Private ruling: Deductibility of gifts
Date of advice: 7 June 2017
Published: October 2017
Ruling period: ● The income year ending 30 June 2017 | ● The income year ending 30 June 2018 | ● The income year ending 30 June 2019 | ● The income year ending 30 June 2020
Date scheme commenced: The Taxpayers (E and F) own a substantial art collection.

Ruling: Q1: Are the Taxpayers entitled to claim a tax deduction in relation to the proposed gifts of art to Museum A? | A1: Yes | Q2: Are the Taxpayers entitled to claim a tax deduction in relation to the proposed gifts of art to Museum B? | A2: Yes | Q3: Are the Taxpayers entitled to claim a tax deduction in relation to the proposed gifts of art to Museum C? | A3: Yes | Q4: Are the Taxpayers entitled to a deduction for the proposed gifts that is reasonable having regard to each of their individual interests in the proposed gifts? | A4: Yes | Q5: Will the Taxpayers be able to utilise the averaging provisions in Subdivision 30-DB of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the proposed gifts? | A5: Yes | Q6: Are the gains on the proposed gifts exempt from capital gains tax (CGT)? | A6: Yes | Q7: What is the value of the tax deduction that the Taxpayers are entitled to claim in respect of the proposed gifts? | A7: Each Taxpayer is entitled to claim 50 per cent of the GST inclusive market value of the proposed gifts reduced by a percentage representing the adjustment in accordance with section 30-220 of the ITAA 1997.

Relevant facts and circumstances: The Taxpayers (E and F) own a substantial art collection. The Taxpayers intend to gift selected art to Museum A, Museum B and Museum C. The gifts are subject to the acceptance of those gifts by the proposed recipients. The Taxpayers propose to retain the right to use the art from the time of the gift until the date of death of the survivor of E and F. On the death of the survivor of E or F, the whole interest in the art will pass to Museum A, Museum B or Museum C as the case may be. The Taxpayers are joint owners of the proposed gifts of art. The art will be fully and appropriately insured by the Taxpayers while they retain possession of the art. Any gift will be valued at more than $2. Museum A, Museum B and Museum C are endorsed under subdivision 30-BA of the ITAA 1997 as deductible gift recipients. A separate deed poll has been drafted for the gifts to each of Museum A, Museum B and Museum C, which are yet to be executed. The Taxpayers will obtain two or more valuations of each gift made at a date on or within 90 days of the time of the gift from valuers approved by the Arts Secretary as a valuer of the particular kind of property being gifted. The GST inclusive market value of the art will be reduced by a value based on all the circumstances and conditions of the gifts.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 30-15 | Income Tax Assessment Act 1997 Section 30-17 | Income Tax Assessment Act 1997 Section 30-200 | Income Tax Assessment Act 1997 Section 30-225 | Income Tax Assessment Act 1997 Section 33-247 | Income Tax Assessment Act 1997 Section 30-248 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 118-60

Reasons for decision: Detailed Reasoning - Detailed reasoning: Section 30-15 of the ITAA 1997 provides that a gift is deductible if the requirements set out under one of the items in the table are met. The museum meets the description of 'Recipient’ under item 1 and item 4 of the table in section 30-15 of the ITAA 1997. Item 4 (c) provides that if the recipient of a gift is a public museum in Australia the gift is deductible if it is property and satisfies the following special conditions: (a) the property must be accepted by the recipient for inclusion in a collection it is maintaining or establishing; and (b) the value of the gift is $2 or more; and (ba) the institution must meet the requirements of the section 30-17, unless it is the Australiana Fund; and (c) you must satisfy the valuation requirements in section 30-200, unless section 30-205 (about the proceeds of the sale being assessable) applies. The gifts are property, and the draft deed poll states that the museum will accept the art for inclusion in their collection. The gifts will be valued at more than $2. Section 30-17 is satisfied as the museum is endorsed as a DGR under subdivision 30 BA. Section 30-200 of ITAA 1997 requires that a taxpayer obtains two or more written valuations of the gifts by approved valuers for the kind of property to be given. Each valuation must state the GST inclusive value of the property on the day the gift was made and the GST inclusive value of the property on the day the valuation was made. The Taxpayers will obtain two or more valuations in accordance with section 30-200. Providing that the requirements under section 30-200 of the ITAA 1997 are met, all the elements of item 4 of the table in section 30-15 of the ITAA 1997 will be satisfied and the Taxpayers will be entitled to claim a tax deduction in relation to the proposed gift of art. | Detailed Reasoning - Detailed reasoning: Section 30-15 of the ITAA 1997 provides that a gift is deductible if the requirements set out under one of the items in the table are met. The Museum meets the description of 'Recipient’ under item 1 and item 4 of the table in section 30-15 of the ITAA 1997. Item 4 (c) provides that if the recipient of a gift is a public museum in Australia the gift is deductible if it is property and satisfies the following special conditions: (a) the property must be accepted by the recipient for inclusion in a collection it is maintaining or establishing; and (b) the value of the gift is $2 or more; and (ba) the institution must meet the requirements of the section 30-17, unless it is the Australiana Fund; and (c) you must satisfy the valuation requirements in section 30-200, unless section 30-205 (about the proceeds of the sale being assessable) applies. The gifts are property, and the draft deed poll states that the museum will accept the art for inclusion in their collection. The gifts will be valued at more than $2. Section 30-17 is satisfied as the museum is endorsed as a DGR under subdivision 30 BA. Section 30-200 of ITAA 1997 requires that a taxpayer obtains two or more written valuations of the gifts by approved valuers for the kind of property to be given. Each valuation must state the GST inclusive value of the property on the day the gift was made and the GST inclusive value of the property on the day the valuation was made. The Taxpayers will obtain two or more valuations in accordance with section 30-200. Providing that the requirements under section 30-200 of the ITAA 1997 are met, all the elements of item 4 of the table in section 30-15 of the ITAA 1997 will be satisfied and the Taxpayers will be entitled to claim a tax deduction in relation to the proposed gift of art. | Detailed Reasoning - Detailed reasoning: Section 30-15 of the ITAA 1997 provides that a gift is deductible if the requirements set out under one of the items in the table are met. The museum meets the description of 'Recipient’ under item 1 and item 4 of the table in section 30-15 of the ITAA 1997. Item 4 (c) provides that if the recipient of a gift is a public museum in Australia the gift is deductible if it is property and satisfies the following special conditions: (a) the property must be accepted by the recipient for inclusion in a collection it is maintaining or establishing; and (b) the value of the gift is $2 or more; and (ba) the institution must meet the requirements of the section 30-17, unless it is the Australiana Fund; and (c) you must satisfy the valuation requirements in section 30-200, unless section 30-205 (about the proceeds of the sale being assessable) applies. The gifts are property, and the draft deed poll states that the museum will accept the art for inclusion in their collection. The gifts will be valued at more than $2. Section 30-17 is satisfied as the museum is endorsed as a DGR under subdivision 30 BA. Section 30-200 of ITAA 1997 requires that a taxpayer obtains two or more written valuations of the gifts by approved valuers for the kind of property to be given. Each valuation must state the GST inclusive value of the property on the day the gift was made and the GST inclusive value of the property on the day the valuation was made. The Taxpayers will obtain two or more valuations in accordance with section 30-200. Providing that the requirements under section 30-200 of the ITAA 1997 are met, all the elements of item 4 of the table in section 30-15 of the ITAA 1997 will be satisfied and the Taxpayers will be entitled to claim a tax deduction in relation to the proposed gift of art. | Detailed Reasoning - Detailed reasoning: Section 30-225 of ITAA 1997 provides that: If: (a) you own property jointly with one or more other entities; and (b) you and the other entities make a gift of the property; and (c) you would have been able to deduct the gift under section 30-15 because of item 4,5 or 6 of the table in that section if you had made the gift of the property as sole owner of it; you can deduct so much of the gift as is reasonable, having regard to your interest in the property. As stated in questions 1-3, the proposed gifts of art will be tax deductible because of item 4 of the table in section 30-15 of the table in the ITAA 1997. Since the Taxpayers are joint owners of the proposed gifts they can both claim 50 per cent of the allowable deduction for each of the proposed gifts. | Detailed Reasoning - Detailed reasoning: Subdivision 30-DB of the ITAA 1997 allows taxpayers to elect to spread deductions for gifts over a period of up to five income years. Section 30-247 of the ITAA 1997 allows the election to be made for gifts covered by item 4 of the table in section 30-15 of the ITAA 1997, provided the gift is made after 1 July 2003. Section 30-248 requires the election to be made in writing before you lodge your income tax returns for the income year in which you made the gift. In the election you must specify the percentage of the deduction that you will deduct in each income years. As stated in questions 1-3, the proposed gifts will be tax deductible because of item 4 of the table in section 30-15 of the ITAA 1997. Therefore the Taxpayers will be able to utilise the averaging provisions in Subdivision 30-DB of the ITAA 1997 in respect of the proposed gifts. | Detailed Reasoning - Detailed reasoning: When the Taxpayers make the proposed gifts of art, CGT event A1 will occur. Subsection 104-10(5) of the ITAA 1997 provides that a capital gain or loss is disregarded if the asset was acquired before 20 September 1985. Further subsection 118-60(2) of the ITAA 1997 provides that a capital gain or loss is disregarded if it is made from a gift of property that is deductible because of item 4 of the table in section 30-15 of the ITAA 1997. As stated in questions 1-3, the proposed gifts will be tax deductible because of item 4 of the table in section 30-15 of the ITAA 1997. Therefore any gains arising to the Taxpayers from the proposed gifts will be exempt from CGT as they will be disregarded under either subsection 104-10(5) of the ITAA 1997 or subsection 118-60(2) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Item 4 in the table in section 30-15 provides that: The general rule is that you can deduct the average of the “GST inclusive market values (as reduced under subsection (3) if that subsection applies) specified in the written valuations you get from approved valuers. Subdivision 30-C sets out: (a) how a person becomes an approved valuer; and (b) the exceptions to the general rule; and (c) the situations when the amount you can deduct is reduced. If the property is jointly owned, see section 30-225 to work out how much of the gift you can deduct. Section 30-220 requires “a reasonable amount” to be deducted from the value of the gift where there are restrictions on the gift. Under subsection 30-220(1) the amount allowed as a deduction under subsection 30- 215(2) is reduced by a “reasonable amount”, having regard to: (a) the terms and conditions on which the gift is made are such that the recipient: (i) does not receive immediate custody and control of the property; or (ii) does not have the unconditional right to retain custody and control of the property in perpetuity; or (iii) does not obtain an immediate, indefeasible and unencumbered legal and equitable title to the properly; or (b) the custody, control or use of the property by the recipient is affected by an arrangement entered into in respect of the making of the gift. Further under subsection 30-220(2), in determining what a reasonable amount is, regard must be had to the effect the terms and conditions of the gift have on the GST inclusive market value of the gift. Taxation Ruling IT 295 Conditional Gifts to the Australiana Fund, Public Libraries, Museums, Art Galleries (IT 295) considered the basis upon which the value of a conditional gift to the Australiana Fund might be reduced because of an arrangement whereby the custody of the gifted property was to remain with the donor for an agreed period after the gifting. The advice in lT 295 also applies to a gift made to, and accepted by, a public art gallery for inclusion in a collection maintained or being established by the public art gallery. IT 295 states: 3. Factors that would have a bearing on this include the effect of a life or fixed period interest of the donor in the gifted property, a joint life or survivorship interest of the donor and his or her spouse, life expectancy of the relevant parties as well as undetermined factors such as the periods during which the donee institution may, if so agreed, require possession of the gifted property for display or study purposes. 4. The end result is not one that could be arrived at by a simple arithmetical formula. In principle, the amount of the deduction for a conditional gift would be the amount which a purchaser could be expected to pay on the date of the gift to acquire the property concerned from the donee, if the purchaser were to be buying the property on the same terms as the donee is receiving it. As mentioned previously, this would depend on an assessment of all the surrounding circumstances. To comply with the special conditions in item 4 of the table in section 30-15 of the ITAA 1997, the Taxpayers will obtain written valuations by two valuers stating their opinion as to the value of the art at a date on or within 90 days of the time of the gift. The value of the artwork for the purposes of the gift will be determined by what a willing, but not anxious, vendor and a willing, but not anxious, purchaser could reasonably be expected to agree to for the transfer of property. This assumes the existence of such a vendor and purchaser both being uninfluenced by any consideration of sentiment or need. The GST inclusive market value of the art will be reduced by a certain percentage. The Commissioner agrees with the Taxpayers methodology for determining the reduction in the GST inclusive market value. The discount to the GST inclusive market value of the donations has been determined taking into account: ● the life expectancy of the Taxpayers; ● a rental yield of a certain amount; and ● a discount rate of a certain amount. In calculating the discount the following has been considered: ● The relevant conditions of the gift which is a right by the Taxpayers to retain possession of one or more of the donated art during their lifetimes. Upon the death of the last of the Taxpayers, full possession and ownership shall revert to the museums.