Edited version of private ruling

Authorisation Number: 1011663595236

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Ruling

Subject: Gifts

Question:

Can the Association issue receipts pursuant to s30-228 of the Income Tax Assessment Act 1997 (ITAA 1997) for the payments made by the donors under the deed of gift?

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 Association has requested for a private ruling regarding its ability to issue a receipt under section 30-228 of the Income Tax Assessment Act 1997 (ITAA 1997) for the payments made by the persons under the deed of gift (the Deed).

Background of the Association and scheme

The Association is a non profit incorporated association which is endorsed as a deductible gift recipient from a particular year.

The Association currently has a donor who wishes to provide gift funds (the Funds) to the Association with some provisions attached to the gift. The provisions are:

· the Funds are to be expended for the specific purpose within 2 years

· the specific purpose is consistent with the Association's purpose

· if the Fund are not expended by the end of 2 years, the donor wishes to reserve the right to:

o continue have the balance of monies available for any joint partnership venture with any other non profit association with the same goals; or

o have any balance of monies if any refunded

The Association is in need of any funds to achieve its objects. It is the board's view that these funds will be fully expended within the 2 years, however, the Association is concerned that any balance left over will pose a problem.

The Deed

The Association has a deed that has not been entered into and not signed, pending on the outcome of this private ruling. The Deed contains the following relevant clauses:

· The Donee must detail the project or initiative for which it will use the proceeds of the Gift which the Donor must then approve before any withdrawal request, may be approved.

· the Donee must pass a motion detailing the project or initiative for which it intends utilise the Gift;

· the Donee will provide the Donor with the minutes recording the motion

· the Donor must inform the Donee in writing within a certain time whether the minutes have been approved by the Donor for the purposes of this Deed; and

· should the Donor not approve of the minutes of the project the Donor shall notify the Donee of the disapproval and the reasons for the disapproval. For the avoidance of doubt, approvals of the project or initiative are at the discretion of the Donor.

· once the minutes of the Project are approved they become the Purpose of the Gift, or such other purposes as many be agreed in writing by the parties or as authorised varied or agreed under the terms of this Deed.

In the event the Gift is not expended in full before the completion date the Donor and the Management Committee of the Donee, as duly appointed pursuant to certain clause of the Constitution

· agree to attend a meeting for the purposes of enabling the Donee the opportunity to detail to the Donor their intentions for the remaining Gift and

· enabling the parties an opportunity to come to an arrangement to ensure the Purpose of the Gift is fulfilled to the Donor's satisfaction.

Any agreement reached during the meeting conducted pursuant to this clause will become the Purpose of the Gift.

Following the Completion Date and subject to compliance with a certain clause, should the Donor consider that the Purpose of the Gift is incapable of being fulfilled by the Donee, the Donor may give 30 days written notice to the Donee to return the balance of the surplus funds, excluding interest, in the Account at that time (Surplus Gift) to the Donor.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 30-15.

Income Tax Assessment Act 1997 section 30-45.

Income Tax Assessment Act 1997 section 30-228.

Reasons for decision

Under section 30-228(1) of the ITAA 1997, a deductible gift recipient (DGR) can choose to issue a receipt for a gift described in the relevant item of the table in section 30-15 of the ITAA 1997 to the donor. However, the DGR must ensure that the receipt is for a gift.

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 it 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.

Paragraph 19 states the following:

If the DGR fails to obtain immediate and unconditional right of custody and control of the property transferred, or less than full title to the transferred property is transferred, a gift deduction will not arise. This will be by reason of the meaning of gift, and/or by reason of the operation of section 78A of the Income Tax Assessment Act 1936 (ITAA 1936).

As stated in paragraph 77 of TR 2005/13, upon the transfer, the DGR must receive full title, custody and control of the property transferred, so that the DGR is entitled to deal with the property in its own right to the entire exclusion of the giver. If the gift is complete, the giver cannot retract the gift. As Latham CJ states in Brunker v. Perpetual Trustee Co Ltd (1937) 57 CLR 555 at 582:

A person who makes a gift cannot recall the gift simply because it is a gift. If he repents of the gift, that fact is immaterial, if the gift of what he was given is complete.

As stated in Deed, the Donee must detail the project or initiative for which it will use the proceeds of the Gift which the Donor must then approve. This suggests that although the gift funds have been physically transferred to the DGR's account, the recipient DGR actually do not receive the full title, custody and control of the transferred gift funds as it needs to obtain approval from the Donee for the usage of the gift funds. Therefore, there will not be a transfer of beneficial interest in property.

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 proposed scheme, the provision of the gift funds from the donor to the Association 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.

Paragraph 28 of TR 2005/13 states the following:

Where the giver is aware that the transfer of property will result in detriments, disadvantages, obligations, liabilities or limitations to the recipient, the attribute of benefaction may be missing. Whether benefaction is in fact conferred will depend to a large extent on the proportion which the detriment, disadvantage, obligation, liability or limitation bears to the value of the property transferred.

However, if any liability or obligation falling on the DGR as a result of the transfer of property is immaterial, the transfer is still a gift.

Upon the transfer of the gift funds, the recipient DGR will result in certain obligations, liabilities or limitations under the Deed. As discussed above, certain clause of the Deed states that the recipient DGR must obtain approval from the donor for the usage of the gift funds. Certain clauses of the Deed also place obligations on the recipient DGR in circumstances where there are left over (surplus) gift funds after two years of the transfer. The Deed states that if there are surplus gift funds, the committee of the DGR must have a meeting with the Donor to discuss the intentions for the remaining gift funds and the Donor has the right to have the surplus gift funds refunded.

As stated in TR 2005/13, benefaction will not arise if the giver is aware that the transfer of property will result in detriments, disadvantages, obligations, liabilities or limitations to the recipient DGR. This will also depend on whether the liability or obligation falling on the recipient DGR is considered to be material compared to the value of the gift funds transferred. In considering the circumstances of the transfer under the proposed Deed, the Donor will remain full rights on the usage of the gift funds under certain clause and also have the right to have any surplus gift funds refunded under other specific clauses. The extent of the power and rights remained in the Donor's hands subsequent to the transfer is considered to be material, hence, the attribute of benefaction from the transfer of the gift funds would be missing.

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.

Under the propose scheme, there will be no material benefit or advantage by way of return to the donor.

As the proposed transfer of gift funds under the proposed Deed does not satisfy the characteristics of a gift as identified in TR 2005/13, the transfer is not considered to be a gift. Therefore, the Association cannot issue a receipt under s30-228 for the transfer of gift funds under the proposed Deed.

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