Edited version of private advice

Authorisation Number: 1052225285245

Date of advice: 8 April 2024

Ruling

Subject:Deductibility of gift or contribution

Question 1

Will the donation of Coy X's rights under an agreement to advance a loan to XX to the PAF constitute a tax-deductible gift or contribution under section 30-15 of the ITAA 1997 Act?

Answer

Yes

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The PAF is a charity endorsed for income tax exemption from XX and as a deductible gift recipient from XX as a private ancillary fund.

PAF was established on XX as the XX family's long term philanthropic vehicle, which has donated over $XX to a wide range of charities.

XX

XX is a social enterprise business and supports chronically unemployed Australians to enter long-term sustainable employment.

The XX forms part of the broader XX group.

Separate funds were created, both attracting independent capital based on the social and economic benefits that the assets provide. XX was established first, ZZ is the major investor in the fund holding $XX in equity (XX%) and debt facility of $XX.

ZZ is a statutory authority of the Australian Government and is accountable to the Parliament and the Minister for XX. ZZ assesses the social and economic benefits of its investment in XX against KPI's quarterly. These KPI's have been continuously exceeded even through the COVID lockdown period.

Coy X

XX is a director of Coy X and PAF and other entities and also holds a nominal number of units in PAF valued at $XX which represents only XX% of the total units.

On XX, Coy X (lender) and XX (borrower) entered into a loan agreement (XX Loan Agreement). The core relevant terms of the XX Loan Agreement were:

• The principal loan amount is $XX (loan).
• Interest of XX% per annum is payable monthly in arrears, commencing one month after the loan date (being the date on which the loan was advanced).
• XX was required to register a mortgage over land owned by it located at XX (secured property).
• The loan has no fixed repayment date. The loan is on-call after the initial 5-month period specified in the XX Loan Agreement, the lender may demand payment at any time after XX months from the loan date, by giving a minimum of XX days' notice to XX. There is no limitation on the agreement that can be made. For example, the parties could agree to increase the interest rate at any time.
• The lender can assign its benefits.
• No failure of delay by the lender to exercise any power, right or remedy under the agreement operates as a waiver of that power, right, or remedy.

The directors of Coy X determined that the ZZ loan is an appropriate arm's length benchmark on which to base the interest rate of the XX Loan Agreement as:

o   ZZ is a statutory organisation; and

o   XX and XX are managing virtually identical assets with the same purpose, and the same social impact outcomes.

Coy X donated its rights under the XX Loan Agreement (Loan Rights) to PAF by way of a deed of gift dated XX (Deed of Gift). The Deed of Gift provides that Coy X (defined as the 'Transferor') assigns and transfers the XX Loan and all its rights under the XX Loan Agreement and the mortgage to PAF (defined as the 'Transferee') by way of Gift.

The value of the XX Loan Agreement at the date of donation is $XX.

Coy X has made the transfer of property to PAF in accordance with the rules under its constitution and the Corporations Law.

At the time of the donation to PAF, in addition to the mortgage security, the directors of PAF were satisfied of XX capacity to make repayments. In addition to rental demand in XX and general market conditions, the directors considered:

o   Interest repayments have always been made on time since the Loan was advanced, including during the Covid lockdowns. XX made a voluntary repayment of $XX to PAF on XX (after the donation was made to PAF).

o   XX net profit, before interest and tax, for the quarter ended XX is $XX. Further, XX net profit before interest and tax, for the quarter ended XX is $XX which is 2x interest cover.

Coy X, and subsequently PAF, agreed with XX to extend the loan on a month-to-month basis. PAF can demand full repayment within 30 days' notice in writing to the XX. The XX Loan remains on foot. Interest remains at XX% but is regularly reviewed to determine whether it reflects market rates for social impact investing and remains identical to the rate charged by the ZZ. The Directors have not varied the interest rate since the donation but have continued to peg the rate to the ZZ rate which remains XX%.

The loan has provided PAF with regular income. Between the donation and XX, interest of $XX in interest income has been received by PAF from the XX Loan.

In XX, Coy X submitted a 'Request for valuation - Philanthropy program'.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 30-15

Income Tax Assessment Act 1997 Subdivision 30-B

Income Tax Assessment Act 1997 section 78A

Reasons for decision

Is your gift to the Charity deductible?

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

Coy X made a donation of the loan rights to PAF on XX by way of a deed of gift. The Charity is an endorsed DGR by the ATO and is covered by item 2 of the table in section 30-15 of the ITAA 1997.

Section 30-15 of the ITAA 1997 provides that a gift or contribution to an ancillary fund is deductible in the income year for which it is made subject to satisfying the relevant requirements set out in the table. Item 2 of that table lists the types of gifts and contributions that may be deductible, which includes a gift of property valued by the Commissioner at more than $5,000. Coy X made a donation to the charity of loan rights. The remaining principle owing on the loan exceeded $5,000. Therefore, we consider this requirement met.

Loans of all types are considered financial assets because they represent a contract that conveys to their holder a contractual right to receive cash or another financial instrument from another entity. The loan rights are property, they are a contractual right to receive money, but are not money in themselves.

In addition, the following special conditions set out under item 2 of the table in section 30-15 of the ITAA 1997 must be met:

(a) the value of the gift must be $2 or more; and

(b) the terms of the will or trust must allow the trustee to invest money that the ancillary fund receives because of the gift only in a way that an Australian law allows trustees to invest trust money; and

(c) the ancillary fund must meet the requirements of section 30-17; and

(d) if the property is to be valued by the Commissioner - the requirements of section 30-212 are satisfied.

The first special condition is that the value of the gift must be $2 or more. Coy X made a donation of loan rights with a valuation of $XXXX, which is greater than $2. Accordingly, this requirement will be satisfied.

The second special condition is that the terms of the will or trust must allow the trustee to invest money that the ancillary fund receives because of the gift only in a way that an Australian law allows trustees to invest trust money. The trust deed of the PAF includes clauses that meet this requirement.

The third special condition is that the fund, authority or institution must meet the requirements of section 30-17 of the ITAA 1997 or be mentioned by name in the relevant table item in Subdivision 30-B. Paragraph 30-17(2)(a) of the ITAA 1997 states that the fund, authority or institution must be an entity that is endorsed under subdivision 30-BA as a DGR. The Charity is endorsed as a DGR. Accordingly, we consider that this requirement will be satisfied.

The fourth special condition is that the requirements in section 30-212 are met. This section requires you to seek a valuation from the Commissioner. You have previously sought a valuation from the Commissioner, which was not provided as the valuations officer requested you seek a private ruling regarding the deductibility of the gift prior to seeking a valuation. Provided you seek a valuation from the Commissioner after this ruling is issued, this requirement will be satisfied.

Before assessing the deductibility of your intended donation, we need to establish if it constitutes a "Gift."

Is your donation considered a gift?

Taxation Ruling TR 2005/13 Income tax: tax deductible gifts - what is a gift 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' takes its ordinary meaning.

Paragraph 13 of 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.

We have considered each of these factors below.

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

Coy X donated their rights under XX Loan Agreement (Loan Rights) to PAF by way of a deed of gift dated XX. The Deed of Gift provides that Coy X(defined as the 'Transferor') assigns and transfers the XX Loan and all its rights under the XX Loan Agreement and the mortgage to PAF (defined as the 'Transferee') by way of Gift. The transfer has resulted in PAF having immediate and unconditional right of custody and control of the loan. This requirement is satisfied.

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.

PAF was established on XX as the XX family's long term philanthropic vehicle, which has donated over $XXXX to a wide range of charities.

Coy X voluntarily chose to donate their rights under XX Loan Agreement (Loan Rights) to PAF by way of a deed of gift dated XX (Deed of Gift).

Coy X made the transfer pursuant to the exercise of their own free will. The transfer will not be made pursuant to any legal obligation imposed on Coy X - whether in contract or at law. The transfer will also not be in connection with the discharge of any contractual obligation owed by Coy X to the PAF. Accordingly, we consider that the transfer will be made voluntarily.

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.

Coy X will donate the loan rights to the Charity on a voluntary and unconditional basis. There will be no agreement in connection with the transfer that gives rise to any obligation or detriment for PAF. The Charity will have full and unfettered discretion as to use of the funds for its own charitable purposes. The Charity will not have any obligation to comply or consider Coy X's wishes or preferences. Accordingly, we consider this requirement met.

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 advantage of a material nature by way of return. Whether a material benefit or advantage has been received will be a matter of fact.

In this case, there will be a transfer of beneficial interest in the gift. The gift is the loan rights over the XX loan agreement, which materially benefits the Charity with no detriment. The gifting of the money has been made voluntarily by Coy X, there was no consideration given and Coy X are under no obligation to make the donation. There is no prior agreement in place, the decision to gift the loan rights is purely Coy X's choice. Once the donation is transferred, it is the decision of the Charity to use it as they choose.

Relevantly, Coy X advanced a loan to PAF on an unconditional and voluntary basis. There is no expectation of anything in return. The transfer will not confer any rights or entitlements to Coy X. The donation is also not consideration for any property or services.

Therefore, we do not consider there is a sufficient link or any causal connection between the donation of the advanced loan that Coy X made to the charity and any material benefit in any relevant sense. Ultimately, Coy X's motivation in making the transfer is to donate to a cause that Coy X are passionate about.

Accordingly, we consider this requirement met, and that the donation of the rights under the loan will constitute a gift.

Certain gifts will not be allowable deductions where section 78A of the ITAA 1936 excludes them. We have considered your circumstances and none of these exclusions apply.

Accordingly, based on the above, we consider that the donation of loan rights to PAF is a gift that is covered by a requisite gift type under item 2 of section 30-15 of the ITAA 1997, and it will be deductible under section 30-15 of the ITAA 1997.