Private ruling: Income Tax - Deductions - gifts
Published: February 2012
Ruling period: Financial year ended 30 June 2010

Ruling: Q1: Can you claim a deduction for the gift of pharmaceuticals pursuant to Division 30 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Is the amount of the deduction that can be claimed by you under Division 30 of the ITAA 1997 equal to the cost of the goods being purchased if that amount is equal to or less than the fair market value of the goods (i.e. the gift) at the time of the donation? | A2: Not applicable as no deduction is allowed under this arrangement (see Question 1). | Q3: Are the purchase agreement for the relevant pharmaceuticals and the receipt for the purchase price together sufficient evidence to establish the amount of the income tax deduction? | A3: Not applicable as no deduction is allowed under this arrangement (see Question 1). | Q4: Are the interest/finance charges included in the amount of the deduction? | A4: Not applicable as no deduction is allowed under this arrangement (see Question 1). | Q5: Does the purchase price, and hence the amount deductible, include Goods and Services Tax (GST) (if the purchase price paid is GST inclusive)? | A5: Not applicable as no deduction is allowed under this arrangement (see Question 1). | Q6: Can you claim a full deduction in the year of donation if the purchase price is paid for a period up to 50 years, as long as: · full title passes to you when entering into the purchase agreement; and · the terms of any financing used by you are in accordance with the Uniform Credit Code and National Consumer Credit Protection Act 2009? | A6: Not applicable as no deduction is allowed under this arrangement (see Question 1). | Q7: Can you elect to spread the deduction over five years? | A7: Not applicable as no deduction is allowed under this arrangement (see Question 1).

Relevant facts and circumstances: You entered into a Purchase Agreement to purchase Donation Units (the pharmaceuticals) from an Australian company (the Vendor). On the same day, you executed a Donor Pledge undertaking to make a gift of the pharmaceuticals to a gift recipient within six months of the date of the pledge. Each Donation Unit consists of a number of treatment kits, and each treatment kit contains a number of pharmaceuticals. The Purchase Agreement specifies a minimum purchase of Donation Units. The Purchase Agreement provides for the following: · the number of Donation Units purchased; · the Total Purchase Price; · the Down Payment required; · the Prepaid Interest required (calculated on the Total Purchase Price less Down Payment); · the Down Payment and Prepaid Interest is the First Payment to the Vendor, due upon signing the Purchase Agreement; · the amount of the Total Purchase Price less the Down Payment is the Amount of Credit that is payable to the Vendor no later than a set number of years from the date of the Purchase Agreement; · no GST was included in any of the amounts under the Purchase Agreement; · the Vendor undertook to pass the title of the pharmaceuticals to you within a set number of days of the payment of the down payment and prepaid interest, and not to accept any Purchase Agreement if it was unable to arrange title of the pharmaceuticals to pass from you to the gift recipient by 30 June 2010; · you granted the Vendor and its assignees limited power of attorney to act as your agents to deliver the pharmaceuticals and to execute and deliver associated paperwork to your selected gift recipient; and · the Vendor undertook that the packaging, storage and delivery of the pharmaceuticals would be at no additional cost to you. Title, ownership and property in the pharmaceuticals transferred from the Vendor to you on or before 30 June 2010. The Vendor issued a tax invoice to you in respect of the Total Purchase Price of the donation units, with GST of $0.00. The promoter of the arrangement, in conjunction with the Vendor, arranged for the pharmaceuticals to be delivered to the gift recipient on your behalf. The gift recipient received title, ownership and property in the pharmaceuticals immediately after it was transferred to you. The pharmaceuticals were never in Australia. The gift recipient sent you a letter thanking you for your support, referring to your donation of the pharmaceuticals on 30 June 2010, and notes that your gift was for a specified fund. The International Drug Price Indicator Guide provides a World Health Organisation (WHO) approved indication of drug prices on the international market. The guide details the international price ranges for the pharmaceuticals contained in the donation units that you purchased and donated to the specified fund. Other than the indicative drug prices in the guide, the facts on which these private rulings are based are those that you have supplied. The Commissioner makes no statement as to the accuracy of any or all of the facts that you have supplied.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 30. | Income Tax Assessment Act 1997 Section 30-15 . | Income Tax Assessment Act 1997 Subdivision 30-B. | Taxation Administration Act 1953 Section 359-5 of Schedule 1. | Taxation Administration Act 1953 Subsection 359-35(1) of Schedule 1. | Taxation Administration Act 1953 Paragraph 359-35(2)(a) of Schedule 1.

Reasons for decision: Summary: You cannot claim a deduction for a gift of the pharmaceuticals under the specified arrangement pursuant to Division 30 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 30-15 of the ITAA 1997 provides that a deduction is allowed to a taxpayer for a gift or contribution to, among others, a fund, authority or institution covered by an item in any of the tables in Subdivision 30-B of the ITAA 1997. It must first be established whether there was a gift of property to the specified fund. The meaning of the term 'gift' is not defined for the purposes of Division 30 nor is it discussed in the Explanatory Memorandum to the Bill that introduced Division 30 to the ITAA 1997, the Tax Law Improvement Bill 1997. Therefore, it takes its ordinary meaning. Rather than attempting a definition of gift, 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. | Detailed Reasoning - See for example:: Federal Commissioner of Taxation v. McPhail (1968) 117 CLR 111; [1968] HCA 13 ( McPhail ); Leary v. Federal Commissioner of Taxation 80 ATC 4438; (1980) 11 ATR 145; and Cyprus Mines Corporation v. Federal Commissioner of Taxation 78 ATC 4468; (1978) 9 ATR 33 ( Cyprus Mines). These criteria are not absolute and may involve a matter of degree, therefore these features must be considered together in order to determine whether there was a gift. It is the substance and reality of the transfer that has to be ascertained. It is therefore necessary to take account of those acts, transactions, arrangements and circumstances that provide the context and the explanation for the transfer (discussed in paragraphs 14 and 15 of Taxation Ruling TR 2005/13: tax deductible gifts - what is a gift (TR 2005/13)). | Detailed Reasoning - i) Is there a transfer of the beneficial interest in property?: The making of a gift to a deductible gift recipient involves the transfer of a beneficial interest in property. You have stated that there is a transfer of the beneficial interest in the goods from you to the specified fund under the Purchase Agreement on or before 30 June 2010. This position has been accepted for the purpose of making this ruling. As suggested by Hill J in Lamont v Commissioner of Taxation 2005 ATC 4411; (2005) 59 ATR 374, where an applicant asks the Commissioner to rule upon an arrangement, the Commissioner may proceed to rule upon that application on the basis that the facts as stated are correct. Should it turn out that the facts as stated in the application were incorrect, the applicant for the ruling will get no protection from the ruling. NOTE: At the time this ruling was made, the Commissioner had not been provided with sufficient evidence to satisfy him that a transfer of a beneficial interest in the pharmaceuticals from you to specified fund has occurred. | Detailed Reasoning - ii) Was the transfer 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 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 that 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 (TR 2005/13 paragraphs 23 and 24). Under the arrangement, you entered into the Purchase Agreement to purchase the pharmaceuticals and the Donor Pledge that bound you to transfer them to the specified fund as part of the one arrangement. However, you entered that arrangement voluntarily, under your own will. Accordingly, it is accepted you have made a voluntary transfer of the pharmaceuticals to the specified fund. | Detailed Reasoning - iii) Did the transfer arise by way of benefaction?: An essential attribute of a gift is that benefaction is intended, and in fact conferred on the recipient (TR 2005/13 paragraph 27). A person may choose between organisations to which to make a gift on the basis of the tax deductibility of the gift. A motive of seeking a tax deduction does not, by itself, disqualify a transfer from being a gift, as it does not sufficiently detract from the detached and disinterested generosity in making the gift (TR 2005/13 paragraph 35). However, if the donor is pursuing self-interested commercial or fiscal objectives, the transfer does not proceed from detached and disinterested generosity (TR 2005/13 paragraph 36). It is apparent that the sole purpose of the donor does not have to be benefaction, as seeking a tax deduction for the donation does not disqualify it from being a gift. Therefore a dual purpose of benefaction and some personal recompense is permitted. However, there comes a point on the spectrum where the personal purpose subsumes the generous purpose, such that the transfer can no longer be considered to proceed from a detached and disinterested generosity. It is considered that you are motivated to some extent by detached and disinterested generosity. However, you also seek substantial personal benefit in the form of a tax deduction, the value of which exceeds the amount you outlay in making the purported gift. The latter is undoubtedly a self-interested fiscal objective, and detracts from the benevolent intention of you as a donor. Conferring benefaction means that the deductible gift recipient 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 (TR 2005/13 paragraph 27). In the present case, the supposed value of the property transferred to the specified fund is significantly more than the cost that the gift recipient could be expected to incur to acquire the same goods. Therefore the specified fund is not advantaged to the extent of the property transferred to them. This further suggests that benefaction is not conferred on the specified fund, and detracts from the characterisation of the transfer as a gift. | Detailed Reasoning - iv) Did you obtain a material benefit or advantage from the transfer?: In order to constitute a gift, the giver must not receive a benefit or an advantage of a material nature by way of return for the transfer of the beneficial interest to the deductible gift recipient. It does not matter whether the material benefit or advantage comes from the deductible gift recipient or another party (see, for example, McPhail ; TR 2005/13 paragraph 37). You have transferred pharmaceuticals to the specified fund costed at the amount of the Total Purchase Price. In order to acquire the pharmaceuticals, you outlaid a Down Payment on the purchase of the pharmaceuticals and Prepaid Interest on the balance of the purchase price. The remainder of the value of the pharmaceuticals is provided to you by way of deferred purchase price - no requirement to pay the balance of the purchase price for a set number of years from the date of the Purchase Agreement - and this benefit and the benefit of the minimal compound interest on the deferred balance are provided as part of the overall arrangement in which you agree to transfer the pharmaceuticals to the specified fund. That is, in return for making the transfer, you are provided with a deferral of payment of the balance of the purchase price (also referred to as the Amount of Credit) for up to a set number of years with only nominal interest payable. Paragraph 44 of TR 2005/13 sets out some circumstances which may lead to a conclusion that a benefit or advantage is material, including: the benefit is sought by the giver in connection with the transfer; and the benefit is offered by the deductible gift recipient as an inducement to potential givers. The long term, low interest terms of purchase in combination with large deductions claimed under this scheme are held out as an incentive to potential participants for entering into the scheme. Although these features are not offered or provided by the gift recipient, it is still a significant inducement for making a donation through the scheme. It is not necessary that the benefit is provided by the recipient to undermine the character of the transfer as a gift ( Cyprus Mines at 78 ATC 4482; (1978) 9 ATR 48). Access to these benefits is conditional on transferring the pharmaceuticals to a participating deductible gift recipient. Further, the benefit of the terms of purchase and large deductions is sought by potential donors who may otherwise choose not to donate, to donate less and/or to donate elsewhere. In a similar arrangement involving the financing of a gift on unusually favourable terms, the Canadian Tax Court in Maréchaux v The Queen 2009 TCC 587, took the view that, given the requirement to commit to transferring money to the charity as a compulsory prerequisite to entering the arrangement and obtaining the finance, the access to the finance on special terms was regarded as a benefit or advantage from the transfer of the money. (This decision was affirmed in Maréchaux v. Canada 2010 FCA 287.) In addition, a tax deduction of significantly greater value than the cash outlay to purchase and transfer pharmaceuticals to the specified fund was also offered as an inducement to enter into the arrangement. While seeking a tax deduction will not disqualify a transfer from being a gift (TR 2005/13 paragraph 34), the high value of the tax deduction (if allowed) compared to the low cash outlay leaves you in a better financial position than if you did not purchase and transfer pharmaceuticals to the specified fund. This further supports the view that you receive a material benefit from making the transfer of pharmaceuticals to the specified fund. | Detailed Reasoning - Conclusion on whether there is a gift of property: As explained above, rather than attempting a definition of gift, 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. In your circumstances, for the purpose of making this ruling, we accept that there has been a transfer of the beneficial interest in property and that this transfer is made voluntarily. However, while the transfer has been made voluntarily, the fiscal benefits to you in the form of the exceptionally generous terms of purchase and the inflated tax deduction are material benefits that you received for entering the arrangement to purchase and transfer pharmaceuticals to the specified fund, and suggest a significant self-interested fiscal objective in making the donation. Therefore it is considered that you did not make a gift of property to the specified fund. Accordingly, you cannot claim a deduction under section 30-15 of the ITAA 1997 because the transfer of pharmaceuticals from you to the specified fund was not a gift. | Summary: The Commissioner has declined to provide a ruling on questions 2 to 7. | Detailed Reasoning - Detailed reasoning: Section 359-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) provides that the Commissioner may make a written ruling on the way in which a relevant provision applies or would apply to an entity in relation to an entity in relation to a specified scheme (a private ruling). Subsection 359-35(1) of Schedule 1 to the TAA 1953 provides that the Commissioner must generally comply with an application for a private ruling, however there are exceptions to this rule. Relevantly, paragraph 359-35(2)(a) of Schedule 1 to the TAA 1953 provides that the Commissioner may decline to make a private ruling if the Commissioner considers that making the ruling would prejudice or unduly restrict the administration of a taxation law. The Explanatory Memorandum to the Tax Laws Amendment (Improvements to Self Assessment) Bill (No. 2) 2005 outlines Parliament's intention in giving the Commissioner the power to decline to make a private ruling at paragraphs 3.82 and 3.83: 3.82 The purpose of these exclusions is to allow the Commissioner to focus efforts on increasing certainty for taxpayers in the most genuine and worthy cases. The ATO is not in the business of giving advice as a purely academic exercise, or assisting unscrupulous people to provide doubtful tax planning advice, or allowing some taxpayers to divert the ATO's resources to meet their needs to the detriment of others and the robustness of the system as a whole. Currently the ATO receives millions of requests for advice a year and only a fraction of them need to be dealt with in the formal private ruling system. 3.83 Examples where making a ruling would prejudice or unduly restrict the administration of a tax law include where: The application is frivolous or vexatious or not seriously contemplated; Complying with the request for the private ruling would not have any practical consequences for the taxpayer, for example, because it relates to a transaction that occurred some years ago and the taxpayer's amendment period has already expired; or Making the private ruling would unreasonably divert resources from other matters to which the Commissioner must attend in the course of administering the taxation laws. No deduction is allowed to you for the transfer of pharmaceuticals from you to the specified fund under the arrangement. Questions 2 to 7 of your application for a private ruling all assume that a deduction is allowed for a gift of pharmaceuticals by you under the arrangement. In the absence of a gift, and consequently an entitlement to a deduction, the remaining questions posed in your application do not apply to your situation. It follows that any ruling provided to you in response to your request for a private ruling on these questions would not have any practical consequences for you. In light of this, the Commissioner declines to provide you with a ruling on these questions as to do so would be of no value to you and would prejudice or unduly restrict the administration of a taxation law (paragraph 359-35(2)(a) of Schedule 1 to the TAA 1953. | Detailed Reasoning - Further issues for you to consider: The ruling is limited to the questions raised. The following comments are made for your information, in respect of provisions that may be applicable to a gift that is deductible under section 30-15 of the ITAA 1997. | Detailed Reasoning - Valuation: Your attention is drawn to Goods and Services Tax Ruling GSTR 2001/6 Goods and services tax: non-monetary consideration, about the valuation of non-monetary consideration. It does not follow from the principles expressed in that ruling that market value will derive from price in a place in which property was never located nor put to use. | Detailed Reasoning - Amount paid: Your attention is drawn to ATO Interpretative Decision ATO ID 2002/770 Income Tax Medical expenses tax offset - portion of medical expense paid in year of income , which states that where payment for medical services is made by instalments over more than one year of income only the actual amount paid in a particular year of income is 'paid' for the purpose of the taxpayer's entitlement to the medical expenses tax offset. The same principles apply to the purchase of property for donation.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Does Part IVA, or any other anti-avoidance provision, apply to this ruling? | This ruling is limited to the questions you asked, however, there may be other issues to consider. | Gift-specific anti-avoidance provision: Your attention is drawn to section 78A of the ITAA 1936 which provides that no deduction is allowed for a gift of property in certain defined circumstances . This section could apply where, among other situations, donors receive a material benefit for making the gift. | General anti-avoidance provisions: Your attention is drawn to section 177F of the ITAA 1936 which provides that the Commissioner can make a determination cancelling, among other things, a tax deduction that is obtained under a scheme entered for the purpose of obtaining a tax benefit. A scheme under which participants obtain a reduction in tax that is greater than their cash outlay in the income year may be found to be a scheme entered for the purpose of obtaining a tax benefit.