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Ruling

Subject: Donations

Question 1

Are the amounts received from a donor (in return for the payment of premiums on the donor's life insurance policy) tax deductible gifts?

Advice/Answers

No

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

Has been ongoing for many years

Relevant facts

A resident in a rural town has made a Deductible Gift Recipient the beneficiary of their life insurance policy when they die.

Each year the resident makes a monetary contribution to the Deductible Gift Recipient and the Deductible Gift Recipient issues the resident with a receipt.

The resident's long standing agreement with the Deductible Gift Recipient is that the monetary contribution will be used to pay the resident's annual insurance renewal premium which they forward to the Deductible Gift Recipient.

The resident uses the receipt issued by the Deductible Gift Recipient each year to claim a tax deduction.

There is no deed of assignment which assigns ownership of the relevant life insurance policy to the Deductible Gift Recipient.

The Deductible Gift Recipient is not legally liable to make any repayments on the life insurance policy.

The Deductible Gift Recipient is only the beneficiary of the policy; it is not the owner of the policy.

The owner of the policy is entitled to change the beneficiary of the policy.

Relevant legislative provisions

Income Tax Assessment Act 1997 - Section 30-15

Reasons for decision

Issue 1

Question 1

Under section 30-15 of the Income Tax Assessment Act 1997 (ITAA 1997), a taxpayer is entitled to income tax deductions for gifts they make to a Deductible Gift Recipient (DGR) provided it meets the requirements set out in the tables contained within that section. A gift that can be deductible to the donor includes:

· Money

· Property

· An item of trading stock disposed of outside the ordinary course of business

· Property gifted under the Cultural Gifts Program

· Gifts of places included in the National Heritage List, the Commonwealth Heritage List, or the Register of the National Estate.

Taxation Ruling TR 2005/13: Income Tax: tax deductible gifts - what is a gift provides the Commissioner's views of the principles taken into account in determining whether a payment is a gift. Paragraph 13 of TR 2005/13 states:

13. Rather than attempting a definition of a 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

A Transfer

Paragraph 18 and 19 of TR 2005/13 provide as follows:

18. For there to be a transfer, the property which belonged to the giver must become the property of the DGR. A gift is effectual only where the giver has 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…

19. 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…

Paragraph 62 and 63 of TR 2005/13 goes on to state:

62. In each case 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).

63. In Milroy v. Lord (1862) 45 ER 1185 at 1189; 4 De GF & J 264,, at p 274; [1861-73] All ER Rep 783.Turner L J said that for a gift to be valid and effectual, the giver:

must have done everything which according to the nature of the property comprised in the settlement, was necessary to be done in order to transfer the property and render the settlement binding upon him.

Paragraph 77 of TR 2005/13 emphasises the importance of the DGR receiving full title to the property that has been transferred from the donor. It states:

77. Upon 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…

In this case, it is clear that there has been no transfer of the beneficial interest in property (being the life insurance policy) from the donor to the DGR.

The donor has made the DGR the beneficiary of the life insurance policy, but the donor is still the owner of the policy. There has been no contractual assignment (deed of assignment) of the life insurance policy which transfers ownership of the policy to the DGR, and the DGR is not legally liable to pay the premiums on the policy. Furthermore, the donor is able to change the beneficiary of the policy at any time.

The facts show that there has been no change in ownership of the policy. Consequently, the donation does not meet the first requirement as set out by TR 2005/13 that there must be a transfer of the beneficial interest in the property. As there is no transfer, neither can it be concluded it was made voluntarily nor that it arose by way of benefaction.

On this basis, the donations made to the DGR in return for paying the life insurance premiums for the donor do not constitute a gift for the purposes of section 30-15 of the ITAA 1997.