Edited version of your private ruling

Authorisation Number: 1012591030989

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Ruling

Subject: Deduction for gift of a promissory note to a Public Ancillary Fund

Question 1

Are you entitled to claim a deduction for the gift to a Private Ancillary Fund (PAF) for the value of the promissory note?

Answer

Yes

Question 2

Are you entitled to claim as a deduction for the amount of the promissory note as determined by the Australian Valuation Office (AVO)?

Answer

Yes, but only to the value that the AVO approved.

Question 3

Are you entitled to claim as a deduction for the gift in the income year of expense?

Answer

Yes. You will be able to make the claim in the income year of expense, but not until you receive the valuation determination from the AVO.

This ruling applies for the following period(s)

Income year ended 30 June 20AA

Income year ended 30 June 20BB

The scheme commences on

June 20AA

Relevant facts and circumstances

The taxpayer settled a private ancillary fund (PAF).

On the same date, the taxpayer gifted a promissory note to the Trust.

The promissory note was in the form of a deed, which had a face value of a certain amount and was due and payable in the next income year.

To secure the rights of the trustee in relation to the promissory note, the donor executed a separate deed creating an equitable mortgage over all of their current and future property to secure the promises contained within the deed.

At the time of the gift, the PAF had not yet applied for its Deductible Gift Recipient (DGR) status.

The PAF applied for DGR status and was granted DGR status effective on the date the PAF was settled by the taxpayer.

The donor applied for a valuation of the promissory note from the AVO. The AVO has yet to complete the determination.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 30

Income Tax Assessment Act 1997 section 30-15

Income Tax Assessment Act 1997 section 30-212

Reasons for decision

Detailed reasoning

Gift to be tax deductible

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 nominated funds, authorities, institutions, bodies or specified persons 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.

However, a gift is deductible only to the extent that it does not create a tax loss for a taxpayer. A taxpayer making a gift of property may be able to spread their deduction over a period of up to five years. Relevant gifts are those made under the Cultural Gifts Program and gifts of property valued at over $5000 made to certain organisations.

For a donor to claim a tax deduction for a gift, it must:

· be made to a DGR;

· truly be a gift;

· be a gift of money or property that is covered by one of the gift types;

· comply with any relevant gift conditions; and

when claiming tax deductions for gifts, the donor needs to know how much to claim; and when to claim the deduction.

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.

You donated a promissory note to the face value of over $5000 to the PAF that is an endorsed DGR under Division 30 of the ITAA 1997.

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 donor by way of return.

If a transfer fails one or more of these attributes, the transfer will not be ordinarily considered as a gift.

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

Section 30-15 of the ITAA 1997 provides a list of gift types. This section explains the types of gifts covered, the types of DGRs that can receive the gifts and valuation issues.

The gift may be of:

· money;

· property (including trading stock) purchased during the 12 months before the gift was made;

· property valued by the Commissioner at more than $5000;

· an item of trading stock disposed of outside the ordinary course of business;

· a property under the Cultural Gifts or Cultural Bequests programs; or

· gifts of places listed in the Register of the National Estate.

Property has a wide meaning. As well as physical things, it includes rights and interests that are capable of ownership and have a value. Property is either real (that is, an interest or estate in land) or personal (those interests in things other than land including chattels and choses in action). These rights, generally referred to as proprietary rights, are enforceable against the whole world. The content of proprietary rights is controversial but ownership includes the right to exclude others, the right to alienate and the right to use and enjoy

Promissory Note

A promissory note is a financial instrument that is an unconditional written promise by one party to pay another party a definite sum of money either on demand or at a specified future date. A promissory note typically contains all the terms pertaining to the indebtedness by the issuer or maker to the note's payee, such as the amount, interest rate, maturity date, date and place of issuance, and issuer's signature.

The promissory note, in this case, represents an obligation to be paid. By making the note, the taxpayer came under an immediate liability to pay the value of the note even though it is in the future. The promissory note, in this instance, is regarded to be property as the taxpayer ensured that the trustee of the PAF is entitled and secure in the rights to the amount promised in the promissory note.

Property valued at more than $5,000

Under section 30-15 of the ITAA 1997, a tax deduction is available for certain gifts valued at more than $5000, in accordance with the Commissioner's valuation, provided the request for valuation is made in the approved form

Where the property donated is valued at more than $5,000, the amount that will be deductible is the amount as determined by the Commissioner as per section 30-212 of the ITAA 1997.

In this case, the taxpayer donated a promissory note to the PAF in the form of a deed with a face value of over $5000, which was due and payable in the next year from donation. To secure the rights of the trustee in relation to the promissory note, the donor executed a separate deed, creating an equitable mortgage of his property to secure the promises contained within the deed.

Valuation of property donations

The Income Tax Assessment Amendment Regulations 2000 (No 2) amended the Income Tax Assessment Regulations 1997 to establish procedures for the valuation of property donated to certain funds, authorities and institutions and to set the fees that the Commissioner will charge for the valuations. The regulations list the circumstances in which the Commissioner may treat a request for a valuation as having no effect. The regulations also determine that once a valuation is completed and all fees paid, a certificate must be issued showing certain information. Requests for valuation must be made in writing on a form approved by the Commissioner and lodged with the Australian Valuation Office.

Section 30-212 "Valuations by the Commissioner" states

(1) If you make a gift that is covered by a provision Division 30 that refers to the value of property as determined by the Commissioner, you must seek the valuation from the Commissioner.

(2) The Commissioner may charge you the amount worked out in accordance with the regulations for making the valuation.

In your case, you have lodged a valuation determination from the AVO as to the value of the promissory note, however, at this time, the valuation is not yet complete and you have not received a written determination from the AVO.

Therefore, when you receive the written determination from the AVO and you have paid the required fees for the valuation, you will be eligible to make a claim for the amount of the promissory note to the value that is approved by the AVO.

The timing of the deduction

The gift provisions of the ITAA 1997 are generally directed to the allowance of deductions for donations to certain funds, authorities or institutions whose activities are confined to Australia.

As is determined above, the promissory note is regarded to be property and the donation meets the criterion to be deductible. Therefore, the approved value of the promissory note is deductible in the income year in which the gift is made.