House of Representatives

Explanatory Memorandum

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

Chapter 4 - Donation of listed shares to deductible gift recipients

Outline of chapter

4.1 Schedule 4 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to allow a tax deduction for donations of small parcels of shares in listed public companies to eligible deductible gift recipients (DGRs).

Context of amendments

4.2 The income tax law encourages philanthropy through a range of taxation measures. Donations of money or property to DGRs valued at $2 or more are tax deductible.

4.3 Currently, gifts of property to DGRs - which can include shares - are tax deductible if the property is purchased during the 12 months before making the gift, or valued by the Commissioner of Taxation at more than $5,000.

4.4 Gifts of property, including shares, acquired at least 12 months before making the donation, and valued at $5,000 or less, are currently not tax deductible.

Summary of new law

4.5 These amendments allow taxpayers a tax deduction where they gift to a DGR, shares in a listed public company that were acquired at least 12 months before the donation, and have a market value of $5,000 or less. The allowable deduction is the market value of the shares on the day the donor makes the gift.

4.6 This measure was announced in the 2006-07 Budget, and applies in relation to gifts and contributions made in an income year commencing on or after Royal Assent.

Comparison of key features of new law and current law

Detailed explanation of new law

4.7 To further enhance the flexibility of the current tax measures for donations to DGRs, this measure allows a tax deduction for gifts to DGRs of small parcels of shares in listed public companies, which could include a gift of a single share provided the value is $2 or more.

4.8 Taxpayers gifting shares can deduct the market value of the shares on the day they make the gift, provided that the shares:

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were acquired at least 12 months before making the gift;

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have a market value of $5,000 or less;

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were acquired in a listed public company; and

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are listed for quotation on the official list of an Australian stock exchange.

[Schedule 4, items 1 to 6, subsection 30 - 15(2), items 1 and 2 in the table]

Shares acquired

4.9 Shares 'acquired' include shares that come into the donor's possession through a variety of means, for example, shares that have been purchased, inherited, won, received as a gift or received as a bonus.

Meaning of share

4.10 A 'share' in a company refers to a share in the capital of the company. Securities that are not shares, including derivatives of shares, are outside this measure. [Schedule 4, items 1, 4 and 7, subsection 30 - 15(2), items 1, 2 and 7 in the table]

Capital gains tax

4.11 The disposal of shares under this measure is a capital gains tax (CGT) event, and taxpayers who choose to donate shares are still subject to CGT.

Example 4.1

George purchased 100 shares in Lion Resources two years ago at $14 a share. Lion Resources is a listed public company on an Australian stock exchange.

George decides to gift the shares to Fun Run, a DGR. George signs and submits a share ownership transfer document to donate the 100 shares to Fun Run.

The market value of the shares at the time George gifted the shares was $12 per share, bringing the total market value of the parcel to $1,200. Therefore, George can claim a tax deduction of $1,200.

CGT treatment

As the gifting of shares is a CGT event, George has also incurred a capital loss. Assuming a reduced cost base of $14 a share, the capital loss will be the difference between the reduced cost base of the shares ($1,400) and the capital proceeds, which is the market value of the shares ($1,200). In this case, George has a capital loss of $200. It follows that George would make a capital gain if the market value of the shares was greater than the cost base.

Suspended shares

4.12 Shares that are suspended from trading (other than a mere trading halt) are not listed for quotation, and are therefore outside this measure. [Schedule 4, items 1, 4 and 7, subsection 30 - 15(2), items 1, 2 and 7 in the table]

Donations of shares in more than one company

4.13 Donations of shares that are in different companies, but gifted at the same time, are separate donations.

Example 4.2

Mark wishes to gift $3,000 of shares in Red Ltd and $4,000 of shares in Blue Ltd, both listed public companies, to a DGR. Both of these parcels of shares were purchased more than 12 months ago. Mark signs and submits two share ownership transfer forms.

Although their combined value exceeds $5,000, Mark can still deduct the gifts of shares as they are treated as separate gifts each valued at $5,000 or less.

Donations of shares purchased in the last 12 months

4.14 Where a donor wishes to gift a parcel of shares that includes both shares acquired more than 12 months ago and shares purchased in the last 12 months, the donor can claim a deduction under this amendment and under existing provisions respectively. [Schedule 4, items 1, 4 and 7, subsection 30 - 15(2), items 1, 2 and 7 in the table]

4.15 A deduction for shares acquired more than 12 months ago is available as per the examples above, whereas a deduction for property purchased in the 12 months before making the gift is available under subsection 30-15(2), item 1 in the table. In the case of property purchased in the last 12 months, which may include shares recently purchased as part of a dividend reinvestment scheme, a deduction can be claimed for the lesser of the market value of the shares on the day the gift was made, and the amount paid for the shares.

Example 4.3

Michelle currently holds shares in DRP Ltd, a listed public company. Michelle entered into a dividend reinvestment scheme with DRP Ltd two years ago. As part of this scheme, DRP Ltd recently paid a dividend to Michelle which purchased $480 in shares in the company.

Michelle gifts all her shares in DRP Ltd to a DGR within 12 months of receiving the dividend. At the time of the gifting the shares held for more than 12 months were valued at $4,000, while the shares purchased with the dividend were valued at $500.

Under this amendment, Michelle can claim a tax deduction of $4,000 in respect of the shares acquired more than 12 months before making the gift.

Michelle can also claim a deduction of $480 for the shares purchased in the last 12 months under subsection 30-15(2), item 1 in the table, noting that the $480 purchase price is less than the $500 market value at the time of gifting.

The company must be listed at the time the shares are gifted

4.16 The amendments apply only to shares in a public company that were listed for quotation in the official list of a stock exchange when the shares were donated. The stock exchange must be listed under the heading 'Australia' in regulations made for the purposes of the definition of 'approved stock exchange' (see Schedule 12 to the Income Tax Regulations 1936 ). [Schedule 4, items 1, 4 and 7, subsection 30 - 15(2), items 1, 2 and 7 in the table]

Example 4.4

Eva purchased shares in a private company, for $400 two years ago. Eva will not be able to receive a tax deduction for any gift of those shares as they are not in a listed public company.

Contributions of shares where a right to attend a fundraising event is received in return

4.17 These amendments also allow a deduction for contributions of shares by an individual donor made in return for a right, permitting the donor or another individual, to attend, or participate in a particular fundraising event in Australia.

4.18 Consistent with the criteria for gifted shares, the contributed shares must be:

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in a listed public company and listed for quotation in the official list of a stock exchange under the heading 'Australia' in regulations made for the purposes of the definition of an 'approved stock exchange';

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acquired at least 12 months before making the contribution; and

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have a market value on the day the donor makes the contribution of $5,000 or less, but more than $150.

Furthermore, the GST inclusive market value of the fundraising event must not exceed 20 per cent of the value of the shares and $150, whichever is the less. [Schedule 4, items 7 and 9, subsection 30 - 15(2), item 7 in the table]

4.19 If these criteria are satisfied, the donor can deduct the market value of the shares on the day they make the contribution, reduced by the goods and services tax (GST) inclusive market value of the right to attend the fundraising event. [Schedule 4, item 8, subsection 30 - 15(2), item 7 in the table]

Example 4.5

Martin contributes a parcel of shares to a DGR that were acquired 18 months ago in a public listed company. In return Martin is given a ticket to attend the DGRs annual gala dinner fundraising event.

At the time Martin contributed the shares, they had a market value of $1,000. The GST inclusive market value of the right to attend the fundraising event is $100.

Martin can claim a tax deduction for $900, which is the market value of the shares ($1,000) less the GST inclusive market value of the right to attend the fundraising event ($100).

Application and transitional provisions

4.20 This measure applies in an income year commencing on or after the date of Royal Assent. [Schedule 4, item 10]