Edited version of private advice

Authorisation Number: 1051856093487

Date of advice: 24 June 2021

Ruling

Subject: Deductibility of gifts

Question 1

Is the Taxpayer entitled to a deduction under item 4 of the table in section 30-15 of the Income Tax Assessment Act 1997 (ITAA 1997) for the proposed gift of the Xxxx to the Foundation?

Answer

Yes

Question 2

Is the amount of the deduction equal to the average of the GST inclusive market values of the Xxxx, determined under section 30-200 of the ITAA 1997, reduced by X per cent representing the adjustment in accordance with section 30-220 of the ITAA 1997?

Answer

Yes, provided the Foundation receives physical possession of the Xxxx by 30 June 20XX.

Question 3

Can the Taxpayer disregard any capital gain or loss on the disposal of the Xxxx to the Foundation under subsection 118-60(2) of the ITAA 1997?

Answer

Yes

Question 4

If the Taxpayer has a loss for the income year ended 30 June 20XX as a result of the deduction from the proposed gift, can the loss be carried forward to future years?

Answer

No

Question 5

If the answer to question 4 is 'no', can the Taxpayer elect to spread the deduction from the proposed gift over 5 years under subdivision 30-DB of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

The year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1             The Taxpayer owns the Xxxx.

2             The Taxpayer proposes to gift the Xxxx to the Foundation before 30 June 20XX.

3             The Foundation is endorsed as a deductible gift recipient (DGR).

4             The Xxxx is currently located in premises owned by the Taxpayer.

5             The Taxpayer will convey full title of the Xxxx before 30 June 20XX, but retain a right to use it up to 30 June 20XX (Use Condition). The Taxpayer will insure the Xxxx until 30 June 20XX.

6             The Taxpayer intends to gift the premises to the Foundation on or before 30 June 20XX. In any event the Taxpayer will take all necessary steps to ensure the Foundation is given physical possession of the Xxxx by 30 June 20XX, or such other date as may be agreed between the Taxpayer and the Foundation.

7             The proposed Deed of Gift outlines the details and conditions of the gift of the Xxxx.

8             The Taxpayer will obtain two valuations of the Xxxx in accordance with section 30-200 of the ITAA 1997 to determine its GST inclusive market value.

9             A consulting actuary provided advice to the Taxpayer by letter regarding the appropriate discount to apply to the GST inclusive market value to account for the Use Condition. They determined that a reduction of X%pa is appropriate to use for the valuation of the conditions attaching to the gift. Specifically they concluded that if the Taxpayer was to retain the right to use the xxxx for one year, was to pay the insurance premiums for this period, and there were no other conditions attaching to the gift, the reduction that should be applied to the value of the Xxxx is X%.

10           The Commissioner concluded that the methodology proposed by the consulting actuary, as to the value of conditions is reasonable, provided that the Foundation obtains full custody and control of the Xxxx by 30 June 20XX. If full custody and control of the Xxxx is obtained by the Foundation after 30 June 20XX, the Commissioner will require the Taxpayer to update their assessment reflecting the additional period of time for possession. On that basis, the Commissioner determined that X% is a reasonable value of the conditions of the gift of the Xxxx.

11           The Xxxx is currently insured for a value of more than $2.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 26-55

Income Tax Assessment Act 1997 section 30-15

Income Tax Assessment Act 1997 section 30-17

Income Tax Assessment Act 1997 section 30-200

Income Tax Assessment Act 1997 section 30-205

Income Tax Assessment Act 1997 section 30-220

Income Tax Assessment Act 1997 section 30-247

Income Tax Assessment Act 1997 section 30-248

Income Tax Assessment Act 1997 section 36-10

Income Tax Assessment Act 1997 section 36-15

Income Tax Assessment Act 1997 section 118-60

Reasons for decision

Unless otherwise stated, all legislative references are to the Income Tax Assessment Act 1997.

Question 1

Summary

The Taxpayer will be entitled to a deduction under item 4 of the table in section 30-15 of the ITAA 1997 for the proposed gift of the Xxxx to the Foundation.

Detailed reasoning

Division 30 of the ITAA 1997 sets out the rules for working out deductions for certain gifts or contributions. Relevantly, item 4 of the table in section 30-15 allows a taxpayer to claim a deduction for a gift of property to a public museum. Item 4 also provides information on how much you can deduct, and the special conditions which must be met.

It must be determined whether the proposed gift of the Xxxx meets the definition of a gift, and whether it meets the requirements of item 4 of the table in section 30-15.

Meaning of gift

The meaning of the term 'gift' is not defined in the legislation. Taxation Ruling 2005/13 Income tax: tax deductible gifts - what is a gift (TR 2005/13) explains what a gift is, for the purposes of Division 30. Paragraph 13 of TR 2005/13 provides 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.

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.

Transfer of beneficial interest in property

Paragraph 18 of TR 2005/13 provides that a gift is effectual only when the giver has done everything necessary to transfer ownership to the DGR. Generally, if a DGR fails to obtain immediate and unconditional right of custody and control of the property, a gift deduction will not arise. However, paragraph 20 of TR 2005/13 explains that an exception is provided for gifts made under item 4 of the table in section 30-15 of the ITAA 1997, stating that:

Where the terms and conditions of the gift of the property are such that the DGR does not have immediate custody and control or unconditional rights to retain custody and control of, or full legal title to, the gifted property, a reduced deduction is allowable under section 30-220 of the ITAA 1997.

The proposed gift of the Xxxx has conditions attached, namely that the Xxxx will be loaned by the Foundation to the Taxpayer for the period from the date of the gift to 30 June 20XX, and the Xxxx will remain in the Taxpayer's custody until 30 June 20XX, at which point physical possession of the Xxxx will then be given to the Foundation (as per the clauses of the proposed Deed of Gift). Therefore, as the Foundation will not receive immediate custody and control of the Xxxx, it must be established that the gift of the Xxxx fits in to the exception category by establishing that it is a gift made under item 4 of the table in section 30-15.

Transfer is made voluntarily

Paragraph 23 of TR 2005/13 provides that for a transfer of property to be made voluntarily, 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.

The Taxpayer has voluntarily agreed to donate the Xxxx by their own accord and free will. There is no evidence to the contrary.

Transfer arises by way of benefaction

Paragraph 27 of TR 2005/13 provides that conferring benefaction means that the DGR is advantaged in a material sense, without a countervailing detriment arising from the terms of the transfer.

The Foundation will be advantaged in a material sense upon receipt of the Xxxx as an addition to the collection it is maintaining or establishing.

No material benefit or advantage is received by the giver in return

Paragraph 37 of TR 2005/13 provides that there will not be a gift if the giver receives a benefit or advantage from the DGR or another party in return.

There is no evidence that the Taxpayer (the giver) will receive any material benefit or advantage in return for their proposed gift of the Xxxx to the Foundation.

Therefore, it is accepted that the proposed gift of the Xxxx displays the required characteristics of a gift in accordance with TR 2005/13, provided that the requirements of item 4 of the table in section 30-15 are met.

Item 4 of the table in section 30-15 of the ITAA 1997

In order for a gift to be deductible under item 4 of the table in section 30-15, the recipient of the gift must be:

(a)          The Australiana Fund; or

(b)          A public library in Australia; or

(c)          A public museum in Australia; or

(d)          A public art gallery in Australia; or

(e)          An institution in Australia consisting of a public library, a public museum and a public art gallery or any 2 of them.

Item 4 of the table in section 30-15 also requires that the gift be a gift of property, and that the gift satisfy the following special conditions:

(a)          the property must be accepted by the recipient for inclusion in a collection it is maintaining or establishing; and

(b)          the value of the gift is $2 or more; and

(ba) the institution must meet the requirements of section 30-17, unless it is the Australiana Fund; and

(c)          you must satisfy the valuation requirements in section 30-200, unless section 30-205 (about the proceeds of the sale being assessable) applies.

The Foundation is endorsed as a DGR which meets the description of a recipient under item 4 of the table in section 30-15. The Foundation also meets the requirements of section 30-17 due to this endorsement.

The Xxxx is considered to be property, and therefore meets the requirement for the type of gift or contribution allowed under item 4 of the table in section 30-15.

The proposed Deed of Gift provides that the Foundation will accept the Xxxx into the collection it is maintaining or establishing. The value of the Xxxx will be more than $2.

Section 30-200 requires that two or more written valuations of the gift are obtained from valuers approved by the Arts Secretary for the kind of property to be given. Each valuation must state the GST inclusive market value of the property on the day the gift was made, or the GST inclusive value of the property on the day the valuation was made, provided the valuation is made within 90 days before or after the gift was made. The Taxpayer will obtain two written valuations of the Xxxx to determine its GST inclusive market value in accordance with section 30-200.

Provided the Taxpayer satisfies with the valuation requirements in section 30-200, the special conditions and other elements in item 4 of the table in section 30-15 will be satisfied, and accordingly, the Taxpayer will be entitled to a deduction for the proposed gift of the Xxxx to the Foundation.

Question 2

Summary

The tax deduction to which the Taxpayer is entitled is the average of the GST inclusive market values of the Xxxx, determined in accordance with section 30-200 of the ITAA 1997, reduced by X per cent in accordance with section 30-220, provided that the Foundation receives physical possession of the Art work on or by 30 June 20XX.

Detailed reasoning

Section 30-215 of the ITAA 1997 contains the rules for working out how much you can deduct for a gift of property made to a recipient covered by item 4 of the table in section 30-15. It provides that generally you can deduct the average of the GST inclusive market values specified in the written valuations obtained in accordance with section 30-200.

Taxation Ruling 96/1 Income tax: deductions for gifts made under the Taxation Incentives for the Arts Scheme: procedures and valuation method (TR 96/1) provides that the valuation method should determine what price a willing, but not anxious, vendor and a willing, but not anxious, purchaser could reasonably be expected to agree on for the transfer of the property.

Subsection 30-220(1) provides that the amount you can deduct is reduced by a reasonable amount if:

(a)          the terms and conditions on which the gift is made are such that the recipient:

i.does not receive immediate custody and control of the property

ii....

iii....

Subsection 30-220(2) provides that in deciding what is a reasonable amount for the reduction, the effect of the terms and conditions on the GST inclusive market value of the gift must be regarded.

The gift of the Xxxx will be achieved by the Taxpayer conveying full title of the Xxxx to the Foundation before 30 June 20XX; however, the Taxpayer will retain the use and custody of the Xxxx until 30 June 20XX as provided for in the clauses of the proposed Deed of Gift. The proposed Deed of Gift also provides that the Taxpayer will take all necessary steps to ensure that the Foundation is given physical possession of the Xxxx by 30 June 20XX or such other date as may be agreed between the parties. The Foundation will have custody and control of the Xxxx when it has physical possession of the Xxxx.

As the Foundation will not receive immediate custody and control of the Xxxx, the amount the Taxpayer can deduct must be reduced by a reasonable amount in accordance with section 30-220.

Taxation Ruling No. IT 295 Conditional gifts to the Australiana Fund, public libraries, museums, art galleries (IT 295) considers the basis on which the value of a conditional gift to the Australiana Fund might be reduced because of an arrangement under which the custody of the gifted property is to remain with the donor for an agreed period after gifting. The guidance in IT 295 applies equally to gifts made to a public museum.

Paragraph 3 of IT 295 lists factors that would have bearing on the weight given to the effect of the conditions of the gift on the recipient. The factors include the effect of a fixed period interest of the donor in the gifted property. Paragraph 4 of IT 295 provides that:

in principle, the amount of a deduction for a conditional gift would be the amount which a purchaser could be expected to pay on the date of the gift to acquire the property concerned from the donee, if the purchaser were to be buying the property on the same terms as the donee is receiving it.

The Taxpayer has obtained a letter of advice from a consulting actuary regarding an appropriate reduction to the amount the Taxpayer can deduct for the gift of the Xxxx to the Foundation. The advice takes into account the principles in IT 295 and concludes that if the Taxpayer retains the right to use the Xxxx for one year, pays the insurance premiums for this period, and there were no other conditions attaching to the gift, the reduction that should be applied to the value of the Xxxx is X per cent.

The ATO has accepted that X per cent is an appropriate reduction under section 30-220 for the time period from the date of donation to 30 June 20XX. Therefore, in accordance with section 30-215, the Taxpayer is entitled to deduct the average of the GST inclusive market values specified in the written valuations obtained in accordance with section 30-200, reduced by X per cent.

Question 3

Summary

The Taxpayer can disregard any capital gain or loss on the disposal of the Xxxx to the Foundation under subsection 118-60(2) of the ITAA 1997.

Detailed reasoning

Capital gains tax event A1 will occur when the taxpayer gifts the Xxxx to the Foundation.

Subsection 118-60(2) provides that a capital gain or capital loss made from a gift of property that is deductible under section 30-15, because of item 4 in the table in that section, is disregarded.

Therefore, as the Xxxx gifted to the Foundation is deductible under item 4 of the table in section 30-15, the Taxpayer can disregard any capital gain or loss arising from the disposal of the Xxxx.

Question 4

Summary

A loss as a result of the deduction from the proposed gift cannot be carried forward to future years under section 36-15 of the ITAA 1997 due to the operation of section 26-55 of the ITAA 1997.

Detailed reasoning

Section 36-10 provides that the tax loss for an income year is the excess of your allowable deductions (other than tax losses of earlier income years) over your total assessable income and net exempt income for that year.

Section 36-15 allows an entity other than a corporate tax entity to deduct tax losses in a later income year, firstly from any net exempt income for that later year, and secondly from their total assessable income which exceeds the total deductions for that later year.

However, subsection 26-55(1) limits the amount you can deduct under a number of provisions including Division 30 of the ITAA 1997. Subsection 26-55(2) provides that this limit is worked out by subtracting from your assessable income all your deductions except tax losses. This means that deductions for gifts or contributions under Division 30 cannot create a tax loss.

The Taxpayer's deduction resulting from the proposed gift is a deduction under Division 30. Therefore, it cannot create a tax loss to be carried forward to future years due to the limit placed on the amount you can deduct by section 26-55.

Question 5

Summary

The Taxpayer can elect to spread the deduction from the proposed gift over 5 years under Subdivision 30-DB of the ITAA 1997.

Detailed reasoning

Subdivision 30-DB allows a taxpayer to elect to spread deductions for certain gifts over up to 5 income years. Section 30-247 provides that an election may be made for a gift that is covered by item 4 of the table in section 30-15, provided the gift is made after 1 July 2003.

The proposed gift will be made after 1 July 2003 and is deductible under item 4 of the table in section 30-15, therefore the Taxpayer may make an election under Subdivision 30-DB.

Section 30-248 describes how an election must be made. You may make a written election to spread the deduction over the current income year and up to 4 of the immediately following income years. The election must specify the percentage of the deduction which will be deducted in each of the income years, and the election must be made before you lodge your income tax return for the income year in which you made the gift.

Other relevant comments

If the Foundation does not receive physical possession of the Xxxx by 30 June 20XX, but instead receives physical possession at a later date agreed between the Taxpayer and the Foundation, the Taxpayer will be required to contact the Commissioner to update the reduction to their deduction amount to reflect the additional period of time in which the Foundation did not have physical possession of the Xxxx.

This is because the X% reduction to the value of the deduction under section 30-220 is based on the Foundation receiving physical possession of the Xxxx one year after the original gift.