Private ruling: Deductible gift
Date of advice: 25 May 2016
Published: July 2016
Ruling period: 1 July 2016 to 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Are gifts under the proposed arrangement from the Donors to the Deductible Gift Recipients tax deductible under Division 30 of the Income Tax Assessment Act 1997? | A1: Yes | Q2: Does section 78A (2) (c) of the Income Tax Assessment Act 1936 apply to deny the deduction to the donor? | A2: No

Relevant facts and circumstances: The Foundation operates a school building fund and a scholarship fund both of which are endorsed as Deductible Gift Recipients (DGRs). The Foundation is registered with The Australian Charities and Not-for-Profits Commission (ACNC) as a charity. A finance company will assist in the funding of activities and ventures undertaken by the school and provide finance to parents of students where the finance request has a connection to the School. The proposed finance company will enter into a loan agreement with each individual donor (the Donors) to loan them the requested funds, with repayments to be made over a period. The Loan Agreement will be under commercial terms. In some circumstances the Donors will gift the loan amount (the Donation) to either the school building fund or the scholarship fund (the Deductible Gift Recipients). If funds are loaned by the School to the finance company any resulting debt will not be forgiven. Such funds would either be repayable on demand by the School or within a specified period. The school has advised that the Donation will not qualify the Donors for a fee reduction, or be made in lieu of an increase in school fees, and it will not entitle the Donor to any material benefit.

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

Reasons for decision: Summary: Division 30 of the Income Tax Assessment Act 1997 (ITAA 1997) deals with the deductibility of gifts or contributions a taxpayer makes. For the purposes of Division 30, the word 'gift' is not defined in the ITAA 1997. The word 'gift' has its ordinary meaning and its definition is discussed in case laws and in Taxation Ruling Income tax: tax deductible gifts - what is a gift (TR 2005/13). For a transfer of money or property to be characterised as a gift, it should arise from benefaction and proceed from detached and disinterested generosity. This view was propounded by Owen J. in Federal Commissioner of Taxation v. McPhail (1968) 117 CLR 111 41 ALJR 346 : …it is, I think, clear that to constitute a "gift", it must appear that the property transferred was transferred voluntarily and not as the result of a contractual obligation to transfer if and that no advantage of a material character was received by the transferor by way of return. In Klopper & Anor v. FC of T 97 ATC 4179 , at 4184, Nicholson J also stated the following: …a payment can only be characterised as a gift when there is the element of voluntariness and the absence of consideration: that is, where there is truly a notion of benefaction so there is no advantage of a material character being received in return. Paragraph 13 of TR 2005/13 identifies the characteristics and features which the courts have used to describe a gift: • 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 - Transfer of beneficial interest in property: Paragraphs 16 to 18 of TR 2005/13 state the making of a gift to a deductible gift recipient (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. For a gift to be valid and effectual, the giver must have 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. TR2005/13 states: 61. The making of a gift to a DGR involves the transfer of money or property to that DGR: section 30-15 of the ITAA 1997. In the simplest cases this involves the delivery of money (cash, cheque or electronic transfer of funds) or goods to the DGR. 62. In each case it is necessary to ascertain whether a transfer has occurred, what property has been transferred, and when the transfer took place. This is to ensure that ownership of identifiable property has been divested and has been transferred to the DGR (c.f., Re Rose (dec'd); Rose v. Inland Revenue Commissioners [1952] 1 All ER 1217). 63. In Milroy v. Lord , Turner LJ said that for a gift to be valid and effectual, the giver must have done everything which according to the nature of the property comprised in the settlement, was necessary to be done in order to transfer the property and render the settlement binding upon him…. The Foundation will obtain immediate and unconditional right of custody and control of the Donation upon the transfer of money from the Donor to the Foundation. At this time, the Foundation will hold the beneficial interest in the monetary donation. In the event of the loan not being repaid by the Donor to the proposed finance company the Donation would remain the property of the Foundation. The proposed finance company will have no recourse against the Foundation. | Detailed Reasoning - Transfer is made voluntarily: Taxation ruling TR 2005/13 - Income tax: tax deductible gifts - what is a gift states as follows: 96. To qualify as a gift, the transfer of property has to be voluntary. The transfer must not have arisen from any obligation imposed by law, whether by contract or otherwise. In McPhail Owen J said: it must appear that the property transferred was transferred voluntarily and not as a result of a contractual obligation to transfer it.. In Leary Bowen CJ said: It seems that a payment will not generally be regarded as voluntary if made under an obligation imposed by law, whether under contract or otherwise. All donations will be made voluntarily. | Detailed Reasoning - Arises by way of benefaction: The essential idea of a gift is that there is a conferral of benefaction on the recipient. Deane J in Leary v FC of T 80 ATC 4438; (1980) 11 ATR 145; (1980) 32 ALR 221 explained this at 80 ATC 4453-4454 and 11 ATR 163: It involves, in my view, the concept that the relevant transfer is by way of well doing in that the recipient will be advantaged, in a material sense and without any countervailing material detriment arising from the circumstances of the transfer, to the extent of the property transferred to him. Brennan J also said at 80 ATC 4451 and 11 ATR 160: If the disponor is aware that the receipt of the property by the disponee will impose a liability upon the latter, the disposition may be seen not to be by way of benefaction…No doubt much depends upon a comparison between the property taken and the liability incurred. The donation is to be made without any conditions. | Detailed Reasoning - No material benefit or advantage is received by the giver by way of return: The receipt of a material benefit by way of return to the giver will disqualify the transfer as a gift ( FC of T v. McPhail (1968) 117 CLR 111 ). Deane J in Leary at 164 said that an obvious example where a material benefit or advantage is received by way of return is where the transfer is made 'in return for valuable consideration received by the transferor from the transferee'. Brennan J in Leary also expressed that where a giver is found to have received a material benefit in return for a purported gift, it is not necessary that the material benefit comes directly from the recipient of the property transferred. As stated above, the main issue to consider is whether the advantages or benefits are material, because the material nature of the advantages will affect whether a transfer is a gift. The requirement of materiality will exclude matters of a de minimis nature ( AAT Case 12,314 Re Hodges v. FC of T 97 ATC 2158; (1997) 37 ATR 1091 ). The Donation will not qualify the Donor for a fee reduction, or be made in lieu of an increase in school fees and will not entitle the Donor to any material benefit. | Detailed Reasoning - Question 2: Section 78A of the Income Tax Assessment Act 1936 ('ITAA 1936') is an anti-avoidance provision that supports the integrity of the gift deduction provisions. It is designed to deny deductions otherwise available under Division 30 of the ITAA 1997 where: • the value of the gift to the recipient is less than the value of the property at the time that the gift is made; • the giver or any associate of the giver obtains any benefit, advantage, right or privilege other than the benefit of a tax saving; or, • the recipient is to acquire any other property from the giver or an associate of the giver. Specifically Section 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; … (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 … Under the proposed circumstances there is an act in that the proposed financial institution will lend borrowers monies (the act or transaction). The proposed financial institution will charge interest to the borrower at a commercial rate of interest and on commercial terms. Therefore we consider that section 78A(2) (c) of the ITAA 1936 will not apply to deny proposed taxation deductions, claimed by donors in respect of transfers made to DGRs connected with the School. | Detailed Reasoning - Conclusion:: It is accepted that gifts under the proposal would meet the requirements of section 30-15 of the ITAA 1936. The proposal to lend money to parents through a finance company to enable them to make a donation to a DGR connected with the School and obtain a tax deduction will not be caught by Section 78A (2) (c) of the Income Tax Assessment Act 1936.