Groups running sausage sizzles and claiming charity donation tax credits may find their money taken off them, Inland Revenue warns.

The Inland Revenue Commissioner today issued a revenue alert highlighting concerns about arrangements entered into to get a tax credit where there has not been a true gift of money.

Revenue alerts were issued about twice a year to provide information about significant or emerging issues of concern to IRD.

"While almost everyone who is donating money is doing it correctly, Inland Revenue is seeing cases where arrangements have been entered into where the payment made to a charity is not a true gift of money," IRD's chief tax counsel Graham Tubb said.

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He said a lot of the cases were just misunderstandings.

For example, charities avoiding their GST liability, but as a result also generating donation tax credits in circumstances where the money being donated really comes from a fundraising event and may not even belong to the donor -- such as a sausage sizzle.

"You essentially do see arrangements between a local charitable entity of some sort... running some type of event which wouldn't normally generate donation tax credits.

"The surplus is accumulated and then passed on by the interposed person who's said to run the [sausage sizzle] sale, whereas in reality it's really the community group itself that is doing it and that person then makes a donation of proceeds."

It created a donation credit out of a situation where there should not be one, he said.

IRD would take steps to recover ineligible payments and could impose penalties, he said.

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

It tended to be localised charities which were more prone to breaking the rule and he was not aware of any cases where police had to be involved.

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"We're estimating the cases we are seeing at the moment are in the dozens rather than in the hundreds.

"People just need to be careful they are not adding some string or another to their payment which turns it into not a donation."

- NZPA