Edited version of private advice

Authorisation Number: 1052158518826

Date of advice: 18 August 2023

Ruling

Subject: Deductions for donations - valuing gifted property

Question 1

Will the taxpayer be entitled to a tax deduction for the value of the musical instruments if he or she donates them to the charity under the proposed scheme?

Answer

Yes.

Question 2

If yes to Question 1, what will be the value of the taxpayer's tax deduction?

Answer

The value of the taxpayer's deduction will be the market value of the musical instruments, which is also the price paid for them.

Question 3

If yes to Question 1, does the taxpayer need to use a valuer who is approved on the cultural gifts register to determine the market value of the musical instruments?

Answer

Using an approved valuer is not a formal requirement for the taxpayer to claim a deduction.

However, the taxpayer will need to demonstrate that the amount he or she claims as a deduction reflects the market value of the musical instruments to substantiate entitlement.

Question 4

If yes to Question 1, will the taxpayer be entitled to spread the deduction over a period of up to 5 years?

Answer

Yes, if the Commissioner makes a valuation under section 30-212.

This ruling applies for the following period:

1 July XXXX to 30 June XXXZ

The scheme commenced on:

1 July XXXX

Relevant facts and circumstances

1.         The taxpayer is a member and director of a self-managed superannuation fund, or SMSF.

2.         The taxpayer's SMSF has invested in antique musical instruments, both acquired several years ago.

3.         The musical instruments:

•         are currently on loan to professional Australian musical groups

•         aren't available to the taxpayer or in his or her possession at any time

•         are separately insured

•         are regularly valued by a recognised valuer/trader of these instruments

•         have a value well above $5,000

•         haven't been held as trading stock.

4.         Neither the musical groups nor the musicians who use the musical instruments have any relationship with the taxpayer.

5.         The taxpayer is in the process of establishing a charity and seeking deductible gift recipient status for that charity, although this is on hold until he or she receives this private binding ruling.

6.         The charity will be established as a trust and will comply with its trust deed.

7.         The charity will be formed in Australia and have an Australian resident trustee company.

8.         The charity won't be an ancillary fund.

9.         The charity's purpose will be to acquire musical instruments of a nature and quality to lend to musical groups or musicians of a high musical standard. The charity may lend the instruments directly or indirectly to arts companies or musicians performing substantially in Australia or having a substantial connection with the promotion or performance of musical and other arts in Australia or the education of Australian musicians. This won't exclude the instruments being used outside Australia, as the relevant musicians and musical groups may tour overseas.

10.      The charity's objects clause in its constituting documents will include some ancillary purposes. Other supporting purposes could include promoting the performance of musical and other arts and educating and training musicians or artists in, for the benefit of, or having a substantial connection with Australia.

11.      The trustee will have ancillary powers to repair, maintain, loan, and sell musical instruments.

12.      It's possible that the charity's constituting documents will limit the trustee's ability to sell, dispose of, or abandon control of musical instruments.

13.      The charity's constituting documents may require that any musical instruments lent to musicians will be subject to a written agreement confirming that the charity retains ultimate control of those instruments.

14.      The taxpayer won't receive benefits from the charity or its activities, and this will be prohibited under the charity's trust deed.

15.      The taxpayer will acquire the musical instruments from the SMSF at a price fixed by a valuation. The taxpayer will get a valuation before buying the instruments from his or her SMSF. He or she will pay the SMSF a price determined by that valuation. Both the valuation and price the taxpayer pays will be the market value of the musical instruments.

16.      The taxpayer will then donate the musical instruments to the charity immediately on buying them from the SMSF.

17.      The charity will acquire unencumbered legal and beneficial ownership in the musical instruments from the taxpayer - the taxpayer won't retain any interest in the musical instruments or have any rights requiring the charity to return them to the taxpayer, or that provide for him or her to use or directly benefit from the musical instruments in any way.

18.      The terms and circumstances of the gift won't impose any additional obligation or liability on the charity (other than lending instruments in accordance with its purpose) or provide any benefit to the taxpayer or his or her associates.

19.      The charity will carry on lending the musical instruments consistently with the current arrangements (they won't be made available to the taxpayer). The taxpayer expects that the particular musicians and organisations using the musical instruments will change from time to time depending on their needs (ie, musical instruments will be returned to the charity and then lent to other musicians or musical groups).

Assumptions

20.      The charity will be endorsed as a deductible gift recipient (or 'DGR'), meaning it will qualify as a fund, authority, or institution covered by Subdivision 30-B.

21.      The charity will be prohibited from carrying out any activities beyond the purposes listed in its constituting documents.

Relevant legislative provisions

Income Tax Assessment Act 1997

Section 30-15

Section 30-200

Section 30-205

Section 30-212

Section 30-215

Section 30-220

Section 30-247

Section 30-248

Income Tax Assessment Act 1936

Section 78A

Reasons for decision

In these reasons, all legislative provisions are in the Income Tax Assessment Act 1997, except section 78A, which means section 78A of the Income Tax Assessment Act 1936.

Question 1

Will the taxpayer be entitled to a tax deduction for the value of the musical instruments if he or she donates them to the charity under the proposed scheme?

Answer

Yes

Summary

1.         The taxpayer will qualify for a deduction under section 30-15. The taxpayer will be making a gift because he or she will be transferring full and unconditional title in the musical instruments the charity. The musical instruments will qualify under Item 1 of the table in section 30-15 because they will be gifts of property the taxpayer acquired less than 12 months before making the gift. Section 78A and section 30-220 won't apply because his or her charity will get full title and the taxpayer won't benefit.

Detailed reasoning

You can claim deductions for gifts or contributions in circumstances described in the table in section 30-15, but only Item 1 (about gifts to deductible gift recipients) is relevant to the taxpayer.

2.         Section 30-15 says you can deduct a gift or contribution you make in situations set out in a table in that section. The table lists classes of recipients, types of gifts, and has rules and conditions about any deduction.

3.         There are 7 items in that table.

•                Item 1 is for gifts to a fund, authority, or institution covered by any of the tables in Subdivision 30-B. Speaking very broadly, those tables are about categories of deductible gift recipients. (We'll refer to funds, authorities, or institutions covered by those tables as DGRs for convenience.)

•                Item 2 is for an ancillary fund established for the purpose of giving money, property, or benefits to a DGR for the purposes of that DGR.

•                <Item 3 is repealed>

•                Item 4 is for gifts to the Australiana Fund, or public libraries, public museums, public art galleries, or institutions consisting of a combination of those things.

•                Item 5 is for gifts to the Commonwealth for the purposes of Artbank.

•                Item 6 is for gifts to the National Trust of Australia.

•                Items 7 and 8 are broadly for contributions (which aren't gifts) to DGRs where the payment allows the payer to attend or participate in fund-raising events.

4.         Item 1 is the only relevant item for these facts. The taxpayer's charity will be a DGR, not an ancillary fund or any of the categories of public funds. There's no suggestion that the taxpayer's proposed transaction with his or her DGR will entitle him or her to attend or participate in fund-raising events.

5.         For Item 1 to apply, the taxpayer's donation will need to be a 'gift'.

6.         While 'gift' isn't a defined term, ATO guidance in TR 2005/13[1] lists some characteristics that gifts generally have. At paragraph 13, it says courts have described a gift as having four characteristics.

•                There must be a transfer of beneficial interest in the property.

•                That transfer must be voluntary.

•                The transfer must 'arise by way of benefaction' - TR 2005/13 clarifies (at paragraph 27) this means it must be intended to confer a benefit and achieve that intention.

•                The giver mustn't receive any material benefit or advantage in return.

At paragraph 15, TR 2005/13 says the surrounding circumstances and substance and reality of the transaction are relevant to determining whether a transaction is a gift.

The taxpayer's proposed gift will qualify as a type of gift under paragraph (b) of Column 2 as property purchased during the previous 12 months.

7.         On the facts, the taxpayer will be making a gift. He or she will transfer the musical instruments to the charity. The charity will get complete and unencumbered legal and beneficial title to the instruments. While the trustee may be restricted from disposing, selling, or abandoning control of musical instruments, that's imposed by the charity's constituting documents, not as a condition of the taxpayer's gift. The taxpayer won't retain any interest in the musical instruments or benefit from the transaction. Considering the ATO guidance in TR 2005/13, the transaction meets the characteristics of a gift.

8.         Row 1 of the table details rules relevant to deductions under Item 1. Column 2 lists qualifying types of gifts in paragraphs (a) through (e). Column 3 lists rules for working out the deduction amount at paragraphs (a) through (e). The gift must also comply with special conditions in Column 4 to qualify for a deduction. We'll describe and apply these rules in the following paragraphs.

9.         There are five types of qualifying gift types described in five paragraphs in Column 2. Speaking loosely, these qualifying gift types include:

a)         money

b)         property that you purchased during the 12 months before making the gift

c)         trading stock <meeting conditions described in that paragraph>

d)         property valued by the Commissioner at more than $5,000

e)         public company shares which are listed on an Australian stock exchange <again, meeting conditions described in that paragraph>.

10.      Property, in legal usage, generally means a bundle of rights giving the holder power over things. ATO guidance suggests there's no single test for identifying property, but common tests include whether rights are definable, excludable, can be assumed by third parties, have commercial value, and are enforceable. See TD 2014/26[2] at paragraph 7.

11.      Musical instruments are property. They are tangible items which can be owned; owners of musical instruments have entitlements to use them, prevent others from using them, and can dispose or transfer their rights over them to third parties. The rights attaching to the musical instruments are property rights, so the underlying musical instruments are property.

12.      This proposed donation will qualify as a relevant gift type for deductible donations. We've established that musical instruments are property, and the taxpayer will purchase them (from the SMSF) immediately before making the gift to his or her charity (which is in the 12 months before that gift). That means the taxpayer's proposed gift of the musical instruments qualify under paragraph (b) in Column 2 of the table in section 30-15. There's no exemption or special treatment which excludes property purchased from related parties, so it's irrelevant that the taxpayer's SMSF will have held the property for some years before the taxpayer purchases them.

The taxpayer's deduction is the lesser of the musical instruments' market value, or the amount he or she paid for them: this will be the same if he or she pays market value.

13.      Column 3 lists rules for working out how much you can deduct; we'll list the rules for Item 1.

a)         If the gift is money, the amount you give.

b)         If the gift is property that isn't covered by paragraphs c), d), or e), the lesser of the property's market value on the day you make the gift and the amount you pay for the property.

c)         If the gift is your trading stock (and it meets extra conditions), the item's market value on the day you make the gift.

d)         If the gift is property valued by the Commissioner at more than $5,000 and you didn't purchase the property during the 12 months before making the gift, the value of the property as determined by the Commissioner.

e)         If the gift is shares qualifying under paragraph (3) of Column 2, the market value on the day you make the gift.

14.      The proposed gift will qualify under paragraph (b). The gifted musical instruments are property (not money, trading stock, or shares) so paragraphs a), c) and e) aren't relevant. The taxpayer will buy the property less than 12 months before making the gift, so paragraph d) doesn't apply.

15.      It follows that the deduction amount will be the amount the taxpayer paid to buy the musical instruments. The taxpayer will get a valuation and pay his or her SMSF that amount to buy the musical instruments. The taxpayer will pay market value for the instrument. The taxpayer is entitled to deduct the market value and amount paid - they will be the same.

The taxpayer's proposed gift qualifies for the special conditions in Column 4.

16.      Column 4 lists special conditions applying to donations in Item 1.

a)         The fund, authority, or institution must be in Australia.

aa)      The fund, authority or institution must either meet the requirements of section 30-17 or be mentioned by name in the relevant table item in Subdivision 30-B.

b)         The value of the gift must be $2 or more.

c)         Any conditions set out in the relevant table item in Subdivision 30-B must be satisfied.

d)         If the property is to be valued by the Commissioner, the requirements in section 30-212 are satisfied.

17.      Broadly, ATO guidance suggests a DGR will be 'in Australia' if Australia is its real location. TR 2019/6[3] at paragraphs 5 through 7 says that a DGR will qualify for this condition if Australia can be described as its real location, taking legal form and substance into account. This condition is concerned with its location in a legal or organisational sense, rather than where assets are held or transactions happen. A DGR will meet the condition if it's established or legally recognised in Australia and makes its operational or strategic decisions mainly in Australia.

18.      These conditions will be met. The taxpayer's charity will be established in Australia as a fund, authority, or institution in Australia that qualifies under Subdivision 30-B, so paragraphs a), aa), and c) will be met. The charity will be established in Australia with an Australian resident trustee company, so it will be both legally recognised in Australia and have its strategic decisions made in Australia. (It wouldn't cease to be 'in Australia' just because the charity's musical instruments may be taken overseas temporarily by touring musical groups or musicians.) The musical instruments have a value over $5,000 so the $2 requirement in paragraph b) is met. The property doesn't need to be valued by the Commissioner for reasons we explain in Question 3, so paragraph d) isn't relevant.

Section 78A won't apply. The taxpayer will transfer full title to his or her charity and won't benefit from the transaction. The recipients won't be the taxpayer's associates.

19.      Section 78A is broadly an integrity rule which disallows deductions for transactions that appear to be gifts but either benefit the giver or disadvantage the recipient. We'll loosely summarise the effect of some of the provisions. Subsection 78A(2) disallows deductions for gifts of money where the circumstances of the gift, or some surrounding agreement connected with it, mean that:

a)         the recipient's benefit is less than the property's value

b)         any fund, authority, or institution, or another person becomes liable to transfer property or incur some detriment

c)         the donor or an associate obtains some extra benefit (other than the benefit of the deduction)

d)         the recipient or some other fund, authority, or institution will also acquire property (apart from the gift) from the donor or associate.

Subsection 78A(3) says that the donor is deemed to get a benefit if the recipient fund, authority, or institution doesn't receive immediate custody and control, or doesn't have an unconditional right to retain custody and control. Subsection 78A(1) says that where the donor is a natural person, an associate means a relative, partner, a trustee where the donor or associate benefits under the trust, or a company where the directors are accustomed to act in accordance with the donor's directions, instructions, or wishes.

20.      There's some ATO guidance on section 78A. TR 2005/13 broadly says section 78A doesn't deny genuine gifts made under ordinary circumstances. At paragraph 48, it says section 78A applies to purported gifts if there's considerably reduced benefaction on the recipient, or the recipient bears obligations, or the donor or an associate benefits from the transfer.

21.      Section 78A won't disallow a deduction for this transaction for similar reasons to why we concluded the taxpayer will be making a genuine gift. The taxpayer will transfer complete and unencumbered legal and beneficial title to his or her charity, so it will get the property's full value and won't incur other benefits. The taxpayer won't receive any benefit from the transaction. The taxpayer's associates won't benefit either. The charity won't be the taxpayer's associate because it's established as a trust, and the taxpayer can't benefit under the charity's trust deed. While musicians and musical groups may benefit from the transaction, the facts indicate they are unrelated to the taxpayer and therefore aren't his or her associates.

Section 30-220 isn't relevant because the taxpayer's charity will get full title to the musical instruments.

22.      Section 30-220 reduces deductions by a 'reasonable amount' if the recipient won't receive immediate and unconditional custody and control and legal and equitable title, or custody, control, and use is affected by an arrangement.

23.      This doesn't apply. The taxpayer's charity will get full and unconditional title and control of the musical instruments. While the taxpayer's charity will lend the asset to musical groups and musicians, that will be under separate arrangements it enters into with the relevant parties, consistently with the charity's purpose and constituting documents. The facts don't suggest the taxpayer will enter a side agreement with his or her charity which affects its rights over the musical instruments.

Conclusion: the taxpayer will be entitled to a deduction for donating the musical instruments to his or her charity.

24.      It follows that the taxpayer will be entitled to a deduction if he or she donates the musical instruments to the charity. The taxpayer will make a gift which meets the conditions in Item 1 of the table in section 30-15. Sections 78A and 30-220 won't apply to disallow his or her deduction.

Question 2

If yes to Question 1, what will be the value of the taxpayer's tax deduction?

Answer

The value of the taxpayer's deduction will be the market value of the musical instruments, which is also the price he or she pays paid for them.

Reasoning

25.      See our reasoning to Question 1 at paragraphs 13 to 15.

Question 3

If yes to Question 1, does the taxpayer need to use a valuer who is approved on the cultural gifts register to determine the market value of the musical instruments?

Answer

Using an approved valuer is not a formal requirement for the taxpayer to claim a deduction.

However, the taxpayer will need to demonstrate that the amount he or she claims as a deduction reflects the market value of the musical instruments to substantiate entitlement.

Reasoning

The taxpayer isn't required to get 2 valuations from an approved valuer because his or her eligibility doesn't derive from a gift to a public body under the cultural heritage program.

26.      The gift deduction provisions have rules for valuing gifts of property in Subdivision 30-C. Very broadly, section 30-200 requires you to get 2 or more valuations from an approved valuer. Section 30-210 says that an approved valuer must be approved in writing by the Arts Secretary.[4] (The valuation requirement doesn't apply where section 30-205 applies - which is broadly where the amount would have been included in your assessable income had you sold the property.) Section 30-212 requires you to seek a valuation from the Commissioner if required.

27.      Items 4, 5, and 6 of the table in section 30-15 are broadly about gifts to public institutions. Item 4 is for gifts to the Australiana Fund, or public libraries, public museums, public art galleries, or institutions consisting of a combination of those things. Item 5 is for gifts to the Commonwealth for the purposes of Artbank. Item 6 is for gifts to the National Trust of Australia.

28.      Column 4 of the table has a special condition requiring you to satisfy the valuation requirements in section 30-200 unless section 30-205 applies, but it only applies to Items 4, 5, and 6.

29.      This valuation requirement in section 30-200 (to get 2 or more valuations from an approved valuer) isn't relevant to the taxpayer. It's only relevant for Items 4, 5, and 6 of the table in section 30-15; the taxpayer will qualify under Item 1. The taxpayer isn't required to get 2 valuations from an approved valuer because he or she won't qualify for a deduction under Items 4, 5, and 6 of the table.

The taxpayer isn't required to seek a valuation from the Commissioner - unless he or she wishes to spread his or her deduction over 5 years.

30.      The taxpayer isn't required to seek a valuation from the Commissioner to claim a deduction. The requirement that the taxpayer seek a valuation from the Commissioner only applies to gifts of property you didn't purchase during the 12 months before making the gift.

31.      Nevertheless, we explain in Question 4 that the taxpayer must seek a valuation from the Commissioner if he or she wishes to spread the deduction over 5 years.

The taxpayer should determine the market value of the musical instruments by seeking an objective, independent valuation from a qualified professional who uses an appropriate methodology.

32.      We explained in our reasoning to Question 1 that the amount of the taxpayer's deduction will be the lesser of the market value of the musical instruments and the amount he or she paid for them.

33.      The ATO has guidance about what market value means in the tax context. The ATO website[5] says that market value is an asset's estimated monetary worth on the open market at a particular time. It's based on the most valuable use of the asset, based on the amount that a willing buy and seller would agree to in an arm's length transaction. Any valuation must be objective, accurate, and supported by appropriate evidence. Valuations are usually more credible if they're undertaken by professional valuers who are independent. You are responsible for ensuring the valuer is suitably knowledgeable and experienced, remains objective, their work isn't inhibited, and they provide a reasonable market value supported by an appropriate recognised valuation methodology.[6]

34.      This guidance applies to the taxpayer in determining the market value of the musical instruments he or she intends to gift to the charity.

Question 4

If yes to Question 1, will the taxpayer be entitled to spread the deduction over a period of up to 5 years?

Answer

Yes, if the Commissioner makes a valuation under section 30-212.

Reasoning

The taxpayer must seek a valuation from the Commissioner if he or she wishes to spread the deduction over 5 years.

35.      Subdivision 30-DB allows some gift deductions to be spread over 5 years.

36.      Section 30-248 allows you to elect to spread the deduction over the current income year and up to 4 of the immediately following income years. You must specify the percentage (if any) of the deduction in each of the income years. You must make that election before lodging your return. (You can vary for the subsequent years but only before you lodge those returns.)

37.      However, subsection 30-247(1) limits this election to:

•                gifts of money, or gifts of property valued by the Commissioner at more than $5,000 to DGRs under Items 1 or 2 in the table in section 30-15, and

•                gifts to the public bodies under Items 4, 5, and 6 in the table in section 30-15 (ie, cultural and heritage gifts).

38.      The taxpayer must seek a valuation from the Commissioner to be eligible to spread his or her deduction over 5 years. Subsection 30-247(1) limits the election to gifts of money, gifts of property valued by the Commissioner at more than $5,000, and gifts under Items 4, 5, and 6. The taxpayer's gift will be a gift of property, it won't be a gift of money or a gift to a public body mentioned in the Items relevant to the cultural heritage program. The only way the taxpayer can make the election is if the Commissioner values the property at more than $5,000. It follows that the taxpayer should seek a valuation from the Commissioner.

[1] Taxation Ruling TR 2005/13 Income tax: tax deductible gifts - what is a gift.

[2] Taxation Determination TD 2014/26 Income tax: is bitcoin a 'CGT asset' for the purposes of subsection 108-5(1) of the Income Tax Assessment Act 1997?

[3] Taxation Ruling TR 2019/6 Income tax: the 'in Australia' requirement for certain deductible gift recipients and income tax entities.

[4] Section 995-1 says the Arts Secretary means the Secretary of the Department administered by the Arts Minister.

[5] ATO (2023) 'Market valuation of assets' accessed at https://www.ato.gov.au on 31 July 2023.

[6] ATO (2023) 'Market valuation for tax purposes' accessed at https://www.ato.gov.au on 31 July 2023.