Edited version of private advice

Authorisation Number: 1051999720423

Date of advice: 29 June 2022

Ruling

Subject: Deductions - gift of artwork

Question 1

In respect of the Gift of the Artwork, is the amount of the deduction equal to the average of the GST inclusive market values of the Artwork, determined under section 30-200 of the Income Tax Assessment Act 1997 (ITAA 1997), reduced by X per cent, representing the adjustment in accordance with section 30-220?

Answer

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

Question 2

For the year ending 30 June 20XX, is the Taxpayer entitled to a deduction equal to $XXXX under item 4 of the table in section 30-15 of the ITAA 1997 for the proposed gift of the Artwork to the Foundation?

Answer

Yes, providing the Taxpayer claimed a deduction of $XXXX or less, in respect of the Gift of the Artwork, for the income year ending 30 June 20XX.

This ruling applies for the following periods:

The year ended 30 June 20XX

The year ended 30 June 20XX

The scheme commences on:

21 June 20XX

Relevant facts and circumstances

1.         The Taxpayer owns the Artwork.

2.         The Taxpayer gifted the Artwork to the Foundation, before 30 June 20XX.

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

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

5.         The Taxpayer conveyed full title of the Artwork before 30 June 20XX but retained a right to use it up to 30 June 20XX (Use Condition). The Taxpayer will insure the Artwork until 30 June 20XX.

6.         The Deed of Gift outlines the details and conditions of the gift of the Artwork.

7.         The Taxpayer obtained two valuations of the Artwork in accordance with section 30-200 of the ITAA 1997 to determine its GST inclusive market value.

8.         A consulting actuary determined that a reduction of X% p.a. 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 Artwork for two years, 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 Artwork is X%.

9.         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 Artwork by 30 June 20XX. On that basis, the Commissioner determined that X% is a reasonable value of the conditions of the gift of the Artwork.

10.       The Artwork is insured.

Relevant legislative provisions

Section 26-55 of theIncome Tax Assessment Act 1997

Section 30-15 of the Income Tax Assessment Act 1997

Section 30-17 of the Income Tax Assessment Act 1997

Section 30-200 of the Income Tax Assessment Act 1997

Section 30-205 of the Income Tax Assessment Act 1997

Section 30-220 of the Income Tax Assessment Act 1997

Section 30-247 of the Income Tax Assessment Act 1997

Section 30-248 of the Income Tax Assessment Act 1997

Section 36-10 of the Income Tax Assessment Act 1997

Section 36-15 of the Income Tax Assessment Act 1997

Section 118-60 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Summary

The tax deduction to which the Taxpayer is entitled is the average of the GST inclusive market values of the Artwork, 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 Artwork on or by 30 June 20XX. That is, the total deduction under item 4 of the table subsection 30-15(2), in respect of Gift of the Artwork, is $XXXX.

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

As the Foundation will not receive immediate custody and control of the Artwork, 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 an actuary, regarding an appropriate reduction to the amount the Taxpayer can deduct for the gift of the Artwork 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 Artwork for two 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 Artwork 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. That is, the Taxpayer can reduce the amount and claim a deduction in respect of the Gift of Artwork.

Question 2

Summary

For the year ending 30 June 20XX, the Taxpayer will be entitled to a deduction equal to $XXX under item 4 of the table in section 30-15 of the ITAA 1997 for the proposed gift of the Artwork to the Foundation providing the Taxpayer claimed a deduction of $XXX or less in respect of the Gift of the Artwork, for the income year ending 30 June 20XX.

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.

A ruling issued by the Commissioner in respect of the year ending 30 June 20XX determined that a gift of the Artwork occurred in June 20XX. That ruling also confirmed that the Taxpayer can elect to spread the deduction for the gift of Artwork over 5 years under subdivision 30-DB of the ITAA 1997.

The Taxpayer claimed an amount in the year ending 30 June 20XX (the year the gift was made) and made an election in that return to claim the balance of the value of the gift over the following four years. Under subsection 30-248(4) you may vary the election at any time in respect of income tax returns you have not yet lodged. Therefore, for the year ending 30 June 20XX the Taxpayer would be entitled to claim a deduction for the balance of the value of the gift.