Edited version of your written advice

Authorisation Number: 1051181342053

Date of advice: 16 January 2017

Ruling

Subject: Capital gains, Deductible gifts

Question 1

Can Company A donate the real estate property to Company B for a net amount of $X and claim a tax deduction as a charitable donation of $X?

Answer

No

Question 2

Can the capital gains arising from the transfer of real estate property between the related parties Company A and B be rolled over under subdivision 126-B of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No

This ruling applies for the following period:

01 July 2016 to 30 June 2017

The scheme commences on:

1 July 2016

Relevant facts and circumstances

1. Company A is an Australian private company limited by shares.

2. Company B is an Australian public company, limited by guarantee.

3. Company B is registered as a charity for the purpose of 'advancing education' with the Australian Charities and Not-for-profits Commission (ACNC).

4. Company B is not registered with the Australian Taxation Office (ATO) as a deductible gift recipient (DGR).

5. Company B owns all of Company A's shares.

6. Company A owns a property (the Property)

7. The Property value has increased from purchase date.

8. The main finance source for the building on the Property was a loan from Company B.

9. Company A will transfer the Property to Company B and in return the Loan will be disregarded (the Transaction).

Further issues for you to consider

Whether the Transaction would constitute a gift due to the giver receiving a benefit or advantage of a material nature in return - Taxation Ruling TR 2005/13 Income tax: tax deduction gifts - what is a gift.

That capital gains tax is determined on the market value where the entities disposing and acquiring the asset did not deal with each other at arm's length - Market value substitution rule section 116-30 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act division 30;

Income Tax Assessment Act section 30-15;

Income Tax Assessment Act section 30-227;

Income Tax Assessment Act section 116-30;

Income Tax Assessment Act subdivision 126-B

Income Tax Assessment Act section 126-40

Reasons for decision

Question 1

Summary

The transfer of Property from Company A to Company B is not considered to be a gift as Company A receives a material benefit or advantage in the Transaction.

Detailed reasoning

Section 30-15 of the ITAA 1997 sets out the situations in which a gift or contribution can be deducted from taxable income. Generally, section 30-15 provides that a non-testamentary gift of money or property (to the value of $2 or more) can be deducted where the gift is given to a deductible gift recipient (subject to special conditions).

In determining whether a particular amount is a deductible gift, it is necessary to consider whether the amount paid is a gift.

The term 'gift' is not defined in the ITAA 1997, and has its ordinary meaning for the purposes of Division 30 of the ITAA 1997 (see for example, Federal Commissioner of Taxation v. McPhail (1968) 117 CLR 111 at 116 (McPhail)). The term 'gift' is discussed in Taxation Ruling TR 2005/13 Income tax: tax deductible gifts - what is a gift which provides the following on the meaning of 'gift':

13. Rather than attempting a definition of gift, the courts have described a gift as having the following characteristics and features:

● 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 Transaction, the Property would be transferred to Company B; it is therefore considered that there will be a transfer of beneficial interest in the 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. A transfer will also not be considered to be made voluntarily in a case where the purported gift to a DGR made by the giver has the effect of discharging or reducing a prior contractual obligation of the giver's associate.

As part of the Transaction, Company B will discharge the Loan owed to it by Company A. The Transaction is therefore not made voluntarily as it is 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.

Company A intends for the transfer of the Property to benefit Company B and there will also not be any countervailing detriment arising from the Transaction. Therefore, the Property transferred to Company B will be by way of benefaction.

No material benefit or advantage

To be a gift, a donor must not receive a benefit or advantage of a material nature by way of return (Federal Commissioner of Taxation v. McPhail (supra) at 116). Paragraphs 37 - 44 of TR 2005/13 outline what constitute material benefit or advantage, they state:

37. In order to constitute a gift, the giver must not receive a benefit or an advantage of a material nature by way of return. It does not matter whether the material benefit or advantage comes from the DGR or another party.

38. Any benefit that is received (or is reasonably expected to be received) by an associate of the giver has to be taken into account in determining whether a transfer falls within the provisions of paragraph 78A(2)(c) of the ITAA 1936.

39. As well as any benefit or advantage received as a result of or in connection with a transfer of property, paragraph 78A(2)(c) of the ITAA 1936 also refers to any right or privilege (apart from the tax deduction that may be allowable) that the giver or giver's associate may receive as disqualifying the transfer from being a gift.

40. The giver may still be regarded as having received a material benefit in a case where the value of the benefit to the giver is less than the value of the property transferred. In these circumstances it is not accepted that the value of the benefit received can be notionally deducted from the value of the property transferred and the net balance claimed as a gift. No part of the property transferred is considered a gift.

41. Only advantages or benefits that are material will disqualify a transfer of property from being regarded as a gift. This excludes advantages or benefits of a de minimis nature.

42. It is a question of fact in each case whether any benefit or advantage is considered material. A benefit or advantage can be material if there is a link between the benefit and the transfer, and the benefit is sufficiently significant in relation to the value of the transfer.

43. Each of these is not a material benefit or advantage:

● one that has no link with the transfer;

● one that is insignificant in relation to the value of the transfer;

● one that only constitutes advertising for the DGR;

● one that cannot be put to use and is not marketable;

● one that does not create any rights, or confer any privileges or entitlements;

● one that merely accounts for the use of the funds;

● one that is mere public recognition of the giver's generosity; or

● one that confers membership of a DGR which was neither sought nor known by the giver at the time of making the transfer.

44. Some circumstances which may lead to a conclusion that a benefit or advantage is material are where:

● the benefit is sought by the giver in connection with the transfer;

● as a result of the transfer, a legal obligation is eliminated or reduced;

● the benefit is offered by the DGR as an inducement to potential givers;

● there is public recognition for purposes of commercial advertising for the giver;

● membership rights and privileges are obtained as a result of transfer; or

● there is a requirement to report to the giver on results of research undertaken by the DGR and the results are to be used by the giver.

The main issue to consider in this case is whether the advantages or benefits are material. As stated above, only advantages or benefits that are material will affect whether a transfer is a gift (McPhail), however the value of the material benefit or advantage given to the donor need not be as much as the value of the property transferred to the recipient.

In this case, as a result of transfer of Property from Company A to Company B the legal obligation to pay back the Loan is eliminated. Therefore, there is a direct link between the material benefit or advantage to the gift as the giving of the gift eliminated Company A's legal obligation. The Loan that will be disregarded is of a significant value in relation to the transfer of Property.

Further, as noted above in paragraph 40 of TR 2005/13 where the value of the benefit to the giver is less than the value of the property transferred, as is occurring in this situation, it is not accepted that the value of the benefit received can be notionally deducted from the value of the property transferred and the balance claimed as a gift. This means that no part of the Property transferred from Company A to Company B is considered a gift.

Conclusion

Considering that Company A will receive a material advantage or benefit from the Transaction no part of the Property transfer will be considered a gift for the purposes of Division 30 of the ITAA 1997. It is also considered that Company A is not transferring the Property voluntarily as they are doing so as part of a legal obligation to pay off the Loan owed to Company B.

Question 2

Summary

The same asset roll-over provision in subdivision 126-B of the ITAA 1997 cannot be used by the client as the subdivision requires at least one of the parties to be a foreign resident. In this case both of the related parties are Australian entities.

Detailed reasoning

Subdivision 126-B relates to asset roll-overs between Companies in the same wholly-owned Group. Section 126-40 states that:

A roll-over may be available for the transfer of a CGT asset between 2 companies, or the creation of a CGT asset by one company in another, if:

(a) both companies are members of the same wholly-owned group; and

(b) at least one of the companies is a foreign resident.

In order to use the same asset roll-over in subdivision 126-B all of the requirements within the provision must be met. One of the requirements in subsection 126-50(5) is that at least one of the companies is a foreign resident, the subsection states:

Company A is an Australian private company limited by shares and Company B is an Australia public company, limited by guarantee. As both Company A and B are Australian companies the Transaction does not meet the requirements of subdivision 126-B and therefore the companies cannot use the same asset roll-over provisions.

No further requirements of the provision are required to be considered as the Transaction does not meet the foreign resident provision and therefore the entities cannot use the same asset roll-over provision in subdivision 126-B.

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