Edited version of your written advice

Authorisation Number: 1051457466488

Date of advice: 22 November 2018

Ruling

Subject: Gifts

Question

Can the gift fund accept conditional grants as “gifts” in compliance with the requirements of section 30-130 of the Income Tax Assessment Act 1997?

Answer

No.

This ruling applies for the following period:

1 July 2005 to 30 June 2019

The scheme commences on:

1 July 2005

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The entity is registered as a charity with the Australian Charities and Not-for-profits Commission.

The entity is listed on the Register of Cultural Organisations.

The entity’s public fund, has deductible gift recipient (DGR) status under item 12.1.1 of the table in section 30-100 of the Income Tax Assessment Act 1997 (ITAA 1997).

The applicant has provided a copy of the entity’s Constitution.

Operation of the Public Fund

The Public Fund receives conditional grants from a range of relevant organisations. Under these agreements, the Public Fund will receive the grant only for use for a particular purpose; for example, it may need to be expended on a particular project specified by the donor. In all cases, the purpose would be consistent with the entity’s objects and purposes. If the Public Fund does not apply the funds for the specified purpose, the grant is required to be returned to the donor (or may be reallocated to another purpose by agreement with the donor).

Constitutional limits on amounts that can be received by the Public Fund

The entity’s Constitution outlines the “Use of Public Fund” and includes:

The company must ensure that:

(a) the Public Fund receives all gifts of money and property for object of the company;

(b) all money (including interest, income or money from the realisation of property) derived from money or property in the Public Fund is paid into the Public Fund;

(c) the Public Fund does not receive any money or property other than money or property described in rules…

Relevant legislative provisions

Income Tax Assessment Act 1997 section 30-130

Reasons for decision

Please note that all legislative references referred to below are in relation to the Income Tax Assessment Act 1997 unless otherwise specified.

Division 30 sets out the rules for working out deductions for certain gifts or contributions.

Section 30-130 contains the requirements for maintaining a gift fund as follows:

30-130(1) The entity must maintain for the principal purpose of the fund, authority or institution a fund (the gift fund):

(a) to which gifts of money or property for that purpose are to be made; and

(b) to which contributions described in item 7 or 8 of the table in section 30-15 in relation to a *fund-raising event held for that purpose are to be made; and

(c) to which any money received by the entity because of such gifts or contributions is to be credited; and

(d) that does not receive any other money or property.

30-130(2) The entity must use the gift fund only for the principal purpose of the fund, authority or institution.

Exception - only one gift fund required per entity

30-130(3) An entity that operates 2 or more funds, authorities or institutions also meets the requirements of this section for 2 or more of those funds, authorities or institutions by maintaining a single gift fund if:

(a) the gift fund meets the requirements in paragraphs (1)(a), (b) and (c) in respect of each of the funds, authorities or institutions for which the gift fund is maintained; and

(b) the gift fund does not receive any other money or property.

30-130(4) The entity must use a gift or contribution made to the fund and any money credited to the fund only for the principal purpose of the fund, authority or institution to which the gift, contribution or money relates.

Note: The entity is also required to keep appropriate records for each of the funds, authorities or institutions: see section 382-15 of the Taxation Administration Act 1953.

The word ‘gift’ is not defined in the ITAA 1997 and for the purposes of Division 30 takes on its ordinary meaning.

Taxation Ruling TR 2005/13 Income tax: tax deductible gifts – what is a gift at paragraph 13 identifies the following characteristics and features which the courts have used to describe a gift:

● 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.

Transfer of beneficial interest in property

The making of a gift to a Deductible Gift Recipient (DGR) involves the transfer of beneficial interest in money or property to that DGR. In the simplest cases this involves the delivery of money or goods to the DGR.

Paragraph 18 of TR 2005/13 states that 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.

Paragraph 19 of TR 2005/13 then goes on to state that 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 by reason of the meaning of gift.

Paragraphs 74 and 77 of TR 2005/13 state as follows:

74. As a result of the transfer, the giver loses and the DGR receives the benefits associated with ownership (that is custody and control) and/or equitable interest in the property transferred. Where the giver only transfers a nominal or legal title to the property, there is no gift of that property.

77. Upon the 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…

Transfer is made voluntarily

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 disponor and there was nothing to interfere with or control the exercise of that will' (Cyprus Mines Corporation v. Federal Commissioner of Taxation 78 ATC 4468 at 4481; (1978) 9 ATR 33 at 48).

A transfer is not made voluntarily if it is made for consideration or because of a prior obligation imposed on the giver by statute or by contract or where the purported gift has the effect of discharging or reducing a prior contractual obligation of the giver’s associate.

Transfer arises by way of benefaction

An essential attribute of a gift is that benefaction is intended, and in fact conferred on the recipient. Conferring benefaction means that the DGR is advantaged in a material sense, to the extent of the property transferred to them, without any countervailing detriment arising from the terms of the transfer.

An obvious example of a transfer that is not by way of benefaction is where the giver merely makes a payment in order to receive services from the DGR. The DGR has the obligation of performing or providing the services. Generally, such payments also fail to be gifts because they are not voluntary and they provide material benefits to the giver.

If any liability or obligation falling on the DGR as a result of the transfer of property is material the transfer is not a gift.

Material benefit or advantage

In order to constitute a gift, the giver must not receive a benefit or an 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.

The giver may still be regarded as having received a material benefit in a case where the value of the benefit to the giver is less than the value of the property transferred. In these circumstances it is not accepted that the value of the benefit received can be notionally deducted from the value of the property transferred and the net balance claimed as a gift. No part of the property transferred is considered a gift.

It is a question of fact in each case whether any benefit or advantage is considered material. A benefit or advantage can be material if there is a link between the benefit and the transfer, and the benefit is sufficiently significant in relation to the value of the transfer.

Paragraphs 43 and 44 of TR 2005/13 provide examples of what benefits are considered material and nonmaterial.

43. Each of these is not a material benefit or advantage:

● one that has no link with the transfer;

● one that is insignificant in relation to the value of the transfer;

● one that only constitutes advertising for the DGR;

● one that cannot be put to use and is not marketable;

● one that does not create any rights, or confer any privileges or entitlements;

● one that merely accounts for the use of the funds;

● one that is mere public recognition of the giver’s generosity; or

● one that confers membership of a DGR which was neither sought nor known by the giver at the time of making the transfer.

44. Some circumstances which may lead to a conclusion that a benefit or advantage is material are where:

● the benefit is sought by the giver in connection with the transfer;

● as a result of the transfer, a legal obligation is eliminated or reduced;

● the benefit is offered by the DGR as an inducement to potential givers;

● there is public recognition for purposes of commercial advertising for the giver;

● membership rights and privileges are obtained as a result of transfer; or

● there is a requirement to report to the giver on results of research undertaken by the DGR and the results are to be used by the giver.

The following paragraphs are examples provided in TR 2005/13 which refer to whether a benefit or advantage is material:

Example 72

203. P makes a grant to a university (a DGR) to fund cancer research for publication in the usual scientific/medical journals. An agreement is entered into between P and the university whereby the university will account for its expenditure on the research. This information does not provide a material benefit to P. The payment is a gift.

204. On the other hand, if a DGR is required to supply a report on the results of research undertaken in accordance with the conditions of a grant, and the results of the research are to be used in the grantor's business, the grant does not possess the usual attributes of a gift - the payment is not by way of benefaction to the recipient, an advantage of a material character may be expected to be received by the grantor, and the payment does not proceed from a 'detached and disinterested generosity'.

Example 73

205. The B Pharmaceutical Company makes a grant to a public university (a DGR) with the stipulation that the grant is to be used to fund further research into a particular drug. The results of the research are to be made available exclusively to the company. The supply of information on the results of this research may be expected to provide a material benefit to the company. The payment to the university is consideration for the research undertaken by the university; the payment is not a gift.

In relation to ‘money or property received by a gift fund’ Taxation Ruling TR 2000/12 Income tax: deductible gift recipients the gift fund requirement (now withdrawn) at paragraph 20 provided that:

20. Government grants, receipts from sponsorships or commercial activities, proceeds of raffles, charity auctions, dinners and the like are not to go to the gift fund because they are not gifts. To be a gift, the money or property must be transferred voluntarily and the donor must not receive an advantage of a material character in return. A donor would not be taken to have received a material benefit if, in acknowledgment for making a donation, the donor is given something of trifling or insubstantial value such as a sticker or plastic lapel badge.

Furthermore, paragraph 22 of TR 2000/12 provided that:

22. If money or property is incorrectly added to the gift fund, it is to be removed as soon as practicable, with the accounts adjusted, where necessary, and noted accordingly. Absence of practices or procedures which minimise the risk of inappropriate amounts being added to the fund may indicate it is not being maintained as a gift fund.

Application to your circumstances

You state that the Public Fund receives grants from a range of relevant organisations. Under the agreements, the Public Fund will receive the grant for use for a particular purpose; for example, it may need to be expended on a particular project specified by the donor. If the Public Fund does not apply the funds for the specified purpose, the grant is required to be returned to the donor (or may be reallocated to another purpose by agreement with the donor).

For the reason that the grants received by the Public Fund are subject to a condition regarding their use, it is considered that there is no transfer of beneficial interest in money or property to that DGR.

Therefore, the conditional grants are not considered to be ‘gifts’ for the purposes of Division 30. Accordingly, these grants cannot be accepted by the Public Fund as they are considered to be “any other money or property” pursuant to paragraph 30-130(1)(d).