Donation deductions – general considerations:
To be able to claim a tax deduction for a donation or gift to an organisation, the receiver of that donation must be endorsed as a “deductible gift recipient” (DGR). If you want to make sure, this can be checked on the ABN Look-up web page.
But while this is the main condition imposed on claiming a deduction for donations, it is not the only factor the ATO considers. Also relevant is the nature of the donation (whether money or property, which includes financial assets such as shares), and that it is a voluntary transfer of assets from donor to recipient, performed as an act of “disinterested generosity”.
This last point is important, as the ATO stipulates that there should be no “material benefit” or advantage arising for the giver through the action of the gift or donation. The outcome is that if a donating taxpayer receives something in exchange for their donation the rules state that they cannot claim for the donation in their tax return — even if the receiving organisation is a DGR.
Relevant material benefits and advantages listed by the ATO include:
- raffle or art union tickets
- items such as chocolates and pens
- the cost of attending fundraising dinners, even if the cost exceeds the value of the dinner
- membership fees
- payments to school building funds made, for example, as an alternative to an increase in school fees
- payments where you have an understanding with the recipient that the payments will be used to provide a benefit to you.
Note however that the ATO recognises that a donor being given a lapel sticker to acknowledge their gift, or being mentioned by name in an organisation’s newsletter for the same reason, is not deemed to be an “advantage”, and will not deny a deduction. Where the donor is a corporate entity however, acknowledgement, especially for example by way of signage, may constitute a benefit, and render the donation ineligible for deduction. There may be a case however to treat the contribution as a business expense, or even as a “sponsorship supply”, depending on circumstances.
It should be emphasised that the voluntary nature of giving is central to the tax deductibility of donations. By way of example, there was a mining company in Western Australia that was given the alternative of either paying a royalty to the government or an equivalent amount to a DGR resident in WA. The mining company made a donation to the WA State Library Board. The ATO denied the company’s claim for a deduction, mainly because the miner had no choice about making a payment, only about which entity this payment went to, and it was deemed in the subsequent court case that it was not sufficient that one of these choices was a DGR.
A deduction for a gift or donation cannot add to or create a tax loss. However a donating taxpayer can choose to spread the tax deduction for a donation over a period of up to five financial years, by using the “Election to spread gift deduction” form (ask us if you require this form).
Artists donating their artworks under the Cultural Gifts Program – some tips:
If you’re considering donating your artwork to claim a tax deduction based on market value, make sure that you do it through the Cultural Gifts Program and follow the general gift deductibility rules under tax law. Otherwise, you may be disappointed at tax time that you gave away your artwork for no tax benefit.
Be wary of charity auctions and other fundraising events that encourage artists to gift their works in order to claim a tax deduction.
What to do
- Identify the work which you intend to donate.
- Obtain details of DGR status and Cultural Gift Recipient status of the organisation/entity you intend to donate to.
- Bring these details to your accountant’s attention before you officially make the donation, at least 12 months beforehand if possible.
- Check if it possible to ‘loan’ the work before donating it to the institution, considering the ’12 month rule’.
Your accountant will then:
- Identity the scope for any tax benefits from making the donation.
- Explain the steps necessary to achieve that benefit
If you decide to go ahead, you will need to:
- Follow steps and complete forms at the advice of your accountant
- Organise 2 independent valuations of the artwork.
- Obtain a donation receipt from the donee.
What not to do
Do not make the donation assuming it is going to provide a tax benefit equal to the market value of the item. If the correct steps are not followed, you may even be worse off making the donation than if you had retained the gift.
Your accountant can’t alter past events; only advise you on how to tax plan for future events.
Donations of property or trading stock – general considerations:
- If the property or trading stock was purchased by the donor during the 12 months before making the contribution, then the value of the donation is the lesser of:
- the market value of the property on the date of the contribution is made; and
- the amount the donor paid for the property.
- However, where property was purchased by the donor more than 12 months earlier, the value of the property is determined by the Australian Valuation Office within the Tax Office. A valuation may be required within 90 days of making the donation.
- These forms are on the ATO website for property valued at $5,000 or more – Request for Valuation (application and valuation fees apply) and Certificate of Donation.
- The government encourages gifts of significant cultural items to public art galleries, museums and libraries under the Cultural Gifts Program. The general rule is that you can deduct the average of the market values specified in two formal valuations received from independent valuers. There are other tax law considerations to make your gift tax deductible.
Artwork as Trading Stock or Property/Asset
Artwork can be your trading stock – i.e., if it has been made available for sale. A business can claim a deduction for the value of its trading stock donations. However, the outcome may be tax neutral (no benefit) – e.g. if the disposal in itself also creates assessable income, or if a deduction for the materials has already been claimed, or will be.
Artwork can be property – an asset – i.e., works in your private collection. Donations of property can give rise to capital gains tax upon disposal (transfer) of an asset. Tax saved less tax paid = less benefit than possibly anticipated.
NOTE: Property donated under the Cultural Gifts Program is exempt from capital gains tax. A gift to a cultural organisation will be tax deductible if the public fund is listed on the Register of Cultural Organisations when the gift is donated.
Record keeping tips for artists donating their artworks:
Note: Claiming large deductions in your tax return can attract Tax Office scrutiny – this can result in paying back tax, interest and big penalties if you don’t have the right records to back yourself up.
These general tips should be considered in consultation with your accountant – to get it right:
- Maintain business inventory records of all your artworks as they are created, made available for sale, sold, or otherwise transferred.
- Record the cost of materials/manufacture for each artwork (document the method for any estimates of costs).
- Prepare a stocktake at 30 June every year, even if you are eligible for the small business trading stock tax concessions.
- Maintain a separate record of your private property and other assets (e.g. for insurance).
- On the date you transfer an artwork from your trading stock to your private collection (e.g. more than 12 months before making a donation) document the transfer in your accounting ledgers and journals – there are income tax and GST consequences.
- Under the Cultural Gifts Program, the general rule is that you can deduct the average of the market values specified in two formal valuations received from independent valuers. Valuations must be done within 90 days before or after the date of formal acceptance of the gift, to reflect the current market value. The organisation could help you choose suitable valuers approved, for the purposes of the Cultural Gifts Program, to value your gift.
You may spread the deduction over up to five years by making a written election in the Apportionment Election Form for the CGP before you lodge your income tax return for the year in which the donation is made.
Send your written election and receive an acknowledgment letter from the Department of Communications and the Arts.
In the election you must specify the percentage of the deduction you wish to claim for that year and the subsequent four tax years.
You do not have to ‘spread’ the deduction over five years – for example, you may choose to apply the deduction over only two years or in the first year alone – and can elect not to claim a deduction in one or more of the years.
You can vary the election for a year in which a deduction hasn’t already been claimed.
Please contact our office on 1300 546 770 or book an advisory consultation if you would like to discuss.