New Tax Measures to Encourage Philanthropy

Description of Changes
On 26 March 1999, the Prime Minister announced a package of new tax incentives for gifting.

The new arrangements will take effect form 1 July 1999.

The income tax law will be amended to provide:

An income tax deduction for non-testamentary donations of property with a market value of more than $5000, regardless of when the property was purchased or acquired by the donor.
- Valuations will be determined by the Australian Valuation Office - http://www.avo.das.gov.au/ - at a cost to the donor or recipient body.
- The law remains unchanged for property with a market value of $5000 or less. That is, the property must, generally, have been purchased by the donor within the 12 months preceding the making of the donation. Some exceptions to this general rule apply in relation to property that is either trading stock of the donor or where donations are made under the Cultural Gifts or Cultural Bequests Programme administered by the Department of Communication, Information Technology and the Arts.
- The special rules that apply to the cultural Gifts and Cultural Bequests Programmes are not changed by this measure.
A capital gains tax exemption for testamentary gifts of property donated to organisations, bodies or funds eligible to receive tax deductible donations.
- As an anti-avoidance measure the law will ensure that if the donated property is subsequently repurchased by the deceased's estate, a beneficiary of the estate, or an associate of these, capital gains tax will be imposed on the donor.
A new category of 'private funds' to be included in the gift provisions. These new funds will not be required to seek donations from the public at large but will be still be required to meet all the other 'public fund' conditions to be approved (see Australian Tax Office Ruling TR 95/27 for rules on approval of Public Benevolent Institutions).
- Each of the new 'private funds' will need to seek Government's approval and be specifically listed by the name in the gift provisions of the income tax law.
Greater incentives for donations of property made under the Cultural Gifts Programme administered by the Department of Communications, Information Technology and the Arts, involving:
- A capital gains tax exemption for all the gifts accepted by the Programme, and,
- Allowing deductions for all gifts accepted by the Programme to be apportioned over a period of up to five years. The amount of the total value claimable in each year would be determined by the Committee on Taxation Incentives for the Arts after consultation with the donor, and once established could not be altered. (The Committee currently certifies the value of the donation for the purpose of tax deductibility.)

The table below summarises the major changes, compared with existing rules and some implications of the changes.

Impact of the changes
Individual Donors

These incentives will only have appeal to individuals and businesses that are inclined to give assets valued at over $5000 or more or those considering making a cultural gift which might otherwise have been subject to CGT.

It is important to recognise that any CGT will still be payable on gifted assets so the new incentive simply places gifts of assets over $5000 on the same footing as a 'sell first, then give' option. Donors will need to weigh up the merits of selling an asset or making a gift of a relevant asset and then going to the effort and cost of having it valued by the Australian Valuation Office.

Benefactors
The CGT relief on a property legacy will apply where ownership of property passes from the estate to a public fund. Hence, relief from the CGT will be afforded for bequests of property which pass from the Estate to the beneficiary fund. There is no need for an independent valuation in this instance.

It is common for bequests to be for a fixed cash sum, a percentage of the estate or the residual of an estate. This generally means that an estate is settled, CGT is paid and cash proceeds made to beneficiaries, including a public fund.

Benefactors should consider whether they should alter their will so that it specifies assets (subject to CGT) to a nominated value, as a % of the estate or as residual sum which form the bequest. Alternatively, the will may give the discretion to the executor to meet the bequest with the transfer of property in order to attract relief from CGT.

Public Funds
Existing funds and charities should expect to receive donations and bequests of valuable items of property more often. It would be advisable to work with major donors to assist them with the valuation process. It may also be beneficial to take responsibility for the receipt, valuation and sale of assets which have no useful purpose to the organisation but which can be sold to raise funds.

The Form of Bequest for each organisation should also be reviewed. A recommended Form of Bequest which encouraged benefactors to specify assets or gave executors the discretion to meet the bequest with a transfer of property would be far more tax effective for the Estate.

Will these incentives make a difference?
Analysis by Givewell shows that the recently released 1996-97 Taxation Statistics indicate a fall of 50,000 in individual taxpayers making claims for tax deductible gifts. The amount claimed, $541m represents only about 31% of total individual donations. Further, the new tax incentives, while welcome, are unlikely to be used by more than 2 percent of Australian taxpayers.

Analysis
The number of individual taxpayers making claims for donations fell from 3.2million in 1996 to 3.15million in 1997. This breaks a 5 year trend increase. The proportion of taxpayers making claims for gifts also fell from 32.5% in 1996 to 31.8% in 1997.

The amount claimed increased from $528million in 1996 to $541 million in 1997. However, total gifts by individual Australians were estimated in other surveys at $1.8billion, making the amount claimed only 31% of total donations. Givewell also estimates that 5.23million persons made gifts to charity without claiming a tax deduction.

Why only 2% of Australians will use the incentives
The new tax incentives for philanthropy which apply from 1/7/99 will generally benefit the following:

Those donating property valued at over $5,000, or for any amount to the Cultural Gifts Programme.
People who bequest property in their will.
Individuals and businesses wishing to establish a private charitable foundation.

Again, in 1997 less than 1% of Australians gave more than $5,000. Most bequests are for fixed amounts from the estate and the number of private charitable trusts in Australia is still relatively small.

Givewell recommends that the new $5,000 property gift threshold be reduced to around $1,000. This would be fairer to the large number of Australians who donate valuable items of property to charity and provide the right incentive for people to consider a charitable donation when disposing of their property.

Michael Walsh
Principal

New Tax Incentives for Philanthropy - effective from 1/7/99
New Incentive	Current Position	Comments
Tax deduction for gifts of assets valued over $5,000.	Not deductible except if owned for less than 12 months.	Capital gains tax still applies albeit now offset by tax deduction. Puts gifting of valuable assets on same footing as "sell first then give".
CGT relief in bequest of property.	CGT payable by the estate.	Still no tax deduction to the estate for the value of the bequest. Incentive to bequest property rather than a fixed sum or share of corpus.
CGT Relief for Cultural Gifts Programme donations.	CGT payable.	Establishes a genuine tax incentive to donate cultural gifts, regardless of value, period of ownership or whether otherwise subject to CGT.