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Ruling

Subject: Gifts and Material Benefits

Question 1

What is classed as a material benefit?

The GST legislation does not define the term - 'material benefit'. However, the ATO has published a document called the 'Charities Consultative Committee Resolved Issues Document' (CCC document) that contains the Commissioner's views on gifts and material benefits.

In Part 4 - Fundraising, gifts and donations - Question 13, the CCC document provides by way of examples, what is and what is not considered to be a material benefit. It states the following:

The following are not considered to be a material benefit in relation to the making of a donation:

· Listing of donors on a donor board. That is, a mere acknowledgment and not advertising.

· The provision of a gift which is directed towards a specific benefit to a person who is not an associate of the donor. For example, 'this donation is to be used to provide braille books for children undertaking studies towards the NSW Higher School Certificate'.

· The provision of a gift in response to a specific or general appeal for a specified purpose. An example of this is an appeal to help victims of a natural disaster.

· The provision of a mere acknowledgment or items of insubstantial value (for example a cup of tea) as the result of a gift.

· A thank you lunch or dinner to volunteers working for an organisation where there is no pre-existing agreement that such provision will be made.

· Membership of a donor club whether or not the member has any voting right provided the member receives no material benefit. This will be a matter of degree but an example would be a club where the donor receives things like a certificate and an infrequent newsletter or a report upon the progress of projects funded by the donations. The purpose of the newsletter or report is to encourage further donations by the members.

The following are considered to be a material benefit in relation to the making of a donation:

· Membership of a donor club where rights other than voting rights are bestowed on the member. An example is where a health promotion body provides to the member, amongst other things, advice about their symptoms and medication and a quarterly newsletter.

· The recipient of the donation confers an entitlement on the member to discounted prices at functions or events organised and goods or services supplied by it.

· The recipient of the donation confers an entitlement on the member to use its facilities.

· The donee provides advertising (rather than mere acknowledgment) to the member.

Question 2

Can a material benefit be advertising and/or sponsorship?

The recognition of the activities of a giver in commercial advertising and/or sponsorship would be a material benefit received by the giver. Examples of such advertising are the advertising of a business or trading name and/or logo in a prominent position.

However, any benefit that is provided must be considered in light of the surrounding circumstances to determine whether it constitutes a material benefit.

Paragraphs 191 - 195 of TR 2005/13 provide several examples to assist in clarifying the Commissioner's view of material benefits in relation to commercial advertising:

Example 65

191. S, a wealthy businessman decides to make a gift of $5 million to the public hospital (a DGR) in his area for the purpose of building a new wing to treat people suffering from alcoholism. S stipulates that the new wing should be named the 'Frederick S Wing'. In order to recognise S's generosity, the hospital will name the new wing in his honour. It will also acknowledge the gift by placing a plaque acknowledging his generosity in the foyer of the new building. The naming is not a material benefit, and paragraph 78A(2)(c) of the ITAA 1936 will not apply. The obligation he imposed does not detract from a finding that the transfer was by way of benefaction on the hospital.

192. On the other hand, recognition accorded to the giver for purposes of commercial advertising is a material benefit. Sponsorships of DGRs by commercial entities generally fall into this category. Such outgoings, however, may be income tax deductible as business expenses.

Example 66

193. M operates a shop under the trading name M's Musical Supplies. He makes a payment of $20,000 to a cultural DGR, on the basis that it will place a prominent sign at the entrance to its complex thanking M's Musical Supplies for its generous support. The $20,000 payment is not a gift, as he receives a material benefit, namely advertising for his shop, in return for it. As well, the payment would not be deductible because of paragraph 78A(2)(c). However, M may be entitled to a tax deduction for the contribution as a business expense.

Example 67

194. Assume in the example above of S's payment to the hospital (paragraph 191), he stipulated that the new wing be named after his business, the 'S Pharmaceuticals Wing'. The benefit is likely to be material, (constituting advertising) and, in any event, a gift deduction may be precluded by paragraph 78A(2)(c) of the ITAA 1936. There may, however, be a deduction available as a business expense.

Example 68

195. As part of its 'corporate philanthropy' program, a large retailer sponsors three special exhibitions of a public art gallery (a DGR). Its business name is to be included in the name of the exhibition, all advertising and displays of the exhibition are to feature its logo and name in the dimensions it specifies, and they are to emphasise its support and commitment to the arts. The retailer will give the gallery $400,000 for each of the exhibitions. The payments will not be gifts. They do not arise by way of benefaction. The retailer receives material benefits from the advertising. However, the retailer may be entitled to deductions for the payments as business expenses.

Question 3

When does mere acknowledgement constitute advertising?

There is no clear cut rule as to when acknowledgement constitutes advertising. Every scenario or situation is generally different and must be based upon the individual circumstances and facts surrounding the case.

Generally, where a donor receives mere acknowledgment of their contribution or gift, this will not constitute an advantage of a material character and therefore does not provide a material benefit. Examples of 'mere acknowledgement' include the erection of a small plaque, inclusion on a donor board or acknowledgement in a newsletter. Where the acknowledgement includes information concerning the donor's products, services, logos strategically placed, etc then this would amount to advertising and the payment would no longer be considered a gift. (Refer to question 2 as to when a material benefit amounts to advertising).

Paragraph 186 of TR 2005/13 also confirms that public recognition accorded to givers through such things as mere acknowledgements in newsletters, annual reports, on a donor board and so on will not constitute a material benefit. Further examples of mere acknowledgement or recognition can be found in examples 62 - 64 of TR 2005/13.

The comparison between the mere recognition of a gift and the commercial advertising aspect is best highlighted in examples 65 and 67 of TR 2005/13 (refer to Question 2).

Question 4

Does naming the prizes and their donors in a booklet distributed to attendees and prize recipients constitute advertising and/or sponsorship?

As explained in Question 3, the mere acknowledgement of a gift (for example, by inclusion in a booklet or program, or by announcement on a notice board carrying a donor's name) will not provide a material benefit. This issue is reinforced by paragraph 186 of TR 2005/13 which states that public recognition accorded to donors through such things as mere acknowledgements in newsletters, annual reports, on a donor board and so on, will not constitute a material benefit.

The naming of prizes and donors in a booklet that is distributed to attendees and prize recipients will not constitute advertising so long as the acknowledgement does not go further than this. That is, the acknowledgement does not include information concerning the donor's products or services, does not generally contain the donor's logos that have been strategically placed, etc. If they did, then this may amount to advertising and the payment would no longer be considered a gift. Every case must be decided upon, based upon its own individual facts and circumstances.

Question 5

Does listing the prizes and their donors on a website constitute advertising/sponsorship?

The listing of prizes and their donors would generally be considered to be that of mere acknowledgement and not advertising. However as explained in Question 3 above, where this acknowledgement goes further than simply the naming of prizes and/or the naming of the donors then it may constitute advertising.

Reference is made to your website. This website contains a listing of the various awards, prizes and listing of the donors for the various years. The acknowledgement that is made in the website consists of

· Name of Award

· A brief history of the prize

· Selection criteria for individual

· Value of the prize, and

· Previous winners.

In this instance, we consider that the acknowledgement of the award supporters does not constitute advertising. There is no material benefit received by the donor and there is no contractual obligation to acknowledge the award supporter in recognition of the awards support payments. No conditions are imposed on the type of acknowledgement required, for example no requirement to prominently display a corporate logo. In addition, the award supporters do not direct where the funds are distributed, as they have no participation in selecting the winners of the award, apart from the general stipulation of the selection criteria. It is you who selects the outstanding individual based upon the selection criteria. Accordingly in this scenario, the listing of the prizes and donors on your website will not constitute advertising/sponsorship and will not be subject to GST.

Question 6

Does listing the prizes and their donors on an honour role constitute advertising/sponsorship?

The listing of a donor and their prizes will generally not constitute advertising or sponsorship on an honour role. This would generally be considered to be mere acknowledgement. However each case needs to be considered on its own merit. Issues that need to be looked at include the scale of size and degree of the acknowledgement, whether the recognition provided includes logos, their size and strategic placement, etc.

Furthermore, a donation may have some conditions attached to it and still be a gift. For example, the donor may stipulate a purpose for which they wish the item or its proceeds to be used. Such a condition reflects the terms on which the donor intends to make the donation and the donee's understanding of the terms on which the donation will be made. This does not necessarily detract from the intention of the donation and does not directly or indirectly provide a material benefit to the donor.

Paragraph 62 of GSTR 2000/11 explains the fact that a grant may have conditions attached to it that flow from the grantors right to regulate the disposal of the grant will not prevent it from being a gift. It concludes that where the conditions merely reflect the terms of the arrangement and create equitable rights that are enforceable by equitable remedies, then this will not prevent the grant from being a gift. This is provided that the equitable rights do not directly or indirectly provide a material benefit to the grantor or an associate.

Question 7

If the donor stipulates that the award should be named after them is this still classed as mere acknowledgement and therefore no material benefit and therefore has GST applied to it?

A donation may have conditions attached to it that flow from the donor's right to regulate the disposal of the donation and still be a gift. Such conditions reflect the terms on which the donor intends to make the donation and the recipients understanding of the terms on which the donation is made.

For example let us assume a donor makes a donation, (say of $1 million to ABC University for building a Research laboratory) and communicates a wish or stipulation that in return for the monies the Research laboratory or a part of it, be named after him. This will not affect the nature of the payment and the donation will still possess the characteristics of a gift, that is, the donation was made voluntarily and no material benefit accrued to the donor. Therefore the donation is a gift and will not be subject to GST.

This is further clarified by the following 2 examples in TR 20005/13 which state:

Example 65

191. S, a wealthy businessman decides to make a gift of $5 million to the public hospital (a DGR) in his area for the purpose of building a new wing to treat people suffering from alcoholism. S stipulates that the new wing should be named the 'Frederick S Wing'. In order to recognise S's generosity, the hospital will name the new wing in his honour. It will also acknowledge the gift by placing a plaque acknowledging his generosity in the foyer of the new building. The naming is not a material benefit, and paragraph 78A(2)(c) of the ITAA 1936 will not apply. The obligation he imposed does not detract from a finding that the transfer was by way of benefaction on the hospital.

Example 67

194. Assume in the example above of S's payment to the hospital (paragraph 191), he stipulated that the new wing be named after his business, the 'S Pharmaceuticals Wing'. The benefit is likely to be material, (constituting advertising) and, in any event, a gift deduction may be precluded by paragraph 78A(2)(c) of the ITAA 1936. There may, however, be a deduction available as a business expense.

Question 8

(a) Does raising an invoice for each donation mean that the characteristics of the donation no longer fit with that of a voluntary gift and therefore attracts GST?

(b) If yes, would writing letters to potential donors each year asking them whether they would like to donate, and if so to forward their payment/cheque to you, negate this issue?

For a payment to be considered a gift, it must satisfy the following properties:

· it must be voluntary

· the payer must not receive a material benefit in return for the payment, and

· the payment must be made out of benefaction and disinterested generosity of the payer.

Once all these requirements are satisfied, then raising an invoice for the payment will not affect the character of the payment as a gift. Since the payment is established as being a gift, then it will be specifically excluded from being consideration for a supply (pursuant to paragraph 9-15(3)(b) of the GST Act) and there will not be a taxable supply. Consequently GST will not apply.

It should also be noted that writing to potential donors each year asking them whether they would like to donate would generally not be a decisive factor in determining the character of any payment that they chose to make.

Relevant facts and circumstances

You are registered for goods and services tax (GST).

You are endorsed as a charitable institution and a deductible gift recipient for GST purposes.

You receive donations from external parties (mainly GST registered corporate entities and individuals) to be used as prizes for individuals as acknowledgement of their achievement.

The prizes are generally named after the donor although this is not a condition of the donation, it is more convenience.

There is no contractual obligation to name the prize a certain way, although there may be a small number of donors who do request that they be noted on an honour board or something similar.

Other prizes are not named after the donors.

You also produce two booklets, a ceremony booklet and a prize booklet, in which the prize names, recipients and donors are listed.

The prize booklet is posted to recipients after the ceremony. There is a separate prize presentation for individuals and the prize booklet is available to all attendees at the ceremony.

The prize winners are listed in the ceremony booklet which is distributed to attendees at the ceremony.

You have included extracts from both booklets.

A list of the prizes is available on your website.

The acknowledgement that is made in the website consists of:

· Name of Award

· A brief history of the prize

· Selection criteria for individual

· Value of the prize, and

· Previous winners.

No logos or company fonts are used either in the booklet or on the website. The prizes are listed subtly and generically.

No banners/posters are displayed at the ceremony which may contain any of the donor's names, fonts, logos, etc.

You sent letters to last years donor's asking them whether they would like to donate again this year for the same amount as previously. If they accept, they either return the form with their payment or return the form and you invoice them for their contribution. You have included a copy of the letter and form.

Some donors accept with a letter detailing certain requirements such as criteria on which the prize winner should be judged on.

Some donors insist on paying the student directly. In these instances, the donor will forward a cheque made out to the individual via you and you then forward it on to the student.

Some donors may request that the prize name and recipient is included on an honour board.

You do not advertise the prizes in any arenas other than those listed above, although some prizes may be reported on in the local newspapers, which is beyond your control.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Paragraph 9-15(3)(b) and

Income Tax Assessment Act 1936 Paragraph 78A(2)(c).