The minor benefit rule is the one exception that turns a non-deductible contribution into a tax-deductible gift.
Minor Benefit Rule
Is the ticket for a fundraising dinner a tax-deductible gift? Is a successful bid at a charity auction a tax-deductible gift? The short answer is ‘No’. The person paying gets something back in return for the money they spent. They buy something. So it is not a gift but a contribution. And donors can’t claim a tax deduction for a contribution. But …
There is one exception. If the donor only receives a minor benefit in return for what they paid, the contribution is tax-deductible after all – provided the charity has DGR status.
But let’s start from the beginning.
Donations = Gifts + Contributions
A donation is any money or property you voluntarily give to a charity.
If you get nothing in return, your donation is a gift. If you do, your donation is a contribution. So every donation of money or property is either a gift or a contribution.
Div 30 ITAA97 distinguishes between gifts and contributions. The ATO talks about ‘gifts or donations’ in D9 of individual tax returns and online, but that is just messy terminology. So don’t let that confuse you.
So if you pay to attend a fundraising event or bid at a charity auction – for example – you make a contribution since you get something in return.
Whether your donation is a gift or contribution is important. There are different rules for each to claim a tax deduction.
Tax Deduction
If you donate money or property and you receive nothing in return, you give a gift. And a gift to a charity with DGR status is tax-deductible per s30-15 ITAA97 and TR 2005/13 if it passes the six conditions listed in Gifts and Contributions.
If you donate money or property and you receive something in return, you make a contribution. And a contribution is not tax-deductible with two exceptions. The general deduction in s8-1 ITAA97 and the minor benefit rule in s30-15 ITAA97.
The general deduction in s8-1 (1) ITAA97 allows you to claim a tax deduction whenever you make a contribution to gain assessable income. To get brand exposure or to buy donor data for example.
s8-1 (1): You can deduct from your assessable income any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income; or (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
The minor benefit rule allows you to deduct the cost of a ticket to a fundraising event as well as a successful bid at a charity as long as you meet the six conditions to tax deduct a gift – we call this the first hurdle – and the five conditions of the minor benefit rule – let’s call this the second hurdle.
Minor Benefit Rule
You only worry about the minor benefit rule if you get something in return for your contribution. A gift is tax deductible anyway. You don’t need the minor benefit rule to bail you out. So the minor benefit rule is only relevant if you receive a benefit in return.
The minor benefit rule allows you to claim a tax deduction for a contribution if you pass the following 5 conditions – the second hurdle in addition to the first hurdle.
# 1 Individuals
Only individuals can claim a tax deduction under the minor benefit rule. Companies, trusts and partnerships might be eligible to claim a tax deduction for a gift, but they are barred from the minor benefit rule.
So if Bob Smith Pty Ltd pays for Bob to attend a charity dinner – no tax deduction in the company’s tax return. But if Bob pays himself, he can claim a tax deduction in his individual tax return – provided the minor benefit rule applies.
# 2 Only Fundraising Events and Charity Auctions
The minor benefit rule only applies to fundraising events and charity auctions. So if a charity sells merchandise via its website, the minor benefit rule doesn’t apply and hence no tax deduction.
# 3 Less Than 15 Similar Events
The charity must run less than 15 events of the same type per year.
# 4 Only Two Tickets
An individual attending a fundraising event may claim up to two contributions for the same fundraising event – for example, the purchase of a ticket for the individual and their spouse.
# 5 Minor Benefit
If you pay for what you get back, then you didn’t really donate anything. You bought something at market value. There is no donation.
So for the minor benefit rule to apply you must only receive a minor benefit in return for your contribution. This is the core of the minor benefit rule. The thinking is that if you pay way above market value, then you must have done this to support the charity. The dinner and auction is just the side show. It is a minor benefit in comparison to what this is really about.
Whether a benefit is a minor benefit depends on its market value and what you pay for it. The benefit you get must be worth $150 or less. And what you pay must be at least 5 times more than what you paid.
1) The value of the benefit must be $150 or less.
This is important. It means that whenever a venue charges the charity more than $150 per head, the ticket won’t qualify as a minor benefit. And it also means that whenever you buy something at an auction worth more than $150, the auction item won’t qualify as a minor benefit.
But remember this is not about what you actually pay for the ticket or item. It is about what it is worth. It is what the charity pays to the venue for your attendance – the market value of your ticket to the event. And the market value of the auction item you successfully bid for.
And 2) You must pay at least 5 times more than what it is worth.
And this is just as important. It means that if the venue charges $100 per head, then you must pay at least $500 for the ticket for it to qualify as a minor benefit. And if an auction item is worth $50, you must pay at least $250 for it.
You can also look at it from the other side as s30-15 ITAA97 does. The market value of the benefit you get back must not be more than 20% of your contribution.
The argument is that if a donor pays 5 times more for what it is worth, they clearly pay the money for other reasons than the benefit they get back. Their intentions are clearly altruistic.
Market Value
A benefit is worth its market value. The market value is what donors would have had to pay for the same good, service or event on the open market. And if there is nothing else like this, then a similar or comparable good, service or event (price or market comparison).
But what if it is impossible to make a reasonable price or market comparison? Then the market value is assessed based on cost. Take the actual cost plus notional costs plus a certain profit margin and you get the market value(cost-based approach).
It is the charity who assesses the market value, not the donor. Because it is the charity issuing the receipt. So they need to know what to list as a donation on the receipt.
Cost Subsidy
Any benefit is assessed based on its market value or cost, even if part or all of the benefit was actually subsidised.
Let’s say a donor picked up the tap at the charity Gala dinner. So the charity only had to pay $50 per meal, but not the additional $60 per head for free drinks. What is the market value of the benefit received? The answer is $110.
Or if a professional entertainer waives their fees, the minor benefit rule still uses the fees that the entertainer usually charges, even though the charity didn’t pay the fee.
Even if everything was donated – venue, meals, drinks and the MC – it would still be the market value of all this that would go into the calculation. The fact that the charity didn’t pay for some of the benefit doesn’t change the market value or notional cost of that benefit.
But all this only applies if attendees pay to attend the charity event.
Free Event
If attendees don’t pay to attend and are just asked for a donation, which they are free to make or not, then the entire payment is a donation and hence tax deductible as such. You don’t need to worry about the minor benefit rule.
Fundraising Auction
Individual donors can claim a deduction for the purchase of any goods or services at a fundraising auction. And this is in addition and independent of the ticket price.
Let’s say there is a charity auction at the end of the Gala dinner. And Bob Smith bids $1,000 for a golf bag worth $100 and $500 for wine worth $50.
In that case Bob can claim 3 deductions. He can claim $900 for the purchase of the bag, $450 for the purchase of the wine and $450 for the ticket if the event passes the minor benefit rule. If the ticket fails the minor benefit rule, then he can still claim the bag and the wine.
No Gift in Ticket Price
The charity can’t split the ticket into event and gift. It can’t say $150 of the ticket is for the Gala dinner and the other $350 are a gift. Para 149 in TR 2005/13 is very clear on that one,
Para 149: Where DGRs conduct fundraising events such as celebrity dinners, gala events, $1,000-a-plate dinners, and so on, the price of a ticket cannot be notionally split between the value of the material benefit received, that is, the meal, and the amount which represents a gift. Where attendees are to pay a given sum of money in order to attend a function, no part of that sum can be considered a gift. This is so even where the cost of attendance is well in excess of the value of the meal received.
But the charity can charge the meal at market value and then ask for a donation. Para 151 in TR 2005/13 even suggests that,
Para 151: However, a fundraiser can offer tickets to a function for an amount which approximates its market value, and solicit additional optional donations from potential attendees. The ticket cost will not be deductible as a gift. However, the additional optional donations will be tax deductible.
FBT
FBT also has a rule about minor benefits. Benefits that are less than $300 in notional taxable value count as minor benefits and hence are exempt from FBT. But this is a different rule and has nothing to do with the minor benefit rule for contributions to charities with DGR status.
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Tax Deduction for Gifts and Donations
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