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Ruling

Subject: Gifts and donations

Question

Are you entitled to claim a deduction for the donation of trading stock to a deductible gift recipient (DGR)?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

You are in business.

You produced and donated goods to a DGR.

There is no connection between yourself and the DGR.

No contractual obligations arose as a result of making the donation.

The donation was not used to extinguish any existing liabilities between yourself and the DGR.

You received no benefit from making the donation.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 78A

Income Tax Assessment Act 1997 Section 30-15

Income Tax Assessment Act 1997 Section 30-25

Reasons for decision

Summary

You are entitled to a deduction equivalent to the market value of the goods donated to the DGR as all the requirements for a gift deduction have been met.

Detailed reasoning

Division 30 of the Income Tax Assessment Act 1997 (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 or institutions listed is allowable as a deduction in the financial 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

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.

The recipient of the donation is an endorsed DGR.

Be a gift of money or property that is covered by the gift type

To obtain an allowable tax deduction for a gift it must be one of the following gift types:

§ money

§ property that you purchased during the 12 months before making the gift

§ an item of your trading stock if the gift is made outside the ordinary course of your business

§ property valued by the Commissioner at more than $5,000, or

§ shares that you have acquired in a public company listed on an approved stock exchange whose market value is $5,000 or less on the day the gift is made and you acquired the shares at least 12 months before making the gift.

It is accepted the donation was made outside of your normal business activities. Where an item of trading stock is donated, the amount that can be deducted is the market value of the item on the day it is donated.

Your donation will meet this condition as the market value of the donation is in excess of $2, and the donation is being made outside of the ordinary course of your business.

A true gift

Taxation Ruling 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, 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 a gift.

Transfer of property

Paragraphs 61 and 62 of TR 2005/13 states that the making of a gift to a DGR involves the transfer of money or property to that DGR. In the simplest cases, this involves the delivery of money or goods to the DGR.

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.

You have transferred the ownership of the goods to the DGR and thus meet this condition.

Transfer made voluntarily

Voluntarily is a term which describes a giver's act as being of their own will or choice with no consideration or prior obligation imposed.

Paragraph 92 of TR 2005/13 states the case authorities make it clear that for a transfer of property to be a gift it must be made voluntarily. A transfer will be voluntary if it is the act and will of the disposer and there was nothing to interfere with or control the exercise of that will.

A transfer is not made voluntarily where the giver is offered a choice of making a purported gift to the DGR where:

§ the choice is offered as an alternative to discharging or reducing the giver's contractual obligation to the DGR or an associate of the DGR, and

§ 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.

No contractual obligation existed between yourself and the DGR prior to the donation or came into existence as a result of the donation. The decision to make the gift has been made by you voluntarily.

Arises by benefaction

Where the giver is aware that the transfer of property will result in detriments, disadvantages, obligations, liabilities or limitations to the recipient, the attribute of benefaction may be missing. Whether the benefaction is in fact conferred will depend to a large extent on the proportion which the detriment, disadvantage, obligation, liability or limitation bears to the value of the property transferred.

The benefactor in this case is the DGR. The DGR has been advantaged by receiving the gift without any material detriment. You are aware that the DGR is free to enjoy the gift.

Material benefits

In order to constitute a gift, the giver must not receive a benefit or 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. 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 the transfer falls within the provisions of section 78A of the Income Tax Assessment Act 1936 (ITAA 1936)

Section 78A of the ITAA 1936 is designed to support the integrity of the gift deduction provisions. It contains anti-avoidance provisions and aims to ensure that 'the benefit to the fund will equal the deduction allowed to the taxpayer' (Bray v. FC of T 77 ATC 4339, (1977) 7 ATR 780).

As you or an associate did not receive any benefit from the gift section 78A of the ITAA 1936 will not apply.

You are eligible to claim a deduction for the market value of the goods donation to the DGR as you meet all the requirements for a deduction for a gift.