Edited version of private ruling

Authorisation Number: 1011601257982

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Ruling

Subject: Gifts

Question:

Can Company issue receipts pursuant to s30-228 of the Income Tax Assessment Act 1997 (ITAA 97) for the payments made by the persons to the Program under the Proposal?

Answer: No.

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commences on:

1 July 2010

Relevant facts and circumstances:

The Company has requested for a private ruling regarding its ability to issue a receipt under s30-228 of the ITAA 1997 for the payments made by the persons under the proposal.

The Company's background

The Company is currently endorsed as a deductible gift recipient on the basis that it is a public benevolent institution (PBI) as set out in item 4.1.1 of the table in section 30-45 of the ITAA 1997.

The Company runs a program (the Program) under which the public are invited to sponsor a disadvantaged Australian child.

The Program aims to provide each sponsored child with a scholarship.

The minimum term for the Program's sponsorship is one month.

The Program presently provides approximately 31,500 scholarships annually.

The Proposal

The Company wishes to engage in the Proposal with various corporate partners which already makes significant donations to the Program. Under the Proposal, the corporate partner (the Partners) will circulate information relating to the Program to their own clients which allows a wider distribution of information about the Program. If the clients choose to become sponsors of the Program for a minimum term of one year, their details will be noted on the sponsorship application form. This will enable the Company to identify them who would then be entered into a draw for a chance to win a prize anticipated to have a value of approximately $5,000 but in no event to be greater in value than $10,000. The prize will be donated by the Partner to the Company.

The Company will conduct the draw, notify the winner and provide them with the prize, which would not be transferable.

Information about the Program will be circulated by the Partners to their clients, however, the information has not been prepared yet. It is anticipated that such information would include information about the Program and a copy of a sponsorship form. It is also expected that the information will include details about the draw.

Reasons for decision:

For the purposes of Division 30 of the ITAA 1997, the word 'gift' is not defined in the ITAA 1997. The word 'gift' has its ordinary meaning and its definition is discussed in case laws and in Taxation Ruling TR 2005/13 Income tax: tax deductible gifts - what is a gift.

For a transfer of money or property to be characterised as a gift, it should arise from benefaction and proceed from detached and disinterested generosity. This view was propounded by Owen J. in Federal Commissioner of Taxation v. McPhail (1968) 117 CLR 111 41 ALJR 346:

…its is, I think, clear that to constitute a "gift", it must appear that the property transferred was transferred voluntarily and not as the result of a contractual obligation to transfer if and that no advantage of a material character was received by the transferor by way of return.

In Klopper & Anor v. FC of T 97 ATC 4179, at 4184, Nicholson J also stated the following:

…a payment can only be characterised as a gift when there is the element of voluntariness and the absence of consideration: that is, where there is truly a notion of benefaction so there is no advantage of a material character being received in return.

Paragraph 13 of the TR 2005/13 identifies the characteristics and features which the courts have used to describe a gift:

· there is a transfer of the beneficial interest in property;

· the transfer is made voluntarily;

· the transfer arises by way of benefaction; and

· no material benefit or advantage is received by the giver by way of return

Transfer of beneficial interest in property

The making of a gift to a deductible gift recipient (DGR) involves the transfer of a beneficial interest in property to that DGR. For there to be a transfer, the property which belonged to the giver must become the property of the DGR. For a gift to be valid and effectual, the giver must have done everything that is necessary, in accordance with the relevant laws governing the transfer of that kind of property, to transfer ownership to the DGR.

Under the Proposal, the sponsors will transfer money in the form of payments to the Company. As a result, the Company will receive the benefits in the form of money when the actual transfers of payment occur.

Transfer made voluntarily

In order for a transfer of property to be a gift, it must be made voluntarily, that is, it must be the act and will of the giver, and there must be nothing to interfere with or control the exercise of that will (Cypus Mines Corporation v FC of T (1978) 9 ATR 33). A transfer is not made voluntarily if it is made for consideration or because of a prior obligation imposed on the giver by statute or by contract.

Under the Proposal, the money transferred to the Company will be transferred voluntarily and will not be made for consideration.

Arises by way of benefaction

The essential idea of a gift is that there is a conferral of benefaction on the recipient. Deane J in Leary v FC of T 80 ATC 4438; (1980) 11 ATR 145; (1980) 32 ALR 221 explained this at 80 ATC 4453-4454 and 11 ATR 163:

It involves, in my view, the concept that the relevant transfer is by way of well doing in that the recipient will be advantaged, in a material sense and without any countervailing material detriment arising from the circumstances of the transfer, to the extent of the property transferred to him.

Brennan J also said at 80 ATC 4451 and 11 ATR 160:

If the disponor is aware that the receipt of the property by the disponee will impose a liability upon the latter, the disposition may be seen not to be by way of benefaction…No doubt much depends upon a comparison between the property taken and the liability incurred.

Each of the sponsors who transfer money to the Company will intend to benefit the Company. There will also not be any countervailing detriment arising from the transfer for the Company. Therefore, the money transferred to the Company under the Proposal will be by way of benefaction.

No material benefit or advantage

The receipt of a material benefit by way of return to the giver will disqualify the transfer as a gift (FC of T v. McPhail (1968) 117 CLR 111). Deane J in Leary at 164 said that an obvious example where a material benefit or advantage is received by way of return is where the transfer is made 'in return for valuable consideration received by the transferor from the transferee'. Brennan J in Leary also expressed that where a giver is found to have received a material benefit in return for a purported gift, it is not necessary that the material benefit comes directly from the recipient of the property transferred.

As stated above, the main issue to consider is whether the advantages or benefits are material, because the material nature of the advantages will affect whether a transfer is a gift. The requirement of materiality will exclude matters of a de minimis nature (AAT Case 12,314 Re Hodges v. FC of T 97 ATC 2158; (1997) 37 ATR 1091). TR 2005/13 further discusses several circumstances on what is considered to be a material benefit or advantage. Specifically, TR 2005/13 considers whether a benefit is insignificant in comparison with the value of transfer and the following is stated in paragraph 169:

It is a question of fact in each case whether any benefit or advantage is sufficiently significant to be material. Where a benefit of utility or value is received, it will only be considered as not material if there is a considerable disproportion between the value of the transfer and the benefit received. For example, a benefit in the form of a key-ring might be immaterial when considering a transfer of $4,000 but significant for a $4 payment.

TR 2005/13 also considers the situation where the DGRs undertake fundraising campaigns and offer incentives to potential donors. Specifically, paragraph 164 provides an example where a DGR runs a raffle which costs $20 to raise money. The prizes in the raffle are a holiday for two to New Zealand and ten $500 shopping vouchers. The $20 payments will not be gifts.

Paragraph 166 and 168 provides the following explanation:

166. In such situations, the 'incentives' offered are clearly part of a non-gift type of fundraising…The value of the incentive does not, on its own, demonstrate whether the payment is a gift. Even an incentive valued at less than $10 can be part of an arrangement where the payments are not considered as gifts, given the surrounding circumstances.

168. However, there may be situations where the characteristics of the fundraising campaign show clearly it is trying to elicit gifts. If this is the case, the presence of incentives - that are trifling or insignificant in the context of the campaign and the payments - may be immaterial.

The Proposal uses the chance to win a prize, anticipated to have a value of approximately $5,000 to $10,000, as an incentive for the potential sponsors. The main issue here is not whether the sponsors will necessarily win the prize, but whether the value of that incentive is considered material.

As discussed in the key-ring example in paragraph 169 of TR 2005/13, the benefit received will not be considered as material if there is a considerable disproportion between the value of the transfer and the benefit received. The meaning of disproportion here is if the value of benefit received is considerably small compared to the value of the transfer. For example, paragraph 169 shows that receiving a key-ring for a transfer of $4,000 is considered to be disproportionate and therefore, immaterial. In this case, the incentive with an anticipated value of $5,000 to $10,000 to elicit sponsors is considered to be material. Since the value of the incentive is considered significant compared to the amount of transfer, any payments made under the Proposal will not be a gift because there is a receipt of material benefit in return.

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