Introduction
For not-for-profit (NFP) organisations, in-kind contributions are becoming an increasingly common and valuable form of support, often arising from strategic partnerships with businesses rather than simple cash donations. While this type of gift provides essential goods and services, accepting an in-kind donation introduces specific accounting and compliance complexities that organisations must navigate carefully.
This guide provides essential information to help NFPs manage the key obligations that accompany an in-kind contribution. Understanding the correct processes for valuation, accounting, and the potential tax implications is crucial for maintaining proper records and ensuring the full value of the donation is recognised appropriately.
What Is an In-Kind Contribution for Your NFP
Defining In-Kind Donations of Goods & Services
An in-kind contribution is a non-cash donation of goods or services. Instead of a financial gift, your not-for-profit (NFP) receives a service or item that it would otherwise have to purchase. This type of support is a valuable way for businesses and individuals to make a meaningful contribution.
Typically, an in-kind donation replaces a budgeted expense for your organisation. For example, a design firm might create a brochure for free.
Additionally, this kind of gift often provides your NFP with goods or services that it would not have been able to access otherwise, thereby enhancing its operational capacity.
Common Examples of In-Kind Contributions
To make the concept of an in-kind contribution more concrete, it is helpful to consider some common examples of this type of support. These donations can vary widely and provide significant value to an NFP’s mission and operations.
Typical examples of in-kind support include:
| Category | Examples |
|---|---|
| Volunteer specialised labour | A videographer filming an event, an IT specialist setting up a network, or a lawyer offering legal advice. |
| Free venue hire | Use of an office for administrative work or a hall for a community meeting. |
| Free equipment hire | Borrowing items such as marquees for events or lighting for a launch event. |
| Donated goods or property | Physical items like computers for staff, medical supplies for a clinic, or food for a pantry program. |
| Free marketing services | Professional assistance including the design of a new logo, printing of brochures, or securing free advertising space. |
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Correctly Valuing an In-Kind Donation
The Donor’s Responsibility to Determine Value
For any non-cash gift or in-kind contribution, the responsibility for valuation lies with the donor. It is up to the individual or business making the donation to determine the market value of the goods or services provided.
Once the value is established, the donor must advise the not-for-profit recipient of that amount. This ensures the NFP has the correct information for its accounting records and reporting obligations.
How to Calculate the Value of Donated Goods & Services
When preparing budgets for grant applications, using standard and consistent methods to calculate the value of an in-kind contribution is essential.
For donated goods, the value should be calculated based on the fair market price, which is what your organisation would have paid for them.
For services or volunteer time, you can use standard hourly rates to assign a monetary value to the contribution. While specific grant guidelines should always be checked, common rates include:
| Labour Type | Valuation Guidance |
|---|---|
| General volunteer labour | Can be valued at a standard rate, such as $20 per hour, for tasks not requiring specialised training. |
| Specialist volunteer labour | Can be valued at a higher rate, such as $45 per hour, for professionals like lawyers, IT specialists, or project managers. |
The consistent application of these valuation methods helps ensure accuracy in your organisation’s financial reporting while properly acknowledging the true value of contributions received.
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NFP Accounting & Record-Keeping for In-Kind Contributions
Following Australian Accounting Standards Board Regulations
Not-for-profit organisations must adhere to specific regulations from the Australian Accounting Standards Board (AASB), such as the AASB reporting standards, when handling an in-kind contribution. The relevant standard, AASB 1058 Income of Not-for-Profit Entities, mandates that an NFP must recognise assets at fair value. This means you are required to record the value of any in-kind gift in your accounting records.
For accounting purposes, this ensures that non-monetary donations are properly reflected in your financial statements. Following AASB 1058 is crucial for maintaining transparency and regulatory compliance in your organisation’s financial reporting.
How to Record In-Kind Gift Transactions
The accounting transaction for an in-kind donation is designed to have no impact on your organisation’s bottom line. This is because the value of the contribution is recorded as both income and an equivalent expense.
To manage this effectively:
- You may need to create a specific account code, such as ‘Income In-kind’
- Both the income and expense sides must be recorded
- The transaction should balance out in your financial statements
To illustrate, consider a scenario where a consultant gifts your NFP $5,000 worth of their services. The accounting entry would be:
- An ‘Income In-kind’ of $5,000
- A ‘Consultants’ expense of $5,000
If you receive a discounted service, the accounting reflects the net expense. For example, if you are provided with $5,000 of consulting for a fee of only $2,000, your records would show:
- An ‘Income In-kind’ of $3,000 (the donated value)
- A ‘Consultants’ expense of $5,000
- This leaves a net expense of the $2,000 paid
Maintaining Proper Records of Each Contribution
Your organisation is responsible for keeping detailed records of all in-kind support received. It is essential to maintain written evidence of each contribution, which can include a letter of donation or receipts.
While these documents may not need to be submitted with a grant application, they must be available upon request. Proper record-keeping is particularly important for grant acquittal purposes, where you may need to prove the value of the support your project received.
Additionally, maintaining an internal list of standard market prices for common in-kind donations can be a time-saving tool, helping you formulate realistic budgets more quickly for future grant applications.
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Tax Deductibility of an In-Kind Gift
The Importance of Deductible Gift Recipient Status
For a donor to claim a tax deduction for any in-kind contribution, the not-for-profit organisation receiving the gift must be endorsed by the Australian Taxation Office (ATO) as a Deductible Gift Recipient (DGR). This status is a fundamental requirement for tax deductibility purposes.
Not all organisations that have completed their charity registration automatically have DGR status. Therefore, it is crucial for organisations to secure this endorsement if they wish to offer tax incentives to potential donors providing an in-kind donation. Without this official recognition, a donor cannot claim their contribution on their tax return, regardless of the gift’s value.
Conditions for a Donation to Be a Deductible Gift
For an in-kind contribution to qualify as a deductible gift, it must meet several conditions established by the ATO. The core principle is that the donation must be a true gift—a voluntary transfer where the donor receives no significant material benefit or advantage in return, which is a key distinction when considering fundraising vs donations.
To be eligible for a tax deduction, a gift must satisfy the following criteria:
| Condition | Description |
|---|---|
| Must be made to a DGR | The recipient organisation must have official Deductible Gift Recipient (DGR) status at the time of the donation. |
| Must be a genuine gift | The contribution must be made voluntarily, with no expectation of the donor receiving anything of monetary value in return. |
| Must be money or property | This includes financial assets (like shares) as well as physical goods or land. |
| Must comply with gift conditions | Certain DGRs have specific conditions under income tax law that affect the types of deductible gifts they can receive. |
By understanding these requirements, both donors and not-for-profit organisations can ensure that in-kind contributions meet the necessary criteria for tax deductibility and other tax concessions for not-for-profits.
Conclusion
Managing an in-kind contribution requires not-for-profit organisations to navigate specific obligations, from correctly valuing the donation to adhering to accounting standards and maintaining proper records. Understanding the tax implications, particularly the importance of Deductible Gift Recipient status for the donor, is also essential for compliance.
To ensure your organisation correctly handles every in-kind gift, contact the specialists at our not-for-profit law firm, LawBridge, for trusted legal expertise. Our team can help you manage your accounting and tax obligations, allowing you to accept each valuable contribution with confidence.
