Private ruling: Deductibility of financial contribution
Date of advice: 8 July 2016
Published: August 2016
Ruling period: Year ended 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Are you entitled to claim a deduction for deposits made to a university where the funds are used to pay the wages of another university employee and associated expenses? | A1: No.


Relevant legislative provisions: Income Tax Assessment Act 1936 Section 8-1 | Income Tax Assessment Act 1936 Section 78A | Income Tax Assessment Act 1997 Section 30-15 | Income Tax Assessment Act 1997 Section 30-25

Reasons for decision: Summary: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. A number of significant court decisions have established that, for an expense to satisfy the requirements of section 8-1 of the ITAA 1997: It must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income producing expense ( Lunney & Hayley v. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404; (1958) 7 AITR 166) There must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income ( Ronpibon Tin NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236); and It is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces their assessable income ( Charles Moore & Co Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344; (1956) 11 ATD 147; (1956) 6 AITR 379 and Federal Commissioner of Taxation v. Hatchett (1971) 125 CLR 494; 71 ATC 4184; (1971) 2 ATR 5570. Your case: Although you believe that your continued employment at the university is dependent on the results achieved in terms of PhD completions and funding achieved, there is insufficient nexus between the further employment of the research fellow for a 3 month period, where they are responsible for two out of eleven students, for the outgoing to be incidental and relevant to the gaining of your assessable income. In your case, you have deposited funds in your employers account in order to have the contract of another employee extended, as well as to pay for publication of research papers.. The costs incurred are related directly to the payment of the university employee and publication expenses of your students, not to the derivation of your income. As such the costs are considered to be a private expense. Consequently you are not allowed a deduction under section 8-1 of the ITAA 1997 for the financing of the contract continuance of the research fellow and other project related expenses. | Detailed Reasoning - Donation to a Deductible Gift Recipient: Division 30 of the Income Tax Assessment Act 1997 (ITAA 1997) outlines the guidelines for the deductibility of gifts and donations. Section 30-15 of the ITAA 1997 provides that a gift to any funds or institutions listed is allowable as a deduction in the income year in which the gift is made, provided the gift meets the various conditions of the relevant subsections. To be able to claim a tax deduction for a gift, it must: 1) be made to a deductible gift recipient (DGR) 2) be a gift of money or property that is covered by a gift type, and 3) be truly a gift. Item number 2.1.1 of table 30-25 of the ITAA 1997 includes a public university. The recipient university is an Australian public university and is an endorsed DGR. Your donation will meet conditions 1 and 2 as you have made a gift to the university which will be of a value in excess of $2, for the income year ending 30 June 20XX. | Detailed Reasoning - 3) A true gift: Taxation Ruling TR 2005/13 explains what constitutes a gift. The term gift is not defined in the ITAA 1997 and so for the purposes of Division 30, it has its ordinary meaning. The courts have described a gift as having the following characteristics and features: (a) there is a transfer of money or property (b) the transfer is made voluntarily (c) the transfer arises by way of benefaction, and (d) no material benefit or advantage is received by the giver by way of return. If a transfer fails one or more of these attributes, the transfer will not be ordinarily considered as a gift. | Detailed Reasoning - Transfer of money or property: You have extended the contract of a worker in your area of research at the university in addition to providing for academic publication through a donation of monies to the university. This is a transfer of money from you to the university which is a DGR. You therefore satisfy this requirement. | Detailed Reasoning - Transfer made voluntarily: Voluntarily is a term, which describes a giver's act of their own will or choice, with no consideration or prior obligation imposed. Paragraph 92 of TR 2005/13 states that, case authorities make it clear that for a transfer of property to be a gift it must be made voluntarily. A transfer of property will constitute a 'gift' if the property was transferred voluntarily (Cyprus Mines Corporation v. FC of T 78 ATC 4468; 9 ATR 33), and no advantage of a material character was received by the taxpayer in return (FC of T v. McPhail (1968) 41 ALJR 346; 15 ATD 16; 10 AITR 552; Hodges v. FC of T 97 ATC 2158; 37 ATR 1091). | Detailed Reasoning - A transfer made voluntarily will not be considered where:: • the choice is offered as an alternative to discharging or reducing the giver's contractual obligation to the DGR or an associate of the DGR; • the choice, once exercised, has the effect of discharging or reducing the giver's contractual obligation owed to the DGR or associate of the DGR. You are merely an employee of the university and there is no obligation on you to provide funds for the payment of other staff, nor funding for publications. The decision to make the gift was a decision made by you alone, and was made voluntarily with no obligation to do so. | Detailed Reasoning - Arises by way of benefaction: Paragraph 113 of TR 2005/13 highlights that the 'essential idea' of a gift is that there is a conferral of benefaction on the recipient. Additionally, Brennan J in Leary v. Federal Commissioner of Taxation (1980) 11 ATR 145 explains that the giver must be aware that the recipient is free to enjoy the benefit of the gift; otherwise it will not be seen by way of benefaction. 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. The benefactor in this case was the receiver of the gift, the university. The university will be advantaged by receiving the gift without any material detriment. You are aware that the university will be free to enjoy the gift. You have requested the monies to be disbursed by the university for particular purposes, ie payment of the salary of the research fellow, costs of publication and other costs. | Detailed Reasoning - No material benefits or advantage: 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. One material advantage experienced by you will be the possible tax deduction received from the income year ending 30 June 2015. Paragraph 35 of the TR 2005/13 states: A motive of seeking a tax deduction does not, by itself, disqualify a transfer from being a gift. Furthermore if any benefit that is received (or is reasonably expected to be received) by an associate of the giver has to be taken into account in determining whether a transfer falls within the provisions of paragraph 78A(2)(c) of the Income Tax Assessment Act 1936 (ITAA 1936). Subsection 78A(2) of the ITAA 1936 lists circumstances whereby a deduction is not allowable under Division 30 of the ITAA 1997. These include: (a) where the amount or value of the benefit derived by the recipient 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; (b) where any fund, authority or institution other than the recipient of the gift, makes, becomes liable to make, or may reasonably expected to make or to become liable to make a payment or transfer of property to any person or suffers any other detriment; (c) where the donor or associate of a donor would obtain a benefit other than a tax saving. (d) where the recipient acquires property from the donor or associate of the donor as part of or in association with the making of the gift. In your case, in your application for the private ruling you have specifically requested that the expenditure is considered in the context that your continued employment is dependent on the publication output, PhD completions and funding achieved. The above paragraph c is considered to apply. Therefore, section 78A(2) (c) of the ITAA 1936 applies. Since your proposed donation does not meet all the conditions of a 'gift' under Division 30 of the ITAA 1997, you are not eligible to claim a deduction in the income year the gift is made to the university.

Relevant facts: You are employed by a university as an Associate Professor. You supervise over 10 students with the assistance of Research Fellows, who are employed by the university on fixed term contracts. | Funding ended for a particular research project, which would have left two Scholarship PhD students without their Research Fellow co-advisor. | You deposited a sum of your own money into the university account, with the request to extend the fixed term contract of the Research Fellow. | The contract of the Research Fellow was extended for period of time by the university. | You also deposited a sum of your own money into the university account, with instructions that it was to cover publication fees and other costs associated with the project. | You requested that both deposit amounts be transferred into the university account associated with your project, as the salary and other costs are paid from this account. | You state that continued employment at the university depends on research track record, examples of which are: | • Number of PhD completions | You can supply proof of advancement of your track record, including a list of peer reviewed research outputs for your students, the co-advisor and yourself, PhD submissions/completions and funding sought. | The donor university is a deductible gift recipient (DGR).