Edited version of private advice

Authorisation Number: 1052067752621

Date of advice: 12 December 2022

Ruling

Subject: Deductions - gift of artwork

Question

Is the Taxpayer entitled to claim a tax deduction in relation to the proposed gifts of art to a Museum?

Answer

Yes

Question 2

Will the Taxpayer be able to utilise the averaging provisions in Subdivision 30-DB of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the proposed gifts?

Answer

Yes

Question 3

Are the gains on the proposed gifts exempt from capital gains tax (CGT)?

Answer

Yes

Question 4

What is the value of the tax deduction that the Taxpayer is entitled to claim in respect of the proposed gifts?

Answer

The Taxpayer is entitled to claim the GST inclusive market value of the proposed gifts reduced by a percentage representing the adjustment in accordance with section 30-220 of the ITAA 1997.

This ruling applies for the following period

The income year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

•                    The Taxpayer intends to gift selected artworks to a museum in the financial year ending 30 June 20XX and possibly in future years.

•                    The Taxpayer proposes to retain the right to use the artworks from the time of the gift until their death. On the death of the taxpayer, the whole interest in the artworks will pass to the museum.

•                    The artworks must be accepted by the museum, for inclusion in a collection they are maintaining, or establishing so ultimately this will depend on the museum. Accordingly, it may only be possible for the Taxpayer to gift some, but not all, of the artworks to the museum.

•                    The artworks are currently held at a property. The artworks will be fully and appropriately insured by the taxpayer while he retains the possession of the artwork.

•                    The museum is endorsed under subdivision 30-BA of the ITAA 1997 as a deductible gift recipient.

•                    The Taxpayer will obtain two or more valuations of each gift made in accordance with section 30-200 of the ITAA 1997.

•                    A deed poll has been drafted for the gifts to the museum and yet to be executed.

•                    The Taxpayer has obtained a valuation from a qualified valuer setting out the basis upon which the discount was calculated.

Relevant legislative provisions

Section 30-15 of the lncome Tax Assessment Act 1997

Section 30-17 of the lncome Tax Assessment Act 1997

Section 30-200 of the Income Tax Assessment Act 1997

Section 33-247 of the Income Tax Assessment Act 1997

Section 30-248 of the Income Tax Assessment Act 1997

Section 104-10 of the Income Tax Assessment Act 1997

Section 118-60 of the Income Tax Assessment Act 1997

Reasons for decision

Question 1

Summary

The Taxpayer will be entitled to claim a tax deduction in relation to the proposed gift of artworks.

Detailed reasoning

Section 30-15 of the ITAA 1997 provides that a gift is deductible if the requirements set out under one of the items in the table are met.

The museum meets the description of 'Recipient' under item 1 and item 4 of the table in section 30-15 of the ITAA 1997. Item 4 (c) provides that if the recipient of a gift is a public museum in Australia the gift is deductible if it is property and satisfies 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 the 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 gifts (artwork) are property, and the draft deed poll states that the museum will accept the artworks for inclusion in their collection. Each gift will be valued at more than $2.

Section 30-17 is satisfied as the museum is endorsed as a DGR under subdivision 30 BA.

Section 30-200 of ITAA 1997 requires that a taxpayer obtains two or more written valuations of the gifts by approved valuers for the kind of property to be given. Each valuation must state the GST inclusive value of the property on the day the gift was made and the GST inclusive value of the property on the day the valuation was made. The Taxpayer will obtain two or more valuations in accordance with section 30-200.

Providing that the requirements under section 30-200 of the ITAA 1997 are met, all the elements of item 4 of the table in section 30-15 of the ITAA 1997 will be satisfied and the Taxpayer will be entitled to claim a tax deduction in relation to the proposed gift of artworks.

Question 2

Summary

The Taxpayer will be able to utilise the averaging provisions in Subdivision 30-DB of the ITAA 1997.

Detailed reasoning

Subdivision 30-DB of the ITAA 1997 allows taxpayers to elect to spread deductions for gifts over a period of up to five income years. Section 30-247 of the ITAA 1997 allows the election to be made for gifts covered by item 4 of the table in section 30-15 of the ITAA 1997, provided the gift is made after 1 July 2003.

Section 30-248 requires the election to be made in writing before you lodge your income tax returns for the income year in which you made the gift. In the election you must specify the percentage of the deduction that you will deduct in each income years.

As stated in question 1, the proposed gifts of artworks will be tax deductible because of item 4 of the table in section 30-15 of the ITAA 1997. Therefore, the Taxpayer will be able to utilise the averaging provisions in Subdivision 30-DB of the ITAA 1997 in respect of the proposed gifts of artwork.

Question 3

Summary

The gains arising on the proposed gifts will be exempt from CGT either because the artworks were acquired before 20 September 1985 or because the capital gain will be disregarded under subsection 118-60(2) of the ITAA 1997.

Detailed reasoning

When the Taxpayer makes the proposed gifts of artwork to the museum, CGT event A1 will occur. Subsection 104-10(5) of the ITAA 1997 provides that a capital gain or loss is disregarded if the asset was acquired before 20 September 1985. Further subsection 118-60(2) of the ITAA 1997 provides that a capital gain or loss is disregarded if it is made from a gift of property that is deductible because of item 4 of the table in section 30-15 of the ITAA 1997.

As stated in question 1, the proposed gifts of artwork will be tax deductible because of item 4 of the table in section 30-15 of the ITAA 1997. Therefore, any gains arising to the Taxpayer from the proposed gifts to the museum, will be exempt from CGT as they will be disregarded under either subsection 104-10(5) of the ITAA 1997 or subsection 118-60(2) of the ITAA 1997.

Question 4

Summary

The value of the tax deduction the Taxpayer is entitled to claim is the GST inclusive market value of the artworks reduced by a percentage representing the adjustment in accordance with section 30-220 of the ITAA 1997.

Detailed reasoning

Item 4 in the table in section 30-15 provides that:

The general rule is that you can deduct the average of the "GST inclusive market values (as reduced under subsection (3) if that subsection applies) specified in the written valuations you get from approved valuers.

Subdivision 30-C sets out:

(a)          how a person becomes an approved valuer; and

(b)          the exceptions to the general rule; and

(c)          the situations when the amount you can deduct is reduced.

If the property is jointly owned, see section 30-225 to work out how much of the gift you can deduct.

Section 30-220 requires "a reasonable amount" to be deducted from the value of the gift where there are restrictions on the gift. Under subsection 30-220(1) the amount allowed as a deduction under subsection 30- 215(2) is reduced by a "reasonable amount", having regard to:

(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; or

(ii) does not have the unconditional right to retain custody and control of the property in perpetuity; or

(iii) does not obtain an immediate, indefeasible and unencumbered legal and equitable title to the properly; or

(b) the custody, control or use of the property by the recipient is affected by an arrangement entered into in respect of the making of the gift.

Further under subsection 30-220(2), in determining what a reasonable amount is, regard must be had to the effect the terms and conditions of the gift have on the GST inclusive market value of the gift.

Taxation Ruling IT 295 Conditional Gifts to the Australiana Fund, Public Libraries, Museums, Art Galleries (IT295) considered the basis upon which the value of a conditional gift to the Australiana Fund might be reduced because of an arrangement whereby the custody of the gifted property was to remain with the donor for an agreed period after the gifting. The advice in lT 295 also applies to a gift made to, and accepted by, a public art gallery for inclusion in a collection maintained or being established by the public art gallery. IT 295 states:

3. Factors that would have a bearing on this include the effect of a life or fixed period interest of the donor in the gifted property, a joint life or survivorship interest of the donor and his or her spouse, life expectancy of the relevant parties as well as undetermined factors such as the periods during which the donee institution may, if so agreed, require possession of the gifted property for display or study purposes.

4. The end result is not one that could be arrived at by a simple arithmetical formula. In principle, the amount of the 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. As mentioned previously, this would depend on an assessment of all the surrounding circumstances.

To comply with the special conditions in item 4 of the table in section 30-15 of the ITAA 1997, the Taxpayer will obtain written valuations by two valuers stating their opinion as to the value of the artworks at a date on or within 90 days of the time of the gift. The value of the artwork for the purposes of the gift will be determined by what a willing, but not anxious, vendor and a willing, but not anxious, purchaser could reasonably be expected to agree to for the transfer of property. This assumes the existence of such a vendor and purchaser both being uninfluenced by any consideration of sentiment or need.

The GST inclusive market value of the artworks will be reduced by a percentage. The Commissioner agrees with the Taxpayer's methodology for determining the reduction in the GST inclusive market value. The discount to the GST inclusive market value of the donations has been determined taking into account:

•                     the life expectancy of the Taxpayer

•                     a rental yield

•                     a discount rate.

In calculating the discount the following has been considered:

•                     The relevant conditions of the gift which is a right by the Taxpayer to retain possession of one or more of the donated artworks during their lifetime. Upon the death of the Taxpayer, full possession and ownership shall revert to the museum.

•                     An appropriate method to value the reduction, in these circumstances, is to consider the rental stream which would theoretically be available on the artworks. It is recognised that it may be impractical to rent the artworks. However, the framework behind the calculation in this manner is considered sound. Experience and investigation of the art rental market shows that where rentals are expressed as a yield (that is, as a percentage of value), the yield decreases as the value of the artwork increases. It is appropriate that the adopted rental yield is at the low end of rental yields applicable to artwork. This reflects the high quality and value of the donated artwork. A yield of X per cent is considered reasonable.

•                     The period for which the conditions shall apply is uncertain, and consistent with the life expectancy of the Taxpayer. The period of years is reasonable for gifts occurring in the 20XX financial year based on the age of the Taxpayer after December 20XX.

•                     The stream of rentals should be reduced to reach a present value of the opportunity cost reflecting the conditions of the gift. A rate of X per cent per annum is considered reasonable for this purpose.

Using a term of X years, a rental yield of X per cent per annum and a discount rate of X per cent per annum, a reduction reflecting the conditions of the gift of approximately X per cent of the GST inclusive market value of the artworks is reasonable, leading to an allowable deduction for the Taxpayer of X per cent of the GST inclusive value of the artworks.