House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Chapter 5 - Philanthropy

Overview

5.1 Schedule 5 to this Bill will amend the Income Tax Assessment Act 1997 (ITAA 1997) and the Income Tax Assessment Act 1936 to implement the Governments response to the report on philanthropy in Australia by the Business and Community Partnerships Working Group on Taxation Reform. On 26 March 1999, the Prime Minister, the Treasurer, the Minister for Family and Community Services, the Minister for Communications, Information Technology and the Arts, and the Minister for the Arts and the Centenary of Federation announced income tax measures to encourage greater corporate and personal philanthropy in Australia.

5.2 The amendments will:

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allow an income tax deduction to certain funds, authorities and institutions and to political parties for a gift of property worth more than $5,000, regardless of when or how the property was acquired;

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provide a capital gains tax (CGT) exemption for testamentary gifts of property to certain funds, authorities and institutions and to political parties unless the property is reacquired by the estate, a beneficiary of the estate or an associate;

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provide a CGT exemption for gifts of property made under the Cultural Gifts Program unless the property is reacquired for less than market value by the donor or an associate;

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allow concessional taxation treatment for specified private funds which will not be required to seek donations from the public but will be subject to the other requirements applying to public funds; and

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allow the apportionment of deductions for donations made under the Cultural Gifts Program over a period of up to 5 income years.

5.3 These measures are explained in the following Sections:

Section 1: Deduction for gifts of property valued at more than $5,000

Section 2: Deduction for gifts to private funds

Section 3: Apportionment of donations made under the Cultural Gifts Program

Section 4: CGT exemption for gifts of property made under the Cultural Gifts Program and testamentary gifts of property to gift deductible organisations

Summary of the amendments

Purpose of the amendments

5.4 The purpose of the amendments is to encourage greater corporate and personal philanthropy in Australia by providing taxation incentives for donors.

5.5 The amendments will provide incentives by extending the existing gift deductibility provisions, providing CGT exemptions and allowing an apportionment of deductions in certain cases. Specifically:

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The existing gift deductibility provisions will be extended to gifts of property to certain funds, authorities and institutions and to political parties worth more than $5,000, regardless of when or how the property was acquired, and to specified private funds, which must satisfy the requirements of public funds except for the requirement of seeking and receiving public contributions.

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CGT exemption will be extended to gifts of property made under the Cultural Gifts Program and to testamentary gifts of property to certain funds, authorities and institutions and to political parties unless the property is reacquired by the estate of the deceased, a beneficiary or an associate.

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Deductions for donations made under the Cultural Gifts Program will be apportionable over periods of up to 5 income years.

Date of effect

5.6 The amendments will apply from 1 July 1999:

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Deductions will be allowable for gifts of property to certain funds, authorities and institutions and to political parties made on or after 1 July 1999 where the value of the property exceeds $5,000, regardless of when or how the property was acquired.

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Deductions will be allowable for gifts to specified private funds made on or after 1 July 1999.

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CGT exemption will apply to property donated under the Cultural Gifts Program on or after 1 July 1999.

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CGT exemption will apply to testamentary gifts of property donated on or after 1 July 1999.

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Deductions for donations under the Cultural Gifts Program made on or after 1 July 1999 may be apportioned over a period of up to 5 income years.

Background to the legislation

Current law

Gifts or contributions

5.7 Taxpayers are entitled to income tax deductions for certain gifts or contributions. The rules relating to these deductions are contained in Division 30 of the ITAA 1997. The structure of the Division is as follows:

5.8 Under section 30-15 certain donations made to listed recipients are eligible for tax deductibility. The table in section 30-15 specifies the type of recipient, the type of gift or contribution, how much can be deducted and any special conditions that apply. The type of recipient includes public hospitals, public libraries, public museums and charitable institutions. The recipients are commonly known as "gift deductible organisations".

Cultural Gifts Program

5.9 The Cultural Gifts Program encourages gifts of significant cultural items to public art galleries, public museums and public libraries by offering donors a tax deduction. The recipients of deductible gifts under the Cultural Gifts Program are listed at items 4 and 5 of the table in section 30-15.

5.10 The Department of Communications, Information Technology and the Arts administers the program with the advice of the Committee on Taxation Incentives for the Arts (an expert Committee appointed by the Minister for the Arts and the Centenary of Federation). The Committee advises the Minister on matters relating to the program, advises the Secretary of the Department on the approval of valuers for the program and examines donations made under the program to ensure they conform with the requirements of the program.

Capital gains and losses

5.11 Taxpayers can only make a capital gain or capital loss if a CGT event happens in relation to a CGT asset. The types of CGT assets that potentially may be donated include land, buildings, shares, collectables (for example, artwork) and personal use assets (for example, property that is used or kept mainly for personal use or enjoyment). The capital gain or capital loss is disregarded or reduced when an exemption applies.

5.12 Subdivision 118-A of the ITAA 1997 deals with general exemptions from CGT. Collectables are exempt assets if the collectable was acquired for $500 or less (subsection 118-10(1)) and personal use assets are exempt assets if acquired for $10,000 or less (subsection 118-10(3)). Gifts of property that are made under the Cultural Bequests Program do not give rise to a capital gain or capital loss under section 118-60.

Explanation of the amendments

Section 1: Deduction for gifts of property valued at more than $5,000

Gifts to certain funds, authorities and institutions

5.13 Schedule 5 of this Bill amends the table of deductible gifts or contributions in section 30-15 of ITAA 1997. The proposed amendments will allow a tax deduction for gifts of property valued by the Commissioner of Taxation (the Commissioner) at more than $5,000 to recipients listed at items 1 and 2 of the table. The deduction will apply to gifts made on or after 1 July 1999 [item 26] .

5.14 Item 1 of the table relates to recipients that are funds, authorities or institutions listed by name or by type in subdivision 30-B. Item 2 of the table relates to public funds; broadly, funds that are open for subscription by the public and to which the public contributes. The Commissioners view of what is a public fund is contained in Taxation Ruling TR 95/27. (Note that item 2 of the table is amended to include specified private funds by item 6 . See Section 2 of this Chapter for an explanation.)

5.15 The type of gift that may be tax deductible is amended to include property valued by the Commissioner at more than $5,000 [items 2 and 7] . The amount deductible is the value of the property as determined by the Commissioner [items 4 and 9] . Where the property is valued at more than $5,000 and is purchased within the 12 months before making the gift, the existing rules apply [items 3, 4, 8 and 9] ; that is, the amount deductible is the lesser of the market value of the property and the amount paid for the property.

5.16 An amendment is made to the special conditions relating to gifts to recipients listed at Items 1 and 2 of the table. For gifts valued by the Commissioner at more than $5,000 to be tax deductible, the valuation requirements of new section 30-212 must be satisfied [items 5 and 10] .

Valuations by the Commissioner of Taxation

5.17 New section 30-212 provides valuation rules for gifts valued by the Commissioner of Taxation at more than $5,000 [item 11] . Valuations for these gifts must be made by the Commissioner for a tax deduction to be allowable. The Commissioner may charge a valuation fee for the service in accordance with the Income Tax Assessment Regulations [newsubsection 30-212(2)] .

5.18 The Australian Valuation Office, which forms a part of the Australian Taxation Office, will advise the Commissioner of appropriate property valuations.

Consequential amendments

5.19 An amendment is made to the index to Division 30 in section30-315 to include a reference to new section 30-212 [item 18] .

Example 1

Alexis donates her farm in the Australian Capital Territory (ACT) to the Royal Society for Prevention of Cruelty to Animals (ACT) Incorporated on 1September1999. She has owned the property since 1979. She has the farm valued by the Commissioner at $200,000. She is entitled to a deduction for the amount of the valuation, that is, $200,000.

Example 2

Enrico donates his 4-wheel drive vehicle to Amnesty International. The Commissioner values the vehicle at $35,000. Enrico has a friend who is a car salesman and he says that the value of the vehicle is $33,000. Enrico is entitled to a deduction for the amount of the Commissioners valuation of $35,000.

Gifts and contributions to political parties

5.20 Schedule 5 also amends the deductions for political contributions and gifts to allow deductions for property valued by the Commissioner at more than $5,000. A deduction will be allowable for contributions or gifts made on or after 1 July 1999 [item 26] .

5.21 The Taxation Laws Amendment (Political Donations) Bill 1999 (Political Donations Bill) rewrites the provisions relating to political donations that are currently listed in the table in section 30-15. New section 30-242 of the Political Donations Bill replaces and modifies Item3 of the table. Subsection 30-242(2) is amended by this Bill to allow a contribution or gift of property valued by the Commissioner at more than $5,000 to qualify for a deduction [item 12] .

5.22 The amount of the deduction that is allowable for political contributions and gifts is also amended (new section 30-243 of the Political Donations Bill). Where a contribution or gift of property is valued by the Commissioner at more than $5,000, the deduction allowed is $1,500 [items 13 and 14] . The deduction is limited to $1,500 rather than the value of the property as determined by the Commissioner because deductions for political contributions and gifts cannot exceed $1,500 [newsubsection 30-243(2A)] .

5.23 The valuation requirements of new section 30-212 also apply to political contributions and gifts of property valued by the Commissioner at more than $5,000 (see paragraph 5.17).

Section 2: Deduction for gifts to private funds

5.24 Schedule 5 to this Bill amends section 30-15 of the ITAA 1997 to allow deductions for gifts made to specified private funds from 1 July 1999. This is achieved by extending the application of item 2 in the table to prescribed private funds [items 6 and 26] . Item 2 of the table deals with gifts to public funds established and maintained under a will or trust instrument solely for:

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the purpose of providing money, property or benefits to a fund, authority or institution covered by Subdivision 30-B; or

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the establishment of such a fund, authority or institution.

5.25 To be eligible to receive gift deductible donations, prescribed private funds will need to comply with most of the requirements of public funds (see Taxation Ruling TR 95/27).

What is a public fund?

5.26 Public fund is not defined in the ITAA 1997 but the decision in Bray v FC of T
78 ATC 4179 ;
8 ATR 569 establishes that a fund will be public where:

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it is the intention of the promoters or founders that the public will contribute to the fund;

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the public, or a significant part of it, does in fact contribute to the fund; and

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the public participates in the administration of the fund.

5.27 Therefore, a public fund is one to which the public is invited to contribute and in fact does contribute. The fund must be controlled or administered by persons or institutions with a degree of responsibility to the community as a whole.

What is a prescribed private fund?

5.28 Prescribed private funds will not have to comply with the requirement of public funds to seek and receive contributions from the public, but will have to comply with all the other requirements of a public fund. This means that individuals and corporations will be able to establish funds for philanthropic purposes without advertising for public contributions.

5.29 Prescribed private fund is defined in subsection 995-1(1) to be a fund that is prescribed by the Income Tax Assessment Regulations but does not include a fund that is declared in writing by the Treasurer not to be a prescribed fund [item 24] . Private funds seeking to be prescribed in the Regulations will need approval from the Government. Where a prescribed private fund no longer complies with the requirements, the Treasurer may declare in writing that the fund is not a prescribed private fund. From the date of declaration, donations to that fund will not be tax deductible under section 30-15.

Section 3: Apportionment of donations made under the Cultural Gifts Program

5.30 New Subdivision 30-DB is inserted in Division 30 of the ITAA 1997 to allow apportionment of deductions for gifts made under the Cultural Gifts Program over a maximum of 5 income years [item 16] . The apportionment applies to deductions for gifts made on or after 1 July 1999 [item 26] .

5.31 The Cultural Gifts Program is administered by the Department of Communications, Information Technology and the Arts. The program encourages the donation of significant cultural gifts to the recipients of deductible gifts listed at Items 4 and 5 of the table in section 30-15. These recipients are:

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the Australiana Fund;

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a public library in Australia;

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a public museum in Australia;

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a public art gallery in Australia;

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an institution in Australia consisting of a public library, a public museum and a public art gallery or any 2 of them; and

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the Commonwealth for the purposes of Artbank.

New Subdivision 30-DB is structured as follows:

Making an election

5.32 New subsection 30-247(1) provides that a taxpayer may elect to spread a deduction for a gift made under the Cultural Gifts Program over up to 5 income years. If the taxpayer makes this election, the apportionment must commence in the income year in which the gift is made and cannot exceed 100% of the original deduction.

5.33 When a taxpayer makes an election, they must specify the percentage, if any, to be deducted in each income year [newsubsection30-247(2)] .

5.34 The election must be made before the taxpayer lodges the income tax return for the income year in which the gift was made. [New subsection 30-247(3)]

5.35 A copy of the election must be given to the Arts Secretary by the taxpayer prior to lodging the income tax return for the year in which the gift was made [new subsection 30-247(4)] .

5.36 New subsection 30-247(5) provides that the taxpayer may vary the election at any time. The variation will apply to the percentage of the original deduction that is to be claimed in income years for which an income tax return has not yet been lodged. The taxpayer must give the Arts Secretary a copy of the variation before lodging the income tax return for the first income year to which the variation applies.

5.37 Under new subsection 30-247(6) the election and any variation must be made in a form approved in writing by the Arts Secretary.

5.38 The Arts Secretary is defined in subsection 995-1(1) to mean the Secretary of the Department administering the National Gallery Act 1975 [item 23] . The responsible department is currently the Department of Communications, Information Technology and the Arts.

Example 1

Sarah donates a Norman Lindsay painting to the National Gallery of Australia in April 2000 under the Cultural Gifts Program. Sarah decides to spread the deduction over 5 income years. The first income year in which she can claim a portion of the deduction is the 1999-2000 income year.

Sarah decides to apportion her deduction for the painting in the following manner:

Example 2

Thomas donates rare manuscripts written by Captain Cook on his voyage on the Endeavour to the National Library of Australia in September 2000. Thomas elects to apportion the deduction over 3income years. The first income year in which Thomas will be able to claim a deduction is the 2000-2001 income year. Thomas apportions his deduction in the following manner:

Effect of election

5.39 The effect of this election is that the taxpayer must claim the deduction in the manner specified in the election. By making an election, the taxpayer forgoes the opportunity to claim the full amount of the deduction in the income year in which the donation was made. [New section 30-248]

Consequential amendments

5.40 Section 30-5, which provides a guide to Division 30, is amended to include a reference to the apportionment of certain gifts under new Subdivision 30-DB [item 1] . An amendment is made to the index to Division 30 in section 30-315 to include a reference to new Subdivision 30-DB [item 17] . These 2 amendments are to assist the reader of the Division.

Section 4: CGT exemption for gifts of property made under the Cultural Gifts Program and testamentary gifts of property to gift deductible organisations

5.41 Currently, under section 118-60 of the ITAA 1997, gifts of property made under the Cultural Bequests Program are exempt from CGT; that is, a capital gain or a capital loss made from the gift is disregarded. Schedule 5 of this Bill amends section 118-60 to extend the exemption to:

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testamentary gifts of property made to gift deductible organisations [item 20] ; and

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gifts of property made under the Cultural Gifts Program [item22] .

5.42 Capital gains and capital losses will be disregarded on gifts donated under these circumstances on or after 1 July 1999 [item 26] . To ensure that this measure is not abused, an anti-avoidance provision has been included in the amendments.

Testamentary gifts

5.43 New subsection 118-60(1) provides that a capital gain or capital loss made from a testamentary gift to a gift deductible organisation is disregarded [item 20] . The amendment is designed to encourage people to make testamentary gifts to the recipients listed in section 30-15. Under the current law, there is no tax concession available for testamentary gifts because testamentary gifts are specifically excluded from gift deductibility by subsection 30-15(2).

5.44 New subsection 118-60(4) provides that if a testamentary gift is reacquired for less than market value by either:

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the estate of the deceased person; or

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a person who is an associate of the deceased persons estate; or

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a person who was an associate of the deceased person just before the person died;

then the rules relating to the effect of death on CGT assets apply (section 128-15). This treats the asset in the same way as if it had been bequested directly to the beneficiary or associate. That is, instead of the beneficiary or associate having a cost base for the asset of the amount that they paid for it, the first element of the assets cost base will be either:

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the cost base of the asset on the day of death of the donor where the donor acquired the asset on or after 20 September 1985; or

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the market value of the asset on the day of death of the donor where the donor acquired the asset before 20 September 1985; or

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the market value of the asset on the day of death of the donor where the asset was the donors main residence just before death and was not used to produce assessable income; or

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the market value of the asset on the day of death of the donor where the asset is trading stock.

Cultural gifts

5.45 New subsection 118-60(2) provides that a capital gain or capital loss made from a gift of property to the recipients covered by items 4 and 5 of the table in section 30-15 is disregarded. Items 4 and 5 relate to the Cultural Gifts Program. Income tax deductions are available for gifts of property to these recipients, except for a gift of an estate or an interest in land or in a building or part of a building. The amendments will provide additional incentive for gifts of property under the Cultural Gifts Program and will align the program more closely with the Cultural Bequests Program.

5.46 Under new subsection 118-60(3) , the CGT exemption will not apply when the person who donated the gift under the Cultural Gifts Program reacquires the property for less than market value. Similarly, when an associate of the donor reacquires the property for less than market value, the CGT exemption will not apply to the original donor.

Consequential amendments

5.47 New section 112-48 is inserted in the finding tables for special CGT rules in Subdivision 112-B. New section 112-48 guides the reader to subsections 118-60(1) and (2) for the special rules for gifts acquired by associates. [Item 19]

5.48 An amendment is made to subsection 304(4) of the Income Tax Assessment Act 1936 to reflect the extension of the CGT exemption to testamentary gifts to gift deductible organisations and gifts made under the Cultural Gifts Program. [Item 25]