Private ruling: Deduction for donation of land to a Private Ancillary Fund
Date of advice: 24 August 2016
Published: October 2016
Ruling period: The income year in which the donation of the land is made
Date scheme commenced: The date the donation of the land is made

Ruling: Q1: Is the donor company entitled to a deduction for the value of the land it donates to The Foundation which is endorsed as a Deductible Gift Recipient (DGR)? | A1: Yes

Relevant facts and circumstances: The founder of the Foundation is also the owner of the donor company which owns the land to be donated. The land was part of a larger lot purchased by the donor company with the intent to develop and sell. The larger parcel was subdivided into more than five lots of which some were sold and the largest one, being the land subject to the donation, was kept for future development. This land is fully owned and is the sole remaining asset of the donor company; and is being treated and brought to account in the books of the company as trading stock. The company intends to gift this remaining land to The Foundation. The Foundation is a private ancillary fund (PAF) which is registered as a Deductible Gift Recipient (DGR) under item 2 of the table in section 30-15 of the Income Tax Assessment Act 1997 (ITAA 1997). The making of the gift and transfer of the land to The Foundation is to be made voluntarily, at arm's length, with no benefits of any kind to the donor company or its associates. The value of the land is more than $5,000 and was not purchased during a period of 12 months before making the gift. The proposed gift of land will not be of a greater value to the Foundation unless it is developed to the stage where it can be sold. This is due to the need for continued maintenance costs and high rates, as the land is in a raw state covered in trees, bushes and native fauna. The undertaking and completion of the development of the land, once the land is donated, will enable The Foundation to realise the maximum value of the land and apply funds for the purposes of its existence and establishment which is to provide funds to other DGRs. The current market value of the land, at the time the donation is made, will not diminish or be less than the amount or value at the time when the gift is made. Ownership of the donated land will pass to The Foundation when the gift is made. Neither the donor company, nor any associated entity, will be involved, benefit, or take any part in the development or sale of the land. The Founder of the Foundation, who is the sole owner of the donor company, has no dependants to whom they would bequeath their shares in the company, and they have no one willing to act as a director to enable the company to complete the development of the land and its sale. The company will be wound up following the donation of the last asset, which is the land. The owner of the donor company has failing health. They have absolutely no interest in devoting the few remaining years of their life in undertaking any stressful undertakings relating to land development. The land is vacant and has had no improvements made to it apart from some boundary fencing. Electricity, town water, sewage and telephone services are available but not connected. The site is accessed by a dirt road linked to a nearby sealed road. At this stage the environmental issues associated with development have been approved and to develop the land The Foundation would need to: • Prepare and submit a development plan to the Local council • Carry out the full works after development approval (clear land, install all utilities, construct sealed road and apply for change in land title) This would allow The Foundation to sell the individual blocks of land. The development would be carried out in two to three stages over a period of twelve to twenty four months. The land will yield approximately forty one blocks. A developer has not been approached as yet.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 30 | Income Tax Assessment Act 1997 Section 30-15 | Income Tax Assessment Act 1997 Section 30-17 | Income Tax Assessment Act 1997 Section 30-212 | In come Tax Assessment Act 1936 Section 78A | In come Tax Assessment Act 1936 Subsection 78A(1) | In come Tax Assessment Act 1936 Subsection 78A(2)

Reasons for decision: Summary: The governing rules about deductibility of particular kinds of amounts for gifts or contributions to a deductible gift recipient (DGR) which is an ancillary fund, such as The Foundation, fall under the provisions of item 2 of the table in section 30-15, section 30-17 and section 30-212 of the Income Tax Assessment Act 1997 (ITAA 1997). Item 2 of the table in section 30-15 of the ITAA 1997 states that gifts can be made to an ancillary fund established and maintained under a will or instrument of trust solely for the purpose of providing money, property or benefits to a fund, authority or institution to which gifts are deductible or for the establishment of such a fund authority or institution. Furthermore, item 2 of the table in section 30-15 of the ITAA 1997 specifies the type of gift that can be made, how much can be deducted and any special conditions. The type of gift that can be made includes (d) property valued by the Commissioner at more than $5,000, and also (c) an item of trading stock gifted outside the ordinary course of the business. The amount that can be deducted is subject to meeting the requirement of certain special conditions. The relevant special conditions as stated in item 2 of the table in sub-section 30-15 require that: • The value of the gift must be $2.00 or more; and • The ancillary fund must meet the requirements of section 30-17 of the ITAA 1997 which provides that to claim a deduction for a gift to a fund covered by item 2 of the table in section 30-15 of the ITAA 1997 the fund must be endorsed as a DGR: and • The requirements of section 30-212 of the ITAA 1997 are satisfied if the property is to be valued by the Commissioner The Foundation is an ancillary fund therefore item 2 of the table in section 30-15 of the ITAA 1997 specifies the type of gift, the amount that can be deducted and any special conditions applicable to gifts that are to be made to it. The Foundation is endorsed as DGR satisfying the special condition in (c), as mentioned above, as required by section 30-17 of the ITAA 1997. The proposed gift of land by the donor company is property which is trading stock with the value of more than $5,000, which was not purchased during a period of 12 months before making the gift, and as such is a type of gift specified in item 2 of section 30-15 of the ITAA 1997. The gift of land to The Foundation must also be a true 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 as established by case law. The courts have determined that a payment is a gift if it has the following characteristics and features: • The donor transfers money or property - the making of a gift involves the transfer of a beneficial interest in property to the recipient of the gift. • The donor makes the transfer voluntarily - a transfer must be made voluntarily in order for it to be a gift. 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 • The transfer arises by way of benefaction - a gift should intend and confer benefaction on the recipient. Benefaction means that the recipient is advantaged materially without any detriment arising from the terms of the transfer. Where the giver is aware that the transfer will result in detriments, disadvantages, obligations, liabilities or limitations to the recipient, benefaction may be missing. • There is no material benefit or advantage for the donor - to constitute a gift, the giver must not receive any material benefit or advantage from the transfer. Consideration must also be given to the application of section 78A of Part III in Sub-division A of Division 3 of the Income Tax Assessment Act 1936 (ITAA 1996) which operates as an anti-avoidance measure to deny a deduction for gifts under arrangements which are put in place, that would compromise the bona fides of the gift (paragraph 8 of TR 2005/13). Section 78A does not apply to deny deductions for genuine gifts. Section 78A applies to purported gifts if there is considerably reduced benefaction conferred upon the recipient DGR arising from the transfer of the property, or alternately if the benefit of the transfer was obtained by the recipient DGR, another (associated) fund, authority or institution bears obligations as a result of the transfer (paragraph 48 of TR 2005/13). However subsection 78A(4) of the ITAA 1936 states: Paragraph 2(a) of section 78A(2) does not prevent a deduction under Division 30 of the ITAA 1997 from being allowed as a deduction from the assessable income of the donor where 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, by reason only that the fund, authority, institution or person has incurred, will incur, or may reasonably be expected to incur, expenses for the purpose of obtaining or soliciting the gift, being expenses that, in the opinion of the Commissioner, are reasonable in relation to the value of the gift. TR 2005/13 explains the application of subsection 78A(4) of the ITAA 1936 at paragraph 210, and at paragraph 211 discusses costs expected to be incurred by a recipient in relation to donated property: 210. Due to the operation of subsection 78A(4), where the amount or value of the benefit derived by the DGR as a result of a gift is less than the amount or benefit of the gift at the time the gift was made because the DGR incurs reasonable expenses for the purpose of obtaining or soliciting the gift, and for no other reason, paragraph 78A(2)(a) will not apply. 211. Expected costs for normal incidents of continuing ownership (such as local government rates on land, registration for motor vehicles, insurance, storage, maintenance), which a DGR will incur for its own holding of property once it is donated, will not trigger the application of paragraph 78A(2)(a). That is, such costs, despite being reasonably expected, will not be taken to lessen the amount or value of the donated property for the purposes of the paragraph. The donor company has provided information to support its claim of arm's length dealings and that neither the company, or any of its associates, will be involved in the development of the land. Based on the information, confirmations and undertakings provided, it is accepted that the gifted land is made voluntarily, on an arms' length basis and that there is no interference or control to be exercised which may reasonably be expected to attract or create any benefits, advantages, rights or privileges to the donor company, or an associate of the donor. The gift is intended to and will confer benefaction upon The Foundation. The current market value of the land, at the time the donation is made, will not diminish or be less than the amount or value at the time when the gift is made. This gift will be of a greater value to The Foundation if it is developed to the stage where it can be sold. This is due to the current need for continued maintenance and high rates, as the land is in a raw state covered in trees, bushes and native fauna. The development of the land will enable The Foundation to realise the maximum value of the land and to apply funds for the purposes of its existence and establishment, which is to provide funds to other DGRs. The anti-avoidance rules/measures in section 78A of the ITAA 1936 , will not apply to deny a deduction to the donor company, under this arrangement. The proposed gift of land has the characteristics of a true gift. As the recipient of the gift, The Foundation, is an endorsed DGR, the donor company will be entitled to a deduction for the gifted land, subject to the requirement in section 30-212 of the ITAA 1997 being satisfied. Such requirement is that the donor company must seek a valuation for the gifted property from the Commissioner of Taxation.