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Edited version of private ruling
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Ruling
Subject: Capital gains tax - disposal of a gift
Question 1
Will the donation by the rulee result in a capital gains tax (CGT) event A1 occurring pursuant to section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes.
Question 2
Will the capital proceeds resulting from the CGT event A1 be equal to the market value of the asset in accordance with subsection 116-30(1) of the ITAA 1997?
Yes.
Question 3
Will the rulee be entitled to the 50% general discount in Division 115 of the ITAA 1997?
Yes.
Question 4
Will the donation of the shares to an entity who is a deductible gift recipient (DGR) be tax deductible under Division 30 of the ITAA 1997?
Yes.
Question 5
Can a gift deduction under Division 30 of the ITAA 1997 lead to a carry forward loss?
No.
This ruling applies for the following period
30 June 2010
The scheme commenced on
1 July 2009
Relevant facts
The rulee wishes to gift some shares to an entity that is endorsed as a deductible gift recipient (DGR).
The rulee has held the shares for more than 12 months. The shares are worth more than $5,000.
The rulee has now gifted the shares to the entity.
Relevant legislative provisions
Income Tax Assessment Act 1936, Section 78A
Income Tax Assessment Act 1936, Subsection 78A(2)
Income Tax Assessment Act 1997, Section 26-55
Income Tax Assessment Act 1997, Subsection 26-55(2)
Income Tax Assessment Act 1997, Division 30
Income Tax Assessment Act 1997, Section 30-15
Income Tax Assessment Act 1997, Section 36-10
Income Tax Assessment Act 1997, Section 36-15
Income Tax Assessment Act 1997, Subsection 36-15(2)
Income Tax Assessment Act 1997, Section 104-10
Income Tax Assessment Act 1997, Subsection 108-5(1)
Income Tax Assessment Act 1997, Section 115-5
Income Tax Assessment Act 1997, Paragraph 115-100(a)
Income Tax Assessment Act 1997, Subsection 116-20(1)
Income Tax Assessment Act 1997, Subsection 116-30(1)
Reasons for decision
Question 1
If a person disposes of a CGT asset to another entity, then CGT event A1 under section 104-10 of the ITAA 1997 will occur. A CGT asset includes property and legal and equitable rights that are not property (subsection 108-5(1) of the ITAA 1997). Shares are made up of legal and equitable rights and as such are CGT assets
A person disposes of a CGT asset if a change of ownership occurs from the person to another entity, whether because of some act or event or operation of law (subsection 104-10(2) of the ITAA 1997). The time of the event is when the person enters into a contract for the disposal of the asset or if there is no contract, when the change of ownership occurs (subsection 104-10(3) of the ITAA 1997). The time of the event occurred when the rulee gifted their shares to the entity who is a DGR.
A capital gain is made if the capital proceeds from the disposal exceed the cost base of the asset. Conversely a capital loss will occur if the capital proceeds are less than the asset's reduced cost base (subsection 104-10(4) of the ITAA 1997).
Question 2
Division 116 of the ITAA 1997 explains how to work out the capital proceeds from a CGT event. Section 116-20 of the ITAA 1997 provides some general rules about capital proceeds. While subsection 116-20(1) states that the capital proceeds from a CGT event are the total of the money a person has received, or is entitled to receive and the market value of any other property that the person has received, or are entitled to receive (worked out at the time of the event), in respect of the event happening.
However, as the rulee did not receive any capital proceeds in this instance, then the rulee is deemed under subsection 116-30(1) of the ITAA 1997 to have received the market value of the CGT asset worked out at the time of the event.
Question 3
The rulee will be entitled to the discount capital gain under Division 115 of the ITAA 1997 if the rulee complies with the following requirements of section 115-5 of the ITAA 1997:-
· you are an individual, complying superannuation entity or trust (section 115-10 of the ITAA 1997); and
· the capital gain resulted from a CGT event happening after 11.45 am on 21 September 1999 (section 115-15 of the ITAA 1997); and
· you did not choose to apply indexation to any of the elements of your cost base (section 115-20 of the ITAA 1997); and
· you have owned the CGT asset for at least 12 months before the CGT event (section 115-25 of the ITAA 1997).
As the rulee is an individual who has complied with all of the other requirements in section 115-5 of the ITAA 1997, then the rulee is entitled to claim a discount percentage of 50% in accordance with paragraph 115-100(a) of the ITAA 1997.
Question 4
Division 30 of the ITAA 1997 outlines the guidelines for the deductibility of gifts and donations. Section 30-15 of the ITAA 1997 provides that a gift to any funds and institutions listed is allowable as a deduction in the income year in which the gift is made, provided the gift meets the various conditions of the relevant subsections.
To be able to claim a tax deduction for a gift, it must:
· be made to a deductible gift recipient (DGR)
· be a gift of money or property that is covered by a gift type, and
· be truly a gift.
Deductible Gift Recipient (DGR)
Only gifts made to a DGR are tax deductible. Division 30 of the ITAA 1997 provides that a taxpayer will be able to claim a deduction for a gift or contribution made during the year to nominated funds (including prescribed private funds), authorities, institutions or specified persons.
Paragraph 3 of the Taxation Ruling 2000/12 (TR 2000/12) explains that a deduction is not available unless the recipient is endorsed by the Commissioner or is specifically listed by name in the ITAA 1997 as an eligible gift recipient.
The entity to whom the shares have been gifted is an endorsed DGR and therefore this condition has been complied with.
Be a gift of money or property that is covered by the gift type.
The Table in section 30-15 of the ITAA 1997 sets out the types of non-testamentary gifts (to the value of $2 or more) to a DGR that can be income tax deductible. They are:
· money
· property (including trading stock) purchased during the 12 months before making the gift
· property valued by the Commissioner at more than $5,000
· an item of your trading stock disposed of outside the ordinary course of business
· property under the Cultural Gifts Program, or
· gifts to places listed in the Register of the National Estate.
The rulee meets this condition as they have made a gift of property to a DGR during the relevant income year and the gift is expected to be valued by the Commissioner at more than $5,000.
A true gift
Taxation Ruling 2005/13 (TR 2005/13) explains what constitutes a gift. The term gift is not defined in the ITAA 1997 and so for the purposes of Division 30 of the ITAA 1997, it has its ordinary meaning. The courts have described a gift as having the following characteristics and features:
· there is a transfer of money or 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.
If a transfer fails one or more of these attributes, the transfer will not ordinarily be considered as a gift.
Transfer of money or property
Paragraph 61 of the TR 2005/13 states that:
The making of a gift to a DGR involves the transfer of money or property to that DGR: section 30-15 of the ITAA 1997. In the simplest cases, this involves the delivery of money (cash, cheque or electronic transfer of funds) or goods to the DGR.
Paragraph 62 goes on to state that:
It is necessary to ascertain whether a transfer has occurred, what property has been transferred, and when the transfer took place. This is to ensure that ownership of identifiable property has been divested and has been transferred to the DGR (c.f., Re Rose (dec'd); Rose v. Inland Revenue Commissioners [1952] 1 All ER 1217).
The rulee has transferred the property and as such the transfer has taken place, the rulee has therefore satisfied this requirement.
Transfer made voluntarily
Voluntarily is a term, which describes a giver's act of their own will or choice, with no consideration or prior obligation imposed.
Paragraph 92 of TR 2005/13 explains how the transfer of property can be a gift when it states that:
Case authorities make it clear that for a transfer of property to be a gift it must be made voluntarily. A transfer of property will constitute a 'gift' if the property was transferred voluntarily (Cyprus Mines Corporation v. FC of T 78 ATC 4468; 9 ATR 33), and no advantage of a material character was received by the taxpayer in return (FC of T v. McPhail (1968) 41 ALJR 346; 15 ATD 16; 10 AITR 552; Hodges v. FC of T 97 ATC 2158; 37 ATR 1091).
A transfer made voluntarily will not be accepted as voluntarily where:
· the choice is offered as an alternative to discharging or reducing the givers contractual obligation to the DGR or an associate of the DGR;
· the choice, once exercised, has the effect of discharging or reducing the giver's contractual obligation owed to the DGR or associate of the DGR.
The rulee has stated that they have made the transfer voluntarily. As such the rulee satisfies this requirement.
Arises by way of benefaction
Paragraph 113 of TR 2005/13 explains that the essential idea of a gift is that there is a conferral of benefaction on the recipient. Additionally, Brennan J in Leary v. Federal Commissioner of Taxation (1980) 11 ATR 145 explains that the giver must be aware that the recipient is free to enjoy the benefit of the gift, otherwise it will not be seen by way of benefaction.
The benefactor in this case will be advantaged by receiving the gift without any material detriment. Therefore the rulee satisfies this requirement.
No material benefits or advantage
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.
The only material advantage experienced by the rulee will be the possible tax deduction received for the relevant income year. According to paragraph 35 of the TR 2005/13:
A motive of seeking a tax deduction does not, by itself, disqualify a transfer from being a gift.
Furthermore if a benefit is received (or is reasonably expected to be received) by the giver or an associate of the giver then it is necessary to determine whether the transfer falls within the provisions of paragraph 78A(2)(c) of the ITAA 1936.
Section 78A of the Income Tax Assessment Act 1936 (ITAA 1936)
Subsection 78A(2) of the ITAA 1936 lists a number of circumstances when a deduction would not be allowable under Division 30 of the ITAA 1997. These include:
· where the amount or value of the benefit to the recipient as a result of the gift or contribution is less than the amount or value of the gift at the time that the gift is made;
· where the recipient as a result of the gift being made, is expected to make or become liable to make, a payment or transfer property, or suffers any other detriment;
· where the donor or associate of a donor would obtain a benefit other than a tax saving, or
· where the recipient acquires property from the donor or associate of the donor as part of or in association with the making of the gift.
In this case, there is no evidence of a material benefit being provided to the rulee or an associate of the rulee as a result of the gift and as stated in paragraph 46 of TR 2005/13:-
Section 78A does not apply to deny deductions for genuine gifts made under ordinary circumstances therefore section 78A of the ITAA 1936 has no application.
Since the rulee meets all the conditions of a gift under Division 30 of the ITAA 1997, then the rulee is eligible to claim a deduction for the gift made to the entity who is a DGR for the relevant income year once the Australian Valuation Office issues their valuation on behalf of the Commissioner.
Question 5
Section 36-10 of the ITAA 1997 provides that a tax loss is incurred in any income year, if a taxpayer's allowable deductions (other than tax losses of earlier income years) exceeds assessable income and net exempt income (worked out under section 36-20 of the ITAA 1997) for that year.
Section 36-15 of the ITAA 1997 explains how to deduct tax losses for entities other than corporate entities. Subsection 36-15(2) of the ITAA 1997 deals with the situation when an entity other than a corporate entity does not have any net exempt income when it states that:-
If your total assessable income for the later income year exceeds your total deductions (other than tax losses), you deduct the tax loss from that excess.
However, subsection 26-55(1) of the ITAA 1997 then explains that there is a limit on the total of the amounts which you can deduct for the income year under a number of provisions, one of which is Division 30 of the ITAA 1997 (paragraph 26-55(1)(ba) of the ITAA 1997).
Subsection 26-55(2) of the ITAA 1997 then states that:-
The limit is worked out by subtracting from your assessable income all your deductions except:
*tax losses; and
…
….
Therefore section 26-55 of the ITAA 1997 ensures that deductions for gifts or contributions under Division 30 of the ITAA 1997 cannot create or increase a tax loss as defined in section 36-10 of the ITAA 1997.