Charitable giving – a good cause makes sense
By William Truong, IOOF Technical Services Manager
We have witnessed an outpouring of generosity by Australians with the recent Bushfires impacting thousands of individuals and businesses. For some, charitable giving is part of a lifelong mission to help others and goes far beyond donating clothes or making small non-recurring donations to support a favourite cause. For these people, charitable giving can form an integral part of their financial plan. This article looks at some tax-effective options available for clients wanting to undertake charitable giving.
Charitable advice and personal financial advice
Whether it’s contributing to an organisation your clients support or helping family members in times of need, charitable giving is immensely important – and deeply personal – for many clients.
Understanding a client’s commitment to their charitable cause is an important responsibility of financial planners. Many clients are inclined to put their charity ahead of their own financial goals and needs. Hence, part of any good advice is to balance their client’s long-term financial objectives with these charitable giving intentions.
Gifts/ donations (cash)
Giving directly to an eligible charity is the most common way to donate. These donations can be fully tax-deductible for your clients – whether as individuals or other tax entities – and there are no upper limits on the amount that can be claimed or the number of charities that they may donate to.
|Tech tip: for clients who are couples, they could maximise their tax deduction by considering making the donation in the name of the higher income earning spouse.|
To be tax-deductible, a cash donation must meet all of the following conditions:
- Be made to a deductible gift recipient (DGR). This can be checked by finding the charitable organisation on the ABN lookup site (abn.business.gov.au). Please note, not all charities are DGRs. For example, in recent times crowdfunding campaigns have become a popular way to raise money for charitable causes. However, many of these crowdfunding websites are not run by DGRs, therefore donations to these campaigns aren't tax deductible.
- The amount of the gift must be at least $2.
- The client makes the gift voluntarily and does not materially benefit from their gift.
Abdul attends a Christmas concert. He purchases his ticket for $20. At the concert, he also makes a voluntary donation of $100. The $100 is a deductible gift but the $20 for the ticket is not a deductible gift.
When making donations the DGR will usually issue a receipt, but they don't have to. If this is the case, clients can still claim a tax deduction by using other records such as bank statements.
Clients who have made one or more donations of $2 or more to bucket collections conducted by an approved organisation for natural disasters, such as, bushfires, severe storms and flooding, can claim a tax deduction of up to $10 for the total of those contributions without a receipt.
Cash ‘contribution’ donations
When a client receives a benefit from the gift, clients cannot claim a tax deduction as a gift, but they may still be tax-deductible as a ‘contribution’.
An example of a tax-deductible contribution includes when a client makes a contribution greater than $150 to a fundraising event. As they receive a minor benefit from their attendance at the event, they have not made a gift, however, they may claim a portion of their contribution - the amount in excess of $150 - as a tax deduction if they meet the following conditions:
To be tax deductible, the ‘contribution’ must1:
- be made by an individual (other entities cannot claim a deduction from their contributions)
- be made to a DGR
- be for a right to participate in an eligible fundraising event, which is a DGR fundraising event conducted in Australia, including fetes, balls, gala shows, dinners, performances and similar events
- be a cash contribution over $150 (if the eligible event is a fundraising auction)
- not benefit the client to more than 20% of the value of the contribution or $150, whichever is less.
Roshima contributes $300 for the right to attend a DGR's annual gala dinner fundraising event. The value of the ticket to attend the fundraising event is $50. Roshima will be eligible to claim a tax-deductible contribution of $250 ($300 - $50) because:
Property ‘contribution’ / donations of a value over $5,000
If a client makes a gift of property (rather than cash) that the ATO has valued at more than $5,000, they may be able to claim a tax deduction.
'Property' has a wide meaning. As well as tangible objects, such as land, it includes rights and interests that can be owned, such as shares and ownership rights.
Property contributed within 12 months of purchase2:
- If the property, including listed shares, was purchased by the client during the 12 months before making the contribution, the value of the contribution is the lesser of both:
- the market value of the property on the day that the contribution was made
- the amount the contributor paid for the property.
Property contributed after more than 12 months of ownership3:
- If the gift is property valued by the ATO at more than $5,000 and the client purchased the property more than 12 months before donating it, they can claim a tax deduction for the amount the ATO values the property at on their Valuation Certificate.
Property (value less than or equal to $5,000)
Generally, one cannot claim a tax deduction for such property contributions, but there is a specific exception for listed shares, which is as follows:
- For shares acquired more than 12 months ago, the amount clients can deduct is the market value of the shares on the day the contribution was made4
- For shares acquired in the last 12 months, they can claim a deduction for the lesser of the:
- market value of the shares on the day they donated them, or
- the amount they paid for the shares5.
Please note, it’s important to note that the donation of property is a disposal for capital gains tax (CGT) purposes.
Tax and timing of tax deductions
Generally, clients can claim the tax deduction in the income year in which they made the donation. However, they could make a written election to spread the tax deductions for a gift over a period of up to five income years (in any proportion), if the gift meets the following conditions6:
- money of $2 or more
- property the ATO values at more than $5,000
- the election must be in the approved form and must be made before lodging the tax return for the year in which the gift was made.
The election and variation forms vary depending on the gift and the DGR that receives it, so clients should contact the relevant DGR before making the gift.
Spreading the tax deduction over several years may help clients where they may have a higher taxable income in some years than others.
Further, deductions from donations cannot create or increase a tax loss.
Donations made by Centrelink clients
Centrelink or Department of Veterans’ Affairs clients may be subject to deprivation rules where they make gifts or donations without receiving adequate consideration.
Centrelink rules may allow for various concessions from the deprivation rules, for example, gifts of $10,000 per financial year/$30,000 over the five year threshold and when certain clients make gifts to a Special Disability Trust or transfer their principal home to their children under an effective granny flat arrangement.
Salary sacrifice arrangements
Clients may also arrange for gifts to be made to DGRs under a salary sacrifice arrangement with their employer. Under such an arrangement, the client directs part of their pre-tax salary to a DGR, and it’s the employer who can claim for the tax deduction (not the client). Such a donation is not considered a fringe benefit.
Alternatively, where clients participate in their employer’s ‘Workplace Giving’ programs, where part of their after-tax salary is donated to a DGR, the client may be entitled to claim the deduction.
Bequest through investment bonds
As well as enabling tax-free distributions on death (within or outside the ten-year investment period), investment bonds also have a special nomination mechanism allowing philanthropic bequests to charities, churches, hospitals, schools and other similar organisations. This mechanism lets a nomination be made discreetly and, as a ’non-estate’ asset, can help put these types of bequests beyond the legal challenge of Wills and legal estate beneficiaries. Please note, that family provisions law in NSW may still allow disgruntled beneficiaries and family members to claim under the concept of ‘Notional estate’, which may capture assets given away by the deceased.
Bequest with life insurance
A life insurance bequest can be a valuable and generous gift. By making small regular contributions, a client (donor) to make a more substantial contribution to a cause or charity than would otherwise be possible. There are a couple of options for life insurance bequests:
Option 1: leaving a sum of money to the charity which allows the charity to pay regular premiums on the insurance policy and as policy owner, the charity communicates directly with the insurance company.
Option 2: clients can also choose to nominate a charity as the beneficiary of an existing policy.
Setting up a private ancillary fund (permanent charitable option)
Clients may also elect to setup a foundation via a private ancillary fund (PAF). Under this vehicle, a donor will make a large (usually over $500K) irrevocable gift into their PAF and to invest the money, distributing a minimum of 5% of the value of the assets annually to eligible charities.
A PAF is a trust which can be set up during a client’s lifetime or via the Will, but it must meet the following conditions:
- Have corporate trustees, where at least one director is a ‘responsible person’ who has a general responsibility to the community and is not associated with the founder or is not a major donor.
- Not provide a material benefit to the donor, their families or associates.
- The PAF must only donate to charities which have Item 1 DGR status.
- Pays donations of at least 5% of the fund’s assets per financial year, or $11,000 (whichever is greater).
- Maintain an investment strategy and complies with a range of investment restrictions.
A PAF can apply to the ATO to be endorsed as an Item 2 DGR, which allows it to accept donations which can be tax-deductible to donors and may also apply for income tax exempt status, GST and fringe benefits tax concessions. This strategy is beneficial for clients who seek a more permanent and tax-effective charitable option.
PAFs generally take considerable time and expertise to operate and also require a substantial investment amount to be cost effective. Donors can outsource the fiduciary role to a licensed trustee.
A possible alternative is for clients to establish a donor advised account under a Public Ancillary Fund.
A donor advised account is similar to a PAF in that it is a trust established for charitable purposes, however, the legal, administrative and investment responsibilities are provided by a third-party trustee. Donors can establish accounts with initial donations from $50,000 and are required to distribute 4% of the value of the net assets of the account per year to eligible charities (Item 1 DGRs).
Donating while alive or through a Will
Eligible donations made by a client while they are alive are generally tax deductible, however, donations made by the executor to a DGR is not eligible for a tax deduction. Therefore, it is often recommended that clients consider giving part of their intended estate to charity prior to death if this is possible and if a tax deduction is intended.
Importantly, where the deceased estate donates property, while the donation is non-deductible, an exemption from the CGT could apply8, where the recipient organisation is an established DGR prior to the donor’s date of death. CGT would otherwise apply where the client donates property while they were alive.
Case study: donation of property via the Will to a non-DGR
Greg is seeking to donate part of his share portfolio to a PAF, to be established via his Will. The share portfolio will not be exempt from capital gains tax (CGT) when transferred to the PAF because it did not exist at the time of death so it cannot qualify as a DGR. However, if he was to donate the share portfolio to a DGR, rather than a PAF, the CGT exemption could apply.
Understanding charitable intentions is important – but complex
Since charitable giving represents one of the most intimate aspects of personal finance, it’s crucial that financial planners realise how to balance the altruistic desires of their clients while also ensuring their futures are secure.
Part of this process is about understanding the many viable options available for clients who want to make charity donations. These options can be quite complicated, due to their personal nature and other tax implications, estate and Centrelink issues.
Clients should confirm their entitlement to any tax deduction, including any CGT implications, with their tax adviser.
Donating to charity doesn't necessarily mean a monetary donation. Volunteering of their time or even skills and expertise can be the perfect way for your clients’ to know that they are really making a difference. For clients who are interesting in volunteering, they can either check their preferred charity's website, or visit this link: Go Volunteer to search for opportunities in their local area.
If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.
The information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.