Edited version of private advice

Authorisation Number: 1012636150279

Ruling

Subject: Donations

Question 1

Are you entitled to a deduction for amounts paid to a Deductible Gift Recipient (DGR) which will be used to pay for life insurance premiums?

Answer

No.

Question 2

Are you assessable on the proceeds of a life insurance policy owned by the DGR?

Answer

No

This ruling applies for the following periods

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

The scheme commences on

1 July 2013

Relevant facts and circumstances

An entity, which is a deductible gift recipient, intends taking out a life insurance policy on your life.

Upon your death the entity will be the beneficiary of the policy.

You will make a donation to the entity each year of the amount required to pay the premiums.

You will formalise the arrangement with a bequest in your will.

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

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 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 DGR

• a gift of money or property that is covered by a gift type, and

• 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 DGR funds. 

In your case, theentity is a 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 a 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.

Your intention is to donate money and therefore this meets the above conditions.

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:

(a)  there is a transfer of money or property

(b)  the transfer is made voluntarily

(c)  the transfer arises by way of benefaction, and

(d)  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 to ensure that ownership of identifiable property has been divested and has been transferred to the DGR.

You intend to transfer money to the entity and thus meet this condition. You are also donating the rights to your life insurance plan to the DGR.

Transfer made voluntarily

Voluntarily is a term which described 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 voluntarily 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 associated of the DGR.

A contractual obligation will exist between yourself and the entity prior to the donation of the insurance premiums. The donation of insurance premiums comes into existence as a result of the life insurance policy. The decision to make the gift would therefore not be considered to be made 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 entity. The entity will receive the gift of the cost of premiums for life insurance plan however with this gift they are legally responsible for the payment of the life insurance plan. Therefore as the giver you are aware that the transfer of the life insurance plan creates an obligation.

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) 7ATR 780).

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

Conclusion

You cannot claim a deduction for amounts you provide to the DGR which will be used to pay for the insurance premiums as the amounts do not meet all the requirements to be a gift. The creation of the life policy creates an obligation for the DGR and the amounts you provide to pay for the premiums is not considered a true gift.

Assessability of proceeds from the policy

The assessable income of an Australian resident includes ordinary income and statutory income derived directly or indirectly from all sources, in or out of Australia, during the income year (subsection 6-5(2) and subsection 6-10(2) of the Income Tax Assessment Act 1997 (ITAA 1997)).  

Ordinary income is not clearly defined in the legislation and therefore the courts have identified a number of factors that indicate whether an amount has the character of income according to ordinary concepts.

It has been determined that a frequent characteristic of income receipts is an element of periodicity, recurrence or regularity (Federal Commissioner of Taxation v. Dixon (1952) CLR 540; (1952) 10 ATD 82). Other characteristics of income that have evolved from case law also include receipts that:

• are earned

• are expected, and

• are relied upon.

Statutory income is not ordinary income but is included in assessable income by a specific provision in the tax legislation (subsection 6-10(2) of the ITAA 1997). 

In your case, you are neither the owner nor the beneficiary of the policy. Any proceeds from the insurance policy will not be derived by you, either directly or indirectly. You are therefore, not assessable on any proceeds from the insurance policy.