tax deduction
Typically, when a donor donates funds to an entity that is endorsed as a tax-deductible gift recipient (DGR), the donor is entitled to receive in return a tax-deductible receipt for the amount of the donation. The donor can submit this receipt to the Australian Taxation Office (ATO) to reduce the donor’s personal taxable income for the given financial year, by the amount of the donation.
Broadly, the above applies, where a donation is made entirely as a gift, with no advantage or benefit flowing to the donor (other than the right to a tax-deductible receipt). In Leary v Federal Commissioner of Taxation (1980) 11 ATR 145 (“Leary”), the Federal Court of Australia stated that a donation or gift must be given in a spirit of “detached and disinterested generosity”.
Sometimes, donors donate or gift funds to DGRs and receive some form of public recognition as a result. This often takes the form of a plaque, sign or notice acknowledging a donor’s generosity, or buildings, campuses and projects named after donors or family members of donors.
Do these forms of public recognition constitute an advantage or benefit to the donor that would set aside that donor’s right to receive a tax-deductible receipt for their donation?
Again in Leary, the Federal Court noted (in obiter) that “a man may, by his gifts, gain fame or formal honours without losing his tax deductions”.
This position is further reinforced by the following example contained in the ATO Tax Ruling 2005/13:
“S, a wealthy businessman decides to make a gift of $5 million to the public hospital (a DGR) in his area for the purpose of building a new wing to treat people suffering from alcoholism. S stipulates that the new wing should be named the ‘Frederick S Wing’. In order to recognise S’s generosity, the hospital will name the new wing in his honour. It will also acknowledge the gift by placing a plaque acknowledging his generosity in the foyer of the new building. The naming is not a material benefit, and paragraph 78A(2)(c) of the ITAA 1936 will not apply. The obligation he imposed does not detract from a finding that the transfer was by way of benefaction on the hospital. On the other hand, recognition accorded to the giver for purposes of commercial advertising is a material benefit. Sponsorships of DGRs by commercial entities generally fall into this category. Such outgoings, however, may be income tax deductible as business expenses.”
It seems clear from this example that a private donor can generally receive public recognition without losing their right to a tax deduction. Otherwise a business donating for commercial advertising purposes may need to claim their tax deduction as a business expense rather than as a tax-deductible donation.
Notwithstanding, the case law and tax rulings do not seem to cover a scenario where a donation by a private (non-business) donor is made conditional on a certain form of public recognition to the extent that the donor will only gift the funds if they receive a specified type of public recognition in return (e.g. a name on a building or project). In this situation, we would encourage donors and/or recipients of funds to seek a private ruling from the ATO, to confirm that the donor is entitled to a tax deduction on the facts of the particular case.
For more advice on charity or not-for-profit law please contact a member of our Charities Team.