| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1012761733228
Ruling
Subject: Deductibility of Gifts
Question 1
Are the Taxpayers entitled to claim a tax deduction in relation to the proposed gifts of art to The Museum?
Answer
Yes
Question 2
Are the Taxpayers entitled to a deduction for the proposed gifts of art that is reasonable having regard to each of their 50 per cent interests in the proposed gifts?
Answer
Yes
Question 3
Will the Taxpayers be able to utilise the averaging provisions in Subdivision 30-DB of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the proposed gifts of art?
Answer
Yes
Question 4
Are the gains on the proposed gifts of art exempt from capital gains tax (CGT)?
Answer
Yes
Question 5
What is the value of the tax deduction that the Taxpayers are entitled to claim?
Answer
Each Taxpayer is entitled to claim 50% of the GST inclusive market value of the artworks reduced by a percentage representing the adjustment in accordance with section 30-220 of the ITAA 1997.
This ruling applies for the following period:
The ruling applies for the gifts of made between 1 January 20XX and 31 December 20XX.
The scheme commences on:
1 January 20XX
Relevant facts and circumstances
A and B (the Taxpayers) own artworks.
The Taxpayers intend to gift selected artworks to the Museum in the 20XX calendar year.
The Taxpayers are joint owners of the proposed gifts of artworks.
The Taxpayers propose to retain the right to use the artworks from the time the gift until the date of death of the survivor of A or B. On the death of the survivor of A or B, the whole of the artworks will pass to the Museum.
The artworks will be valued at more than a certain value.
The artworks will be fully and appropriately insured by A and B while they retain possession of the artwork.
The artworks will be held in an appropriate environment.
Museum A and Museum B are both endorsed under Subdivision 30-BA of the ITAA 1997 as a deductible gift recipient (DGR).
A Deed Poll will be executed to irrevocably gift, grant and donate the artworks to Museum A and Museum B for inclusion in a collection it is establishing or maintaining.
The Taxpayers will obtain two or more valuation of each gift made.
The GST inclusive market value of the artworks will be reduced by a value based upon all the circumstances and conditions of the gift.
Relevant legislative provisions
Income Tax Assessment Act 1997, section 30-15
Income Tax Assessment Act 1997, section 30-17
Income Tax Assessment Act 1997, section 30-200
Income Tax Assessment Act 1997, section 30-225
Income Tax Assessment Act 1997, section 30-247
Income Tax Assessment Act 1997, section 30-248
Income Tax Assessment Act 1997, section 104-10
Income Tax Assessment Act 1997, section 118-60
ATO view documents
Taxation Ruling IT 295 Conditional Gifts to the Australiana Fund, Public Libraries, Museums, Art Galleries
Reasons for decision
Question 1
Are the Taxpayers entitled to claim a tax deduction in relation to the proposed gifts of art to Museum A?
Summary:
Yes. The requirements under section 30-15 and 30-17 of ITAA 1997 will be satisfied for the Taxpayers to claim a tax deduction in relation to the proposed gifts of art.
Detailed reasoning:
Section 30-15 provides that a gift is deductible if the requirements set out under one of the items in the table are met.
Museum A meets the description of the Recipient under item 1 and item 4 of the table in section 30-15. Item 4 (c) provides that if the recipient of a gift is a public museum in Australia the gift is deductible if it is property and satisfies the following special conditions:
(a) the property must be accepted by the recipient for inclusion in a collection it is maintaining or establishing; and
(b) the value of the gift is $2 or more; and
(ba) the institution must meet the requirements of the section 30-17, unless it is the Australiana Fund; and
(c) you must satisfy the valuation requirements in section 30-200, unless section 30-205 (about the proceeds of the sale being assessable) applies.
Firstly, the gift is property.
Secondly, as specified in the draft deed of gift, Museum A will accept the artworks for inclusion in their collection.
Thirdly the gifts will be valued at more than a certain value.
Fourthly, section 30-17 is satisfied since Museum A is endorsed as a DGR under subdivision 30 BA.
Fifthly, section 30-200 of ITAA 1997 provides that the taxpayer obtains two or more written valuation of the gifts by approved valuers for the kind of property to be given. Each valuation must state the GST inclusive value of the property on the day the gift was made and the GST inclusive value of the property on the day the valuation was made. The Taxpayers have stated that they will obtain two or more valuations in accordance with section 30-200.
Therefore, providing the requirements under section 30-200 are met, all the elements of item 4 of the table in section 30-15 will be satisfied and the taxpayers will be entitled to claim a tax deduction in relation to the proposed gift of artworks.
Question 2
Are the Taxpayers entitled to claim a tax deduction in relation to the proposed gifts of art to Museum B?
Summary:
Yes. The requirements under section 30-15 and 30-17 of ITAA 1997 will be satisfied for the Taxpayers to claim a tax deduction in relation to the proposed gifts of art.
Detailed reasoning:
Section 30-15 provides that a gift is deductible if the requirements set out under one of the items in the table are met.
Museum B meets the description of the Recipient under item 1 and item 4 of the table in section 30-15. Item 4 (c) provides that if the recipient of a gift is a public museum in Australia the gift is deductible if it is property and satisfies the following special conditions:
(a) the property must be accepted by the recipient for inclusion in a collection it is maintaining or establishing; and
(b) the value of the gift is $2 or more; and
(ba) the institution must meet the requirements of the section 30-17, unless it is the Australiana Fund; and
(c) you must satisfy the valuation requirements in section 30-200, unless section 30-205 (about the proceeds of the sale being assessable) applies.
Firstly, the gift is property.
Secondly, as specified in the draft deed of gift, Museum B will accept the artworks for inclusion in their collection.
Thirdly the gifts will be valued at more than a certain value.
Fourthly, section 30-17 is satisfied since Museum B is endorsed as a DGR under subdivision 30 BA.
Fifthly, section 30-200 of ITAA 1997 provides that the taxpayer obtains two or more written valuation of the gifts by approved valuers for the kind of property to be given. Each valuation must state the GST inclusive value of the property on the day the gift was made and the GST inclusive value of the property on the day the valuation was made. The Taxpayers have stated that they will obtain two or more valuations in accordance with section 30-200.
Therefore, providing the requirements under section 30-200 are met, all the elements of item 4 of the table in section 30-15 will be satisfied and the taxpayers will be entitled to claim a tax deduction in relation to the proposed gift of artworks.
Question 3
Are the Taxpayers entitled to a deduction for the proposed gifts of art that is reasonable having regard to each of their interests in the proposed gifts?
Summary:
Yes. The Taxpayers are each entitled to a tax deduction for the proposed gifts of art which is reasonable having regard to their interest in the property
Detailed reasoning:
Section 30-225 of ITAA 1997 provides that:
If:
(a) you own property jointly with one or more other entities; and
(b) you and the other entities make a gift of the property; and
(c) you would have been able to deduct the gift under section 30-15 because of item 4,5 or 6 of the table in that section if you had made the gift of the property as sole owner of it;
you can deduct so much of the gift as is reasonable, having regard to your interest in the property.
As stated in Question 1 and Question 2 above the proposed gifts of artworks will be tax deductible. Since the Taxpayers are joint owners of the proposed gift of artworks it is reasonable for them to claim 50 per cent of the allowable deduction for each of the proposed gifts of artwork.
Question 4
Will the Taxpayers be able to utilise the averaging provisions in Subdivision 30-DB of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the proposed gifts of art?
Summary:
Yes. The Taxpayers will be able to utilise the averaging provisions in Subdivision 30-DB of the ITAA 1997.
Detailed reasoning:
Subdivision 30-DB allows taxpayers to elect to spread deductions for gifts over a period of up to 5 income years. Section 30-247 allows the election to be made for gifts covered by item 4 of the table in section 30-15, provided the gift is made after 1 July 2003.
Section 30-248 requires the election to be made in writing before you lodge your income tax returns for income year in which you made the gift. In the election you must specify the percentage of the deduction that you will deduct in each income years.
As stated in Question 1 and Question 2 above the proposed gifts of artworks will be tax deductible under item 4 of the table in section 30-15. Therefore the Taxpayers will be able to utilise the averaging provisions provided for in Subdivision 30-DB in respect of the proposed gifts of artwork to Museum A and Museum B.
Question 5
Are the gains on the proposed gifts of art exempt from capital gains tax (CGT)?
Summary:
Yes. The gains arising on the proposed gifts of art will be exempt from CGT either because the artworks were acquired prior to 19 September 1985 or the capital gain will be disregarded under subsection 118-60(2) of the ITAA 1997.
Detailed reasoning:
When the Taxpayers make the proposed gifts of art to Museum A and Museum B, CGT event A1 will occur. Subsection 104-10(5) provides that a capital gain or loss is disregarded if the asset was acquired before 20 September 1985. Further subsection 118-60(2) provides that a capital gain or loss is disregarded if it is made from a gift of property that is deductible because of item 4 of the table in section 30-15.
As stated in Question 1 and Question 2 above the proposed gift of artworks will be tax deductible under item 4 of the table in section 30-15. Therefore any gains arising to the Taxpayers from the proposed gifts to Museum A and Museum B will be exempt from CGT due to being disregarded under either subsection 104-10(5) or subsection 118-60(2).
Question 6
What is the value of the tax deduction that the Taxpayers are entitled to claim?
Summary:
The value of the tax deduction the Taxpayers are entitled to claim is the GST inclusive market value of the artworks reduced by a percentage representing the adjustment in accordance with section 30-220 of ITAA 1997.
Detailed reasoning
Item 4 in the table in section 30-15 provides that:
The general rule is that you can deduct the average of the "GST inclusive market values (as reduced under subsection (3) if that subsection applies) specified in the written valuations you get from approved valuers.
Subdivision 30-C sets out:
(a) how a person becomes an approved valuer; and
(b) the exceptions to the general rule; and
(c) the situations when the amount you can deduct is reduced.
If the property is jointly owned, see section 30-225 to work out how much of the gift you can deduct.
Section 30-220 requires "a reasonable amount" to be deducted from the value of the gift where there are restrictions on the gift. In determining what a reasonable amount is, regard must be had to the effect the terms and conditions of the gift have on the GST inclusive market value of the gift. The amount allowed as a deduction under section 30- 215(2) is reduced by a "reasonable amount", having regard to:
(a) the terms and conditions on which the gift is made are such that the recipient:
(i) does not receive immediate custody and control of the property; or
(ii) does not have the unconditional right to retain custody and control of the property in perpetuity; or
(iii) does not obtain an immediate, indefeasible and unencumbered legal and equitable title to the properly; or
(b) the custody, control or use of the property by the recipient is affected by an arrangement entered into in respect of the making of the gift.
Taxation Ruling IT 295 Conditional Gifts to the Australiana Fund, Public Libraries, Museums, Art Galleries (IT 295) considered the basis upon which the value of a conditional gift to the Australiana Fund might be reduced because of an arrangement whereby the custody of the gifted property was to remain with the donor for an agreed period after the gifting. The advice in lT 295 also applies to a gift made to, and accepted by, a public art gallery for inclusion in a collection maintained or being established. IT 295 states:
3. Factors that would have a bearing on this include the effect of a life or fixed period interest of the donor in the gifted property, a joint life or survivorship interest of the donor and his or her spouse, life expectancy of the relevant parties as well as undetermined factors such as the periods during which the donee institution may, if so agreed, require possession of the gifted property for display or study purposes.
4. The end result is not one that could be arrived at by a simple arithmetical formula. In principle, the amount of the deduction for a conditional gift would be the amount which a purchaser could be expected to pay on the date of the gift to acquire the property concerned from the donee, if the purchaser were to be buying the property on the same terms as the donee is receiving it. As mentioned previously, this would depend on an assessment of all the surrounding circumstances.
To comply with the special conditions, the Taxpayers have agreed to obtain written valuations by two valuers stating their opinion as to the value of the artwork at a date on or within 90 days of the time of the gift. The value of the artwork for the purposes of the gift will be determined by what a willing, but not anxious, vendor and a willing, but not anxious, purchaser could reasonably be expected to agree to for the transfer of property. This assumes the existence of such a vendor and purchaser both being uninfluenced by any consideration of sentiment or need.
The ATO and the taxpayers have agreed that the GST inclusive market value of the artworks will be reduced by a certain percentage. The discount to the GST inclusive market value of the donations has been determined taking into account:
(a) the life expectancy of the Taxpayers;
(b) a rental yield of an amount; and
(c) a discount rate of an amount.
In calculating the discount the following has been considered:
(a) The relevant conditions of the gift, which in this circumstance is the Taxpayers' right to retain possession of one or more of the donated artworks during their lifetimes. Upon the death of the last of the Taxpayers, full possession and ownership shall revert to Museum A or Museum B.
(b) The period for which the conditions will apply is uncertain, and consistent with the life expectancies of the Taxpayers. We agreed that a certain period is reasonable for gifts made in 20YY, based on the current ages of the Taxpayers.
(c) An appropriate method to value the reduction, which in the circumstances was to consider the rental stream which would theoretically be available on the artworks. It is recognised that it may be impractical to rent the artworks. However, the framework behind the calculation in this manner is sound. Experience and investigation of the art rental market shows that where rentals are expressed as a yield (that is, as a percentage of value), the yield decreases as the value of the artwork increases. It is appropriate that the adopted rental yield is at the low end of rental yields applicable to artwork. This reflects the high quality and value of the donated artwork. A rental yield of a certain amount is reasonable.
(d) The stream of rentals should be reduced to reach a present value of the opportunity cost reflecting the conditions of the gift. A rate of a certain amount per annum is reasonable for this purpose.
Using a term of years relating to the life expectancy of the taxpayer, a rental yield of a certain percentage per annum and a discount rate a certain percentage per annum, a reduction reflecting the conditions of the gift of X percentage of the GST inclusive market value of the artworks is reasonable, leading to an allowable deduction for the Taxpayers of (100 - X) per cent of GST inclusive value of the artworks.
In accordance with section 30-225, the Taxpayers will each deduct 50 per cent of the GST inclusive market value reduced by X per cent for each donation of artwork. That amount is reasonable having regard to the conditions attached to the proposed gifts and the individual interest of each of the Taxpayers in the artworks.
Copyright notice
© Australian Taxation Office for the Commonwealth of Australia
You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).
