Edited version of private advice

Authorisation Number: 1051667539085

Date of advice: 30 April 2020

Ruling

Subject: Whether funds received by the taxpayer are a gift

Question

Are the funds received by the Taxpayer from a deceased estate a gift under Division 30 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following period

Year ended 30 June 2020

The scheme commences on:

During the year ended 30 June 2020

Relevant facts and circumstances

The Taxpayer is a not-for-profit association and not exempt from income tax.

According to the Taxpayer's association rules:

(a) A member ceases to be a member of the Taxpayer when that person dies;

(b) The assets and income of the Taxpayer shall be applied solely in furtherance of its objects and no portion shall be distributed directly or indirectly to the members of the Taxpayer and;

(c) In the event of the Taxpayer being dissolved, the amount that remains after such dissolution and the satisfaction of all debts and liabilities shall be transferred to another organisation with similar purposes which is not carried on for profit or gain of its individual members.

During the year ended 30 June 2020, the Taxpayer received a substantial amount of funds (the Funds) from the deceased estate of one of its former members.

The Funds were a contribution made by the former member and the Funds contributed were not for any exclusive rights over a collectively owned asset of the Taxpayer whereby the former member would have derived a benefit from the asset for their own purposes or the purposes of the estate.

The Taxpayer has not previously received an amount of money of similar magnitude to the Funds and does not regularly receive monetary gifts.

In the event that monetary gifts have been received by the Taxpayer on an ad-hoc basis, it does not rely on such gifts to maintain its operations and activities.

Taxpayer's assertions

The receipt of the Funds by the Taxpayer from the deceased estate is a transfer of the beneficial ownership of the property.

The transfer was made according to the will without any obligation imposed on the estate. Therefore, the transfer of the Funds to the Taxpayer was made voluntarily.

The Taxpayer has been instructed that the transfer of the Funds to it from the estate was done without any obligation on the Taxpayer to repay those Funds to the estate, nor to repay or transfer the Funds or a consideration of similar value to a third party. The will imposes no obligation on the Taxpayer to repay the Funds or pay any other consideration.

As no other party but the Taxpayer will be receiving a material benefit from the transfer of the Funds, the Taxpayer will not be subject to any detriment from the transfer of the funds and therefore it is likely that the transfer of the Funds arose by way of benefaction.

The estate will not receive any benefit or an advantage following the transfer of the Funds under the will to the Taxpayer.

As this is the first instance the Taxpayer has received money of a similar magnitude as the Funds, it believes that the receipt of the Funds should not constitute income according to ordinary concepts under section 6-5 of the ITAA 1997.

The Taxpayer believes that the transfer of the Funds from the estate should be considered a gift and therefore not be subject to income tax under section 6-5 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 30

Reasons for decision

Summary

The Funds received by the Taxpayer from the deceased estate are a gift.

Detailed reasoning

What is a gift?

For the purposes of Division 30 of the ITAA 1997, the word 'gift' is not defined in the ITAA 1997. The word 'gift' has its ordinary meaning and its definition is discussed in case law and in Taxation Ruling TR 2005/13 Income tax: tax deductible gifts - what is a gift (TR2005/13).

For a transfer of money or property to be characterised as a gift, it should arise from benefaction and proceed from detached and disinterested generosity. This view was propounded by Owen J. in Federal Commissioner of Taxation v. McPhail (1968) 117 CLR 111 41 ALJR 346:

...it is, I think, clear that to constitute a "gift", it must appear that the property transferred was transferred voluntarily and not as the result of a contractual obligation to transfer it and that no advantage of a material character was received by the transferor by way of return.

In Klopper & Anor v. FC of T 97 ATC 4179, at 4184, Nicholson J considered the case authority on what constitutes a gift and stated:

The purport of this dicta is a payment can only be characterised as a gift when there is the element of voluntariness and the absence of consideration: that is, where there is truly a notion of benefaction so there is no advantage of a material character being received in return.

Paragraph 13 of the TR 2005/13 identifies the 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

Paragraph 15 of TR 2005/13 states:

In determining whether a transfer is a gift it is necessary to consider the whole set of circumstances surrounding the transfer and this may include consideration of parties other than the giver and the DGR. It is the substance and reality of the transfer that has to be ascertained. It is therefore necessary to take account of those acts, transactions, arrangements and circumstances that provide the context and the explanation for the transfer.

Transfer of beneficial interest in property

The making of a gift to a recipient involves the transfer of a beneficial interest in property to that recipient. For there to be a transfer, the property which belonged to the giver must become the property of the recipient. For a gift to be valid and effectual, the giver must have done everything that is necessary, in accordance with the relevant laws governing the transfer of that kind of property, to transfer ownership to the recipient.

Transfer made voluntarily

In order for a transfer of property to be a gift, it must be made voluntarily, that is, it must be the act and will of the giver, and there must be nothing to interfere with or control the exercise of that will (Cyprus Mines Corporation v FC of T (1978) 9 ATR 33). 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.

Arises by way of benefaction

The essential idea of a gift is that there is a conferral of benefaction on the recipient. Deane J in Leary v FC of T 80 ATC 4438; (1980) 11 ATR 145; (1980) 32 ALR 221 explained this at 80 ATC 4453-4454 and 11 ATR 163:

It involves, in my view, the concept that the relevant transfer is by way of well doing in that the recipient will be advantaged, in a material sense and without any countervailing material detriment arising from the circumstances of the transfer, to the extent of the property transferred to him.

Brennan J also said at 80 ATC 4451 and 11 ATR 160:

If the disponor is aware that the receipt of the property by the disponee will impose a liability upon the latter, the disposition may be seen not to be by way of benefaction...No doubt much depends upon a comparison between the property taken and the liability incurred.

No 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 non-material.

Paragraph 43 states:

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.

Paragraph 44 states:

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.

From information provided by the Taxpayer, there was a transfer in the beneficial interest in property with the Funds belonging to the late former member being bequeathed to the Taxpayer.

The transfer of the Funds was made voluntarily as it was the wish of the late former member that the Funds go to the Taxpayer. As a former member of the Taxpayer, the late former member has demonstrated that the Funds bequeathed to the Taxpayer was by way of benefaction and that there is no material benefit or advantage to be received by the estate as no conditions have been imposed on the Taxpayer when it received the Funds.

As a result, the Funds received by the Taxpayer qualify as a gift.