Edited version of private advice

Authorisation Number: 1051761800092

Date of advice: 02 October 2020

Ruling

Subject: Tax deductible gifts

Question 1

Where a donation made to the Company is included on the customer invoice as an additional optional component to a payment made for a service, can the Company issue a receipt for a tax deductible gift in accordance with section 30-228 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Where a donation made to the Company is included on the customer invoice as an additional optional component to a payment made for a service, is there a taxable supply for the purposes of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

No

This ruling applies for the following period:

1 July 2020 to 30 June 2023

The scheme commences on:

1 July 2020

Relevant facts and circumstances

The Company

The Company is a Public Benevolent Institution that is registered as a charity with the Australian Charities and Not-for-profits Commission. The Company is endorsed as a Deductible Gift Recipient (DGR).

The Company provides community services.

The Company is registered for GST.

The Company has a number of employees. The Company will use these employees during quieter periods to offer certain services to the general public.

The Company can provide the contractor services at a lower cost than competitor tradespersons. This is because the contractor services provided by the Company are not part of a commercial for-profit operation but merely the use of surplus employee capacity.

Optional donation

Rather than provide the services at a discount to the costs of competitors, a request will be made to customers that they provide an additional optional donation to take the total cost of the service to a comparable price point.

The donation will be included on the customer invoice as an additional optional component to the payment for the service.

The customer will have full discretion as to whether the donation component of the invoice is paid.

The customer invoice will communicate to the customer that they are under no obligation to make the donation and that the supply of the service is not dependent on the provision of the donation.

The service will be provided to the required standard regardless of the size of the donation, or whether a donation is provided at all.

Donations will only be recognised as income once physically received and the donation component will not be pursued as part of debtor collections.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 30

Income Tax Assessment Act 1997 Subdivision 30-B

Income Tax Assessment Act 1997 Subdivision 30-BA

Income Tax Assessment Act 1997 section 30-15

Income Tax Assessment Act 1997 subsection 30-15(1)

Income Tax Assessment Act 1997 section 30-17

Income Tax Assessment Act 1997 section 30-228

A New Tax System (Goods and Services Tax) Act 1999 section 9-5

A New Tax System (Goods and Services Tax) Act 1999 section 9-15

A New Tax System (Goods and Services Tax) Act 1999 section 9-17

A New Tax System (Goods and Services Tax) Act 1999 subsection 9-17(2)

Reasons for decision

Question 1

Summary

The Company can issue a receipt for a tax deductible gift in accordance with section 30-228 of the ITAA 1997 where a donation is included on the customer invoice as an additional optional component to a payment made for a service.

Detailed reasoning

Division 30 of the ITAA 1997 sets out the rules governing deductibility of gifts or contributions.

Under item 1 of the table in section 30-15 of the ITAA 1997, a gift of $2 or more made to a fund, authority or an institution in Australia that is endorsed as a DGR will be deductible.

DGRs are not obliged to issue a receipt for gifts received however section 30-228 of the ITAA 1997 requires that if a DGR does issue a receipt for a gift described in the relevant item of the table in section 30-15 of the ITAA 1997, the receipt must state the name and ABN of the DGR and the fact that the receipt is for a gift.

Therefore, for the Company, as a DGR, to be able to issue a receipt in accordance with section 30-228 of the ITAA 1997, the donation as described in the facts must constitute a gift.

What is a gift

Taxation Ruling TR 2005/13 Income tax: tax deductible gifts - what is a gift (TR 2005/13) explains the meaning of a gift for the purposes of Division 30 of the ITAA 1997.

Paragraph 12 of TR 2005/13 states that the term 'gift' is not defined in the ITAA 1997. For the purposes of Division 30 of the ITAA 1997 the word 'gift' has its ordinary meaning.

Paragraph 13 of the TR 2005/13 states that the courts have described a gift as having the following characteristics and features:

·         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 the beneficial interest in property

The making of a gift to a DGR involves the transfer of a beneficial interest in property to that DGR. It is a requirement that identifiable property has in fact been transferred to the DGR.

For there to be a transfer, the property which belonged to the giver must become the property of the DGR.

The transfer is 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. A transfer made under a sense of moral obligation is still made voluntarily.

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. Nonetheless, a transfer which has the other attributes of a gift will not fail to be considered a voluntary transfer merely because the means used to give effect to the benefaction have contractual or similar features.

Paragraph 102 of TR 2005/13 provides a relevant example (example 26):

A private school's half-yearly fee accounts include an amount described as a 'donation to the school building fund' (a DGR). It is included in the same way as all other amounts on the account, there is no other indication that its payment is not required, and it is included in the total amount shown as due and payable. The amount shown as a 'donation' is not a voluntary payment; it is not a gift. If on the other hand the account shows the amount as being optional, and it is not included in the total amount shown as due and payable, it is considered a voluntary payment and in the absence of contrary features, regarded as a gift.

Paragraph 107 of TR 2005/13 discusses the case of Federal Commissioner of Taxation v. McPhail (1968) 117 CLR 111 (McPhail):

In McPhail, the payment to a school building fund (a DGR) was not accepted as a voluntary payment because 'it was a payment made pursuant to a contract between the taxpayer and the School Council' in relation to school fees. Under the arrangement, the parents qualified for lower school fees for their children should they take up the school's invitation to make payments to the building fund. The arrangement therefore involved a choice between full school fees and lower fees plus a 'gift' to the building fund. The High Court held there was no tax deductible gift.

Paragraph 108 of TR 2005/13 discusses the case of Cyprus Mines Corporation v. Federal Commissioner of Taxation 78 ATC 4468 at 4481; (1978) 9 ATR 33 at 48 (Cyprus Mines):

This is further illustrated by the decision in Cyprus Mines where a mining company gave money to the State Library Board. Under the agreement with the WA Government, it had the alternative of either paying a royalty to the WA Government or an equivalent amount to a DGR resident in WA. In finding that the payment was not a gift, the Court held it was not sufficient that the company had the choice of whether to pay to a DGR, and, if so, the choice of which DGR. Importantly, it had no choice about whether it had to pay the specified sum. It was bound under the agreement to make payment of the specified sum within the prescribed time period. The payment to the DGR was not voluntary.

The transfer arises by way of benefaction

A gift should intend and confer benefaction on the recipient. Benefaction means that the DGR is advantaged materially without any detriment arising from the terms of the transfer.

A gift usually proceeds from detached and disinterested generosity. Where a giver gives a gift for self-interested commercial or fiscal reasons it contradicts any objective to confer benefaction.

A motive of seeking a tax deduction does not, by itself, disqualify a transfer from being a gift.

No material benefit or advantage is received by the giver by way of return

In order to constitute a gift, the giver must not receive a benefit or an advantage of a material nature by way of return.

Application to the Company

Applying the above requirements to the Company's circumstances:

·         The customer will transfer money to the Company. Once the money is transferred, the Company has the full beneficial ownership and control of how the funds are used.

·         The customer invoice will communicate to the customer that they are under no obligation to make a donation and that the supply of the service is not dependent on the provision of the donation.

·         Although there is a contractual nature to the arrangement as the donation is included on the customer invoice, the donation is voluntary.

·         The additional optional donation requested by the Company does not form part of the fee payable for the service. The service will be provided regardless of the size of the donation, or whether a donation is provided at all. Therefore, the customer has a choice about whether to pay the donation at all, which indicates that the transfer of the donation is voluntary.

·         The donation is a simple transfer of money which materially benefits the Company with no detriment.

·         The contract to supply the service is separate from the decision to donate to the Company. The service will be provided to the required standard regardless of the size of the donation, or whether a donation is provided at all. There is no benefit or advantage to the customer in return for the donation.

Conclusion

In this case, it is considered that a donation from a customer as an additional component to a payment made for a service will be a tax deductible gift for the purposes of Division 30 of the ITAA 1997.

The Company can therefore issue a receipt in respect of the tax deductible gift in accordance with section 30-228 of the ITAA 1997.

Question 2

Summary

Where a donation made to the Company is included on the customer invoice as an additional optional component to a payment made for a service, there is no taxable supply for the purposes of section 9-5 of the GST Act.

Detailed reasoning

Section 9-5 of the GST Act states that you make a taxable supply if:

(a)      you make the supply for consideration; and

(b)      the supply is made in the course or furtherance of an enterprise that you carry on; and

(c)      the supply is connected with Australia; and

(d)      you are registered, or required to be registered.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

In the current case, the issue arises as to whether the donation constitutes consideration for the supply of the service.

'Consideration' is defined in section 9-15 of the GST Act as including any payment, or any act or forbearance in connection with a supply of anything or in response to, or for the inducement of a supply of anything. Further, it does not matter whether the payment, act or forbearance was voluntary, or whether it was by the recipient of the supply.

In addition, section 9-17 of the GST Act excludes certain payments and other things from being consideration. Relevantly, subsection 9-17(2) provides that:

(2) Making a gift to a non-profit body is not the provision of consideration.

The term 'gift' is not defined in the GST Act and therefore takes its ordinary meaning.

As concluded in question 1, the donation from a customer to the Company as an additional component to a payment for a service will constitute a gift within its ordinary meaning. As such, the making of the donation to the Company, which is a non-profit body, is not the provision of consideration pursuant to subsection 9-17(2) of the GST Act.

Conclusion

There is no supply for consideration for the purposes of subsection 9-5(a) of the GST Act in respect of the donation. Therefore, there is no taxable supply under section 9-5 of the GST Act.