Edited version of private advice

Authorisation Number: 1052236468298

Date of advice: 4 April 2024

Ruling

Subject: Gift deductibility

Question 1

Will the Partnership be entitled to a tax deduction for the value of each property in accordance with item 1 of the table in section 30-15 of the Income Tax Assessment Act 1997?

Answer

Yes.

Question 2

Will the Partnership be entitled to a tax deduction for the value of an asset which consists of a real property development opportunity in accordance with item 1 of the table in section 30-15 of the Income Tax Assessment Act 1997?

Answer

No

Question 3

If the transfer is a tax-deductible gift under section 30-15 of the Income Tax Assessment Act 1997, will the transfer of each property be precluded from deductibility by reason of the operation of section 78A of the Income Tax Assessment Act 1936?

Answer

No.

This ruling applies for the following period:

Income year ended 30 June 2023

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

1.      The Partnership is a partnership between 1, 2 and 3 (all are trusts).

2.      The Partnership has a bare trustee and nominee entity (Nominee).

3.      The Partnership was the beneficial owner of property owned by Nominee.

4.      The Partnership leased some of the property to Partnership B and Partnership C.

5.      Partnership B and Partnership C were controlled by the same entities who control the Partnership.

6.      Partnership B and Partnership C carried on for-profit businesses. The businesses were operated out of property either owned by Partnership B and Partnership C, leased from the Partnership or leased from another entity.

7.      The partners of the Partnership, Partnership B and Partnership C entered into an Agreement with a deductible gift recipient (DGR) to transfer to the DGR certain property and assets. The family group wanted to transfer the property and assets to a custodian who would continue to use them.

8.      Under the terms of the Agreement, the Partnership transferred property and other assets to the DGR, and the Partnership retained certain property.

9.      For completeness, Partnership B and Partnership C also transferred property and assets to the DGR, and Partnership B retained certain property.

10.   The property transferred by the Partnership to the DGR was unencumbered and free from all security interests.

11.   The DGR entered into leases so it could use the property retained by the Partnership and Partnership B. The rent under the leases is at less than market rent.

12.   Prior to executing the Agreement, the DGR was advised that the Partnership, and Partnership B, would retain certain property. The DGR discussed securing leases that would give them access to the retained property.

13.   Under the arrangement the DGR was not required to enter into any leases with the Partnership or Partnership B and had the ability to explore alternatives to the leases of the retained property, but voluntarily decided to enter the leases for the retained property.

Relevant legislative provisions

Division 30 of the Income Tax Assessment Act 1997

Section 30-15 of the Income Tax Assessment Act 1997

Section 78A of the Income Tax Assessment Act 1936

Section 90 of the Income Tax Assessment Act 1936

Reasons for decision

Questions 1 and 2

Section 30-15 of the Income Tax Assessment Act 1997 (ITAA 1997) provides a deduction for gifts and contributions to endorsed deductible gift recipients if the gift or contribution satisfies the requirements of an item in one of the tables set out in that section.

Item 1 of section 30-15 provides a deduction for a gift of money, property, trading stock or shares given to an endorsed deductible gift recipient if the requirements of the table are satisfied.

Section 90 of the Income Tax Assessment Act 1936 (ITAA 1936) provides that 'net income, in relation to a partnership, means the assessable income of the partnership, calculated as if the partnership were a taxpayer who was a resident, less all allowable deductions except deductions allowable under section 290-150 or Division 36 of the Income Tax Assessment Act 1997'.

In the current circumstances, property and other assets were transferred to a deductible gift recipient, and if the transfer is a gift for the purposes of section 30-15 of the ITAA 1997 and the requirements of that section are satisfied, a deduction can be claimed. A deduction under Division 30 of the ITAA 1997 is an allowable deduction for the purposes of section 90 of the ITAA 1936. As such, if a deduction is allowable in relation to the transfers the object of this ruling, the deduction can be included in calculating the net income of the Partnership. For the purposes of tax law, the Partnership will be the relevant donor of the property.

Property

The term 'property' is not defined in the ITAA 1997, and so its ordinary meaning must be used. In Minister of State for the Army v Dalziel (1944) 68 CLR 261, Starke J stated at 290:

Property, it has been said, ... extends to every species of valuable right and interest including real and personal property, incorporeal hereditaments such as rents and services, rights of way, rights of profit or use in land of another and choses in action. And to acquire any such right is rightly described as an "acquisition of property". On the other hand a mere personal licence such as is not assignable would not be rightly described as property...

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? states the following about the meaning of property:

6. In Yanner v. Eaton (Yanner) the High Court accepted that property refers not to a thing but to a description of a legal relationship with a thing; and, more specifically, to the degree of power that is recognised in law as permissibly exercised over the thing. Noting the difficulties in determining what is meant by 'property' in a thing, their honours quoted Professor Gray who stated '[a]n extensive frame of reference is created by the notion that 'property' consists primarily in control over access'.

7. There is no single test nor a single determinative factor for identifying a proprietary right. Courts have emphasised different characteristics in different circumstances. One formulation that has been applied in Australia is the 'Ainsworth test' - which asks whether a right is definable, identifiable and capable of assumption by third parties, and permanent or stable to some degree. However, courts have also focused on factors such as excludability (whether it is possible to exclude others from the right in question), commercial value (whether something is treated in commerce as a valuable proprietary right), and enforceability of the right against third parties generally. Accordingly, in determining whether something amounts to property it is necessary to weigh up a range of factors, and to treat none as definitive. (footnotes removed)

In accordance with the Agreement, the real property was transferred by the Partnership to the DGR. The property is property for the purposes of section 30-15 of the ITAA 1997.

The Partnership also transferred an asset which was a real property development opportunity. The asset is not considered to be property for the purposes of section 30-15 of the ITAA 1997.

Gift

The issue of what is a gift for the purposes of Division 30 of the ITAA 1997 is dealt with in Taxation Ruling TR 2005/13 Income tax: tax deductible gifts - what is a gift (TR 2005/13).

The word 'gift' is not defined in the ITAA 1997. For the purposes of Division 30 of the ITAA 1997 the word 'gift' has its ordinary meaning.

The courts have described a gift as having the following characteristics and features:

-               there is a transfer of the beneficial interest in property,

-               the donor makes the transfer voluntarily,

-               the transfer arises by way of benefaction, and

-               there is no material benefit or advantage for the donor.

These characteristics are not absolute and may involve a matter of degree. In determining whether a transfer is a gift it is necessary to consider the whole set of circumstances surrounding the transfer that provide the context and explanation for the transfer.

The Agreement is a very detailed document which sets out the transactions for the transfer of property and other assets held by the Partnership, Partnership B and Partnership C.

Transfer of Beneficial interest in property

TR 2005/13 provides the following about the transfer of beneficial interest:

16. The making of a gift to a DGR involves the transfer of a beneficial interest in property to that DGR.

17. It is a requirement that identifiable property has in fact been transferred to the DGR.

18. For there to be a transfer, the property which belonged to the giver must become the property of the DGR. A gift is effectual only where the giver has done everything that is necessary, in accordance with the relevant laws governing the transfer of that kind of property, to transfer ownership to the DGR. Where an owner gives only part of what is owned (for example, ten of fifty hectares of land, or 200 shares of a parcel of 800 shares), only the part that is transferred (the ten hectares, or the 200 shares) can be a gift.

19. If the DGR fails to obtain immediate and unconditional right of custody and control of the property transferred, or less than full title to the transferred property is transferred, a gift deduction will not arise...

The giver must have proprietary rights in the property just prior to its transfer. When money or property is transferred to the recipient, the recipient must receive full title, custody and control of the property so that the recipient is entitled to deal with the property in its own right.

In accordance with the Agreement, the Partnership transferred the property to the DGR.

The DGR received the property free from all security interests and with no other liabilities or obligations attached to them. Following the transfer, the DGR was the legal and beneficial owner of the property.

Accordingly, it is accepted that the property has been transferred to the DGR.

Transfer made voluntarily

TR 2005/13 states the following about when a transfer is voluntary:

23. 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. However, a transfer made under a sense of moral obligation is still made voluntarily.

24. A transfer is not made voluntarily if it is made for consideration or because of a prior obligation imposed on the giver by statute or by contract. Nonetheless, a transfer which has the other attributes of a gift will not fail to be considered a voluntary transfer merely because the means used to give effect to the benefaction have contractual or similar features.

It was the desire of the partners of the Partnership to transfer the property and assets to a custodian that would continue to use them, and it was decided that they would be transferred to the DGR. To give effect to the desired transfer, the Partnership, Partnership B, and Partnership C entered into the Agreement with the DGR to transfer the property and assets.

It is the will of the Partnership to transfer the property to the DGR. There is nothing in the arrangement to suggest that the will of the Partnership has been interfered with. There was no obligation on the Partnership to transfer the property to the DGR.

Accordingly, it is accepted that the property was transferred voluntarily.

Arises by way of benefaction

TR 2005/13 states the following about benefaction:

27. An essential attribute of a gift is that benefaction is intended, and in fact conferred on the recipient. Conferring benefaction means that the DGR is advantaged in a material sense, to the extent of the property transferred to them, without any countervailing detriment arising from the terms of the transfer.

28. Where the giver is aware that the transfer of property will result in detriments, disadvantages, obligations, liabilities or limitations to the recipient, the attribute of benefaction may be missing. Whether benefaction is in fact conferred will depend to a large extent on the proportion which the detriment, disadvantage, obligation, liability or limitation bears to the value of the property transferred.

29. However, detriments, disadvantages, obligations, liabilities, or limitations borne by the recipient which are not within the knowledge and intention of the giver at the time of the transfer, and which do not arise from the terms of the transfer of property by the giver, do not necessarily preclude a finding that the conferral of benefaction was associated with the transfer.

...

34. A gift ordinarily proceeds from a detached and disinterested generosity. There may be a variety of reasons and motivations behind the giver making a gift. However, the fact that the giver has a personal motive for making the gift, such as a strong interest or emotional involvement in the work of the DGR, will not disqualify the gift from being tax deductible.

...

36. In cases where it is clear on the objective facts that the giver is giving effect to self-interested commercial or fiscal objectives rather than conferring benefaction on the DGR, it will be evident that the transfer does not proceed from detached and disinterested generosity.

There are two very different and distinct groups of interests transferred under the Agreement, the property of the Partnership and the property and assets of Partnership B and Partnership C. While the transfer of the property occurs in the context of the Agreement, we will treat the transfers as two separate transfers made by different entities.

Under the Agreement, the unencumbered interest in the property, transferred by the Partnership, is complete upon filing of the title documents with the relevant authorities. Prior to the execution of the Agreement, the DGR was made aware that certain property and assets would be retained by the Partnership and Partnership B. Under the circumstances of the entering into the Agreement, the DGR was not required to enter into any other arrangements with the Partnership, or Partnerships B or C, in order to acquire the transfer of the property from the Partnership. The DGR was free to use the property transferred by the Partnership in any way it saw fit. The DGR initiated, and undertook, the steps to secure access to certain property retained by the Partnership and certain property and assets held by Partnerships B and C.

On the evidence provided, we accept that the DGR voluntarily entered into associated arrangements, and it was not a condition of the transfer of property by the Partnership. It was an option that the DGR sought out and requested to be included in the Agreement.

Following the transfer of the property by the Partnership, the DGR took ownership of the property, and could deal with the property as it wanted. The DGR received full benefit of the property, without any detriment, and was materially advantaged by the transfer from the Partnership.

Accordingly, it is accepted that the benefaction was conferred on the DGR through the transfer of the property by the Partnership.

No material benefit or advantage

TR 2005/13 states the following about material benefit or advantage:

37. In order to constitute a gift, the giver must not receive a benefit or an advantage of a material nature by way of return. It does not matter whether the material benefit or advantage comes from the DGR or another party.

...

41. Only advantages or benefits that are material will disqualify a transfer of property from being regarded as a gift. This excludes advantages or benefits of a de minimis nature.

42. It is a question of fact in each case whether any benefit or advantage is considered material. A benefit or advantage can be material if there is a link between the benefit and the transfer, and the benefit is sufficiently significant in relation to the value of the transfer.

43. Each of these is not a material benefit or advantage:

•      one that has no link with the transfer;

•      one that is insignificant in relation to the value of the transfer;

•      one that only constitutes advertising for the DGR;

•      one that cannot be put to use and is not marketable;

•      one that does not create any rights, or confer any privileges or entitlements;

•      one that merely accounts for the use of the funds;

•      one that is mere public recognition of the giver's generosity; or

•      one that confers membership of a DGR which was neither sought nor known by the giver at the time of making the transfer.

44. Some circumstances which may lead to a conclusion that a benefit or advantage is material are where:

•      the benefit is sought by the giver in connection with the transfer;

•      as a result of the transfer, a legal obligation is eliminated or reduced;

•      the benefit is offered by the DGR as an inducement to potential givers;

•      there is public recognition for purposes of commercial advertising for the giver;

•      membership rights and privileges are obtained as a result of transfer; or

•      there is a requirement to report to the giver on results of research undertaken by the DGR and the results are to be used by the giver.

In accordance with the Agreement, the Partnership transferred ownership of the property to the DGR, and following the transfer the DGR received the property unencumbered and could deal with the property as it wanted.

Prior to the execution of the Agreement, the DGR was made aware that certain property and assets would be retained by the Partnership and Partnership B. Under the circumstances of entering into the Agreement, the DGR was not required to enter into any other arrangements with the Partnership, or Partnerships B or C, in order to acquire the transfer of the property from the Partnership. The DGR was free to use the property transferred by the Partnership in any way it saw fit. The DGR initiated, and undertook, the steps to secure access to certain property retained by the Partnership and certain property and assets held by Partnerships B and C. The further arrangements included the DGR leasing property retained by the Partnership at well below market rate.

The evidence indicates that the transfer of the property by the Partnership was not dependent upon the DGR entering into the leases with the Partnership, or any other arrangements with Partnerships B and C. The DGR could have used other property and assets, and was not dependent upon making the other arrangements with the Partnership, or Partnerships B and C.

Further, if the Partnership chose not to enter into the relevant leases with the DGR, they would have been able to lease their retained properties to a third party at full market rent.

The evidence provided regarding the circumstances of entry into the Agreement indicate that the transfer of the property by the Partnership was independent to any other arrangements with the Partnership and Partnerships B and C and no other benefit was received by the Partnership as a result of the Agreement.

Accordingly, it is accepted that in respect of the property transferred by the Partnership to the DGR, no material benefit or advantage was received by the Partnership.

Conclusion

The transfer of property from the Partnership to the DGR is a gift for the purposes of Section 30-15 of the ITAA 1997. As such, the Partnership is able to claim a deduction for the value of each property transferred to the DGR in accordance with item 1 of the table in section 30-15 unless section 78A of the Income Tax Assessment Act 1936 operates to deny the deduction.

Question 3

Detailed reasoning

Subsection 78A(2) of the ITAA 1936 states:

Subject to this section, a gift of money, or of property other than money, made by a person (in this section referred to as the donor) to a fund, authority, institution or person is not an allowable deduction under Division 30 of the Income Tax Assessment Act 1997 where:

(a)    by reason of any act, transaction or circumstance that has occurred, will occur, or may reasonably be expected to occur, being an act, transaction or circumstance occurring as part of, in connexion with or as a result of:

(i) the making or receipt of the gift; or

(ii) any agreement or scheme entered into in association with the making or receipt of the gift, the amount or value of the benefit derived by the fund, authority, institution or person as a consequence of the gift is, will be, or may reasonably be expected to be, less than the amount or value at the time when the gift was made of the property comprising the gift;

(b)    by reason of any act, transaction or circumstance of a kind referred to in paragraph (a), any fund, authority, institution or person other than the fund, authority, institution or person to which the gift was made, makes, becomes liable to make, or may reasonably be expected to make or to become liable to make, a payment, or transfers, becomes liable to transfer, or may reasonably be expected to transfer or to become liable to transfer, any property, to any person or incurs, becomes liable to incur, or may reasonably be expected to incur or to become liable to incur, any other detriment, disadvantage, liability or obligation;

(c)    by reason of any act, transaction or circumstance of a kind referred to in paragraph (a), the donor or an associate of the donor has obtained, will obtain or may reasonably be expected to obtain any benefit, advantage, right or privilege other than the benefit of any deduction that, but for this section, would be allowable from the assessable income of the donor under Division 30 of the Income Tax Assessment Act 1997 ; or

(d)    by reason of any agreement or scheme entered into as part of or in association with the making of the gift, any property, other than property comprising the gift, has been acquired or will be acquired, whether directly or indirectly, from the donor or an associate of the donor by that fund, authority, institution or person or by another fund, authority, institution or person.

Section 78A of the ITAA 1936 is an anti-voidance provision that, where it applies, denies an income tax deduction for a gift under Division 30 of the ITAA 1997. Section 78A of the ITAA 1936 is not intended to apply to genuine gifts made in ordinary circumstances; rather it is intended to render ineffective arrangements designed to exploit the availability of deductions in respect of gifts.

It was the desire of the partners of the Partnership to transfer the property and assets to a custodian that would continue to use them. The transfer was intended to be a genuine gift, and in the case of the Partnership there was a gift of property. The Partnership was under no obligation to transfer all property it owned to the DGR. The Partnership retained certain property which, at the request of the DGR, was leased to the DGR.

Paragraph 78A(2)(a)

TR 2005/13 states the following about Paragraph 78A(2)(a) of the ITAA 1936:

208. Paragraph 78A(2)(a) of the ITAA 1936 applies where the amount or value of the benefit obtained by the DGR is reduced, or will be reduced, or may reasonably be expected to be reduced subsequent to the making of the gift as a result of any circumstance, transaction or arrangement associated with the gift.

Under the arrangement, the DGR received the full value of the property transferred to it by the Partnership (it received ownership of the property and could fully exploit the property) and the value of the transfer was not reduced by any of the other transactions associated with transfer of property. Paragraph 78A(2)(a) of the ITAA 1936 does not apply to the transfer of property.

Paragraph 78A(2)(b)

TR 2005/13 states the following about Paragraph 78A(2)(b) of the ITAA 1936:

212. Paragraph 78A(2)(b) of the ITAA 1936 provides that no deduction is available in respect of a gift made where, by reason of any transaction, circumstance or arrangement, another fund, authority or institution other than the recipient DGR makes, or becomes liable to make, or may reasonably be expected to make a payment or transfer property or incur any other detriment, disadvantage, liability or obligation.

213. Paragraph 78A(2)(b) is a safeguarding provision designed to ensure that the provisions in paragraph 78(2)(a) are not avoided through arrangements whereby a DGR receives the gift and another affiliated body incurs the detriment, disadvantage, liability or obligation and, as a result of the arrangement, the amount or value of the benefit derived as a consequence of the gift is less than the amount or value of the property comprising the gift at the time the gift is made.

No other fund, authority, institution or person, or affiliated body of the DGR, incurred a detriment under the arrangement. Paragraph 78A(2)(b) of the ITAA 1936 does not apply to the transfer of property.

Paragraph 78A(2)(c)

TR 2005/13 states the following about Paragraph 78A(2)(c) of the ITAA 1936:

215. Where, by reason of the circumstances surrounding a transfer to a DGR, a giver or any associate of the giver receives any benefit, advantage, right or privilege other than the benefit of a taxation deduction, no deduction is allowable under Division 30 because of the operation of paragraph 78A(2)(c).

216. The case authorities do not make it clear that the characterisation as a gift is necessarily precluded where, arising from the transfer, a material benefit is received by an associate of the giver. However, paragraph 78A(2)(c) of the ITAA 1936 requires account to be taken of any benefit obtained, or which is reasonably expected to be obtained, by any associate of the giver.

As discussed in question 1, the DGR entered into lease arrangements with the Partnership in respect of retained property. The rent paid by the DGR to the Partnership under the leases could be seen as a benefit to the Partnership. However, on the evidence available, the DGR was not required to enter into the leases to receive the gift. The gift of the property by the Partnership was not dependent upon the DGR entering into the leases. The DGR could have used other property but decided to enter into the leases. Further, had the DGR not sought out and entered the leases and instead used other property, the Partnership could have leased the property to a third party and would have been entitled to receive market rent. The circumstances surrounding the transfer of the property indicates that the Partnership (donor), did not receive a benefit other than the benefit of a tax deduction from the transfer of the property.

Partnership B also receives rent under lease arrangements with the DGR. As such it is necessary to determine if Partnership B is an associate of the donor.

The meaning of associate for the purposes of Section 78A of the ITAA 1936 is set out in subsection 78A(1), which provides the meaning of 'associate' for a donor being a natural person, and a donor being a company.

Under the meaning of 'associate' in subsection 78A(1) of the ITAA 1936 Partnership B is not an associate of the Partnership

Therefore, Partnership B is not relevant for paragraph 78A(2)(c).

Paragraph 78A(2)(d)

Further, TR 2005/13 states the following about Paragraph 78A(2)(d) of the ITAA 1936:

223. Paragraph 78A(2)(d) is directed at arrangements where a gift of cash is made to the DGR on the basis that the money will be used by the recipient DGR or another fund, authority or institution to acquire property from the giver or the giver's associate.

Example 79

224. P inherits an Australian federation sideboard. It is valued at $4,500. He gifts $4,500 cash to the local museum (a DGR) on the understanding that the museum will buy the sideboard from him. The gift of $4,500 cash is not an allowable deduction because of the operation of paragraph 78A(2)(d).

For the purposes of section 78A, neither Partnership B or C is an associate of the Partnership, therefore paragraph 78A(2)(d) would only apply where other property has been acquired from the Partnership. Only the gifted property has been acquired from the Partnership.

As such, subsection 78A(2)(d) of the ITAA 1936 does not apply to the transfer of property.

Subsection 78A(3) of the ITAA 1936 states that ' without limiting the application of subsection (2), where the terms and conditions on which a gift of property other than money is made are such that the fund, authority, institution or person to which the gift is made does not receive immediate custody and control of the property, does not have the unconditional right to retain custody and control of the property in perpetuity to the exclusion of the donor or an associate of the donor or does not obtain an immediate, indefeasible and unencumbered legal and equitable title in the property, paragraph 2(c) shall be deemed to apply in relation to that gift'.

The Partnership transferred the ownership of the property to the DGR, and the DGR received unencumbered title. Subsection 78A(3) of the ITAA 1936 does not apply to the transfer of property.

In these circumstances, it is considered that the provisions of Section 78A of the ITAA 1936 will not apply to the gift from the Partnership to the DGR, and the Partnership can claim a deduction for the value of each property transferred in accordance with item 1 of the table in section 30-15 of the ITAA 1997.