When you donate gifts and contributions to charities with DGR status, you might get some of your donation back through a lower tax bill.
Gifts and Contributions
The big question is what gifts and contributions you may tax deduct and which you can’t.
Gifts and Contributions
Division 30 of ITAA 97 is titled ‘Deductions for Gifts and Contributions’ and talks about just that – gifts and contributions.
If you get nothing in return, it is a gift. You give money or property and receive nothing in return.
If you do get something in return, it is a contribution. You give money or property and receive something in return – a benefit – for example a raffle ticket, a ticket to a fundraising event or an item from a charity auction. Whatever it is, any benefit in return makes your donation a contribution.
Donations
When you go onto the ATO website or look at D9 in individual tax returns it is all about gifts and donations. Not contributions but donations. How does ‘donation’ fit into ‘gifts and contributions’?
You make a donation whenever you make a gift or contribution. Every donation is either a gift or contribution.
Donations = Gifts + Contributions
So every gift is a donation. But not every donation is a gift.
The word ‘donation’ isn’t actually a tax term as such. It doesn’t come up in Division 30. The ATO talking of ‘gifts and donations’ is just messy terminology. Don’t let that confuse you. Just think of gifts and contributions.
Tax Deduction
You can always tax deduct an expense under s8-1 ITAA97 if you incur the expense to gain assessable income. Under s8-1 it doesn’t matter whether something is a gift or contribution.
But when you try to claim a tax deduction under Div 30 ITAA97, then it matters a great deal whether something is a gift or contribution.
If you give a gift, you can tax-deduct the cost of this gift – provided you meet six conditions. Let’s call this the first hurdle.
If you make a contribution, you need to pass this first hurdle but in addition there is a second hurdle. The contribution needs to pass the minor benefit rule. The minor benefit rule only applies to contributions, not to gifts. If the contribution doesn’t pass the minor benefit rule, then there is no tax deduction.
So let’s look at the first hurdle – the six conditions to tax deduct a gift or contribution.
First Hurdle
You can claim a tax deduction for a gift or contribution per Div 30 ITAA 97 if the following applies.
1) Your gift is at least $2.
2) You make the gift or contribution to a deductible gift recipient (DGR).
3a) You voluntarily give a gift and receive nothing in return. Or:
3b) You voluntarily make a contribution and pass the minor benefit rule.
4) The gift or contribution is money or property, so not time or services.
5) Your donation complies with any specific conditions for that DGR.
6) You have a receipt for your donation.
If you meet these six conditions, you can claim a tax deduction for a gift, but not yet for a contribution. For a contribution there is a second hurdle.
Second Hurdle
The second hurdle only applies to contributions. It is the minor benefit rule. It is the contribution you pay and the benefit you get back in return. That benefit must be relatively minor. It must be minor in value but also minor in comparison to the price you pay.
A benefit is a minor benefit if its value is $150 or less. Value is the market value of the benefit. What do people usually pay for this benefit?
But this is not enough yet. In addition the donor must pay at least 5 times what it is worth. So take the value times 5. If the value is $20, the donor must pay at least $100. In other words, the benefit must be worth 20% or less than what you actually pay.
So your contribution must pass the first hurdle but also meet both conditions of the minor benefit test. If you manage that, you can claim a tax deduction for a contribution.
The minor benefit rule only applies to individuals. Other entities can’t tax deduct a contribution unless it falls under s8-1.
Valuation
A gift or contribution may consist of money and it may consist of property.
Money is straight forward. The gift or contribution is whatever money you paid. If it is in foreign currency, you translate it into Australian dollars. That’s all.
Property, on the other hand, is a completely different story. How do you value property – be it trading stock, financial assets like shares, real estate, jewelry or something else? What amount do you claim as a tax deduction?
Subdivision 30A gives you the answer. If you donate trading stock or ASX listed shares, you use the market value on the day of making the gift.
For any other property the deduction you can claim depends on how long you owned the property before making the donation. If you acquired the property within twelve months of making the gift or if the property is worth less than $5,000, you claim a deduction for the cost or market value on the day of making the gift, whichever is lower. If you acquired the property more than 12 months before making the gift and the Commissioner values it at more than $5,000, you use the Commissioner’s valuation. And it is up to you to obtain the necessary valuation.
Donation in Kind and In-Kind support
Donations in kind and in-kind support are not clearly defined terms. But they are sometimes used to describe scenarios where the donor donates their time and expertise or picks up the bill so the charity doesn’t incur the expense.
When assessing these scenarios, it is good to remember that you can only claim a tax deduction for gifts of money and property. Nothing else. So when assessing whether some form of giving is tax deductible or not, you always bring it back to these two things: money and property. If the gift is money or property, it might be possible to claim a deduction. If it is not, then no.
Donating your time and expertise is not a gift of money or property and so there is no tax deduction.
Paying an expense on behalf of the charity is a gift of money. Donors might pay the venue hire for the charity’s fundraising event. So ultimately donate money that the charity uses to cover an expense.
Receipt
You need a receipt to claim a tax deduction but there is one small $10 exception. If you donated $10 or less to a bucket collection by an approved organisation for bushfire and flood victims, you don’t need a receipt to claim a deduction.
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