5 grants available on the Charity Portal come in to enhance the productivity, operational efficiency, governance and management capabilities of charities.

Investment Income

Investment income can be as simple as the paltry interest generated from savings accounts or can be as sophisticated as investments in bonds, stocks and properties.

Programme Fees

If the charity provides a paid service that directly fulfils its charitable purpose, it will be classified under this category. An example would be charging a subsidized rate for dialysis sessions or providing counselling services for families.

Charities That Undertake Business Activities

Instead of the four sources of funds mentioned above, charities can undertake in businesses to generate additional income or to provide goods and services for their members or clients. The focus of these charities should still be its exclusively charitable purpose and not the business. The business subsidiary should also not undertake excessive risk that will potentially result in the use of charity funds to cover losses. If the business undertaken is not viable anymore, the charity will need to do a review to divest the business.

The type of businesses a charity wants to undertake is not limited but a business subsidiary has to be set up and it will be taxed and treated the same as a normal business. However, if the business subsidiary becomes a supplier of goods or services for the charity, the transactions between them need to be of arm’s length. This means that the transactions have to closely match the market rate and both parties have to act independently and in their self-interest.

For example, if a temple sets up a subsidiary to bring in offerings products like joss sticks and candles, the subsidiary needs to sell the products to the temple at a fair price and not overcharge the temple to take advantage of them when cheaper alternatives are available elsewhere. If they do that, it means that the business subsidiary is benefiting unfairly at the expense of the donors’ money and the tax-exempt status of the charity. Sometimes, the people in charge of the charities and business subsidiaries might overlap, so the transactions have the be treated very sensitively to prevent conflict of interest.

What Kind Of Taxes Do Charities Not Have To Pay?

As compared to a business, here are the types of taxes that a Charity does not need to pay.

Income tax

When a business makes a profit, it will need to pay corporate income taxes on its net profits. In comparison, when a charity receives more funds than its expenses, there will not be any taxes on the surplus. The surplus will just be used up the next year. Most charities always lack funding so we shouldn’t worry about them having a surplus to tax them. Even with a surplus, there is always somewhere that needs help.

GST

If a business exceeds S$1 million in sales, it will need to be registered for GST. To put it simply, businesses will need to pay GST for the sales they make and claim GST for the expenses they pay. Businesses will aim to be profitable so the net GST paid to IRAS will be positive.

A charity will not need to pay GST on the donations received. GST is a tax on consumption and donations are used to help the community so GST will not be charged on donations.

Property tax

Businesses will have to pay a percentage of the annual value of a property every year as property tax.

If a property is used exclusively for charitable purposes, the IPC can apply to the Comptroller of Property Tax to exempt themselves from paying property tax in full or partially.

Indirect Taxes Paid By Charities

Although charities themselves do not pay taxes directly, they still pay employees and suppliers/contractors. Employees will pay personal income taxes while suppliers will pay corporate income taxes. Some payments to suppliers might also attract GST. The funds used on beneficiaries will also be spent in the economy, attracting taxes according.

Taxes That Charities Have To Pay

The actual charity does not need to pay taxes. But, if it has a business subsidiary, it will be treated as an ordinary business and taxes like corporate income tax, GST and property taxes will be paid accordingly.

How Must Charities Use Their Funds?

Under the Code of Governance for Charities and IPCs, charities should spend their resources to further their charitable purpose. There also needs to be internal controls to make sure that the funds are used properly. Areas that require internal controls with clear documentation and procedures include

  • Procurement process
    • Which vendors to use?
    • Is the price ok?
    • Are there any conflicts of interest between staff and suppliers??
    • Are the goods and services delivered acceptable?
  • Payments and receipts
    • Are all transfers of money documented?
    • Does the transfer of money match with donation/bill amounts?
    • Are bills paid on time?
  • Delegation of authority and limits of approval
    • Segregation of approval and payment functions
    • Multiple signatories on bank access
    • Different levels of limits on staff and executives’ approval

Charities will also need to submit a Governance Evaluation Checklist every year based on their size. The checklist will increase in rigorousness as the size of the charity increase. Charities should aim to check off all the boxes and if they can’t, they will need to provide a proper explanation.

Audit And Reporting Requirements Of Charities

A charity will need to submit the following two items annually within 6 months of the end of the financial year

  • Annual Report (including Financial Statements); and
  • Governance Evaluation Checklist.

Depending on the size of the charity, different levels of audit will be needed. The size of a charity is determined by its gross income or total expenditure.

Size Of Charity Audit Requirements
< S$250,00 The accounts can be examined by an independent person whom the governing board members believe to have the relevant ability and practical experience
S$250,001 – S$500,000 The accounts can be examined by an independent person who is a member of the

Institute of Singapore Chartered Accountants, or who possesses the necessary qualifications to be a member of the Institute of Singapore Chartered Accountants or a public accountant

> S$500,000 The accounts of the charity must be audited by a public accountant.

The audit is to attempt to make sure the funds are properly accounted for. The more funds are involved, the higher the level of the audit will be required. It will increase the confidence of all stakeholders to allow them to continue to support the charities.

Whistleblow Policy

If staff or other stakeholders of the charity notice any wrongdoings to the detriment of the charity or society, they should whistleblow.

From 1 January 2018 onwards, charities, in the enhanced tier or with IPC status, will have to disclose in their annual report if they have a whistle-blowing policy.

If you find out the charity that you are involved in is sending out hateful messages or doing things that are detrimental to Singapore, please communicate with them that they are not doing the right thing. If they still continue or if it is not safe for you to do so, do blow the whistle on them.

When the charities themselves do not have a whistleblowing policy, misconduct should be reported to the mccy_charities@mccy.gov.sg. Find out more information here.

Why Is The Misuse Of Charity Funds Worse Than Business Funds?

First, the charity funds are garnered to be used for charitable purposes. When it is siphoned off for personal gain, it is directly taking away money from the beneficiaries of the charity.

Next, it will give charities a bad name. Lowering the confidence of volunteers and donors will divert resources away from other innocent charities, leading to lower benefits for the beneficiaries.

Additionally, if these charities are IPCs, they can give out tax deduction receipts to donors. There is a 250% tax relief on the amount donated. Misuse of funds in this case lowers the tax revenue of Singapore, hurting the programmes that our tax dollars support.

Do not attempt to “protect” your charity from bad press and do the right thing to bring the bad actors to justice. You will be doing a good deed by helping to put away the black sheep.

Cases Of Misuse Of Charity Funds

Here are some cases where there is a misuse of charity funds.

City Harvest Church

The 6 leaders of the church were convicted of misusing S$50 million of funds. They made use of S$24 million of the church’s building funds to purchase sham bonds. The fund is a restricted fund where it is to be used for building or investing. The bonds were then used to finance the pastor’s wife’s secular music career. The remaining S$26 million was used to cover up the initial crime.

Masjid Darussalam Mosque

The chairman of the mosque’s management board misappropriated S$370,000 from mosque donations over 7 years. His actions were only discovered when the donation amounts increased significantly (from S$10+kto S$40-60k a month) after he stepped down. The funds misappropriated were used on his expenses and his own registered charity.

The International Union Against Tuberculosis and Lung Disease Asia Pacific

A finance and admin staff embezzled S$1.46 million from the charity over a few months. She lost S$1.1 million in a love scam while spending the rest on luxury goods and paying back debt. She also tried to obstruct justice by asking her landlord to lie for her.

National Kidney Foundation

When The Straits Times published an article exposing NKF and its CEO, where a contractor claimed that luxurious furnishings, including the infamous golden tap, were being installed in the CEO’s office. NKF and the CEO actually sued the publication for defamation. During the suit, it is revealed that the CEO collected a monthly salary of S$25,000 and collected a 10-month bonus (S$250,000) in 2002 and a 12-month bonus (S$300,000) in 2003 and 2004. He also had access to 8 chauffeured cars and NKF paid for his personal car. The case was dropped on the second day of the trial and the entire board resigned after meeting the Health Minister at the time. After the resignation, it was also found out that the CEO approved payments to companies despite services not being rendered.

TL, DR

Charities are given a tax-exempt status because they are organizations that provide benefits to the local community. If charities want to set up a business to aid in their fundraising efforts, the business will be taxed accordingly, similar to an ordinary business. Charities should use their funds responsibly and will need to undergo yearly audits to make sure funds are utilized properly. If the audits are unable to catch any misconduct, stakeholders should step up and whistleblow to protect the interests of their charity and all other charities in Singapore.

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