Tax Deductible Donation

Tax Deductible Donation

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When can you claim a tax deduction for a donation you make? What makes a donation a tax deductible donation?

Tax Deductible Donation

The short answer is: You can claim a deduction, if you have a tax receipt from an entity with DGR status that says it is a tax deductible donation.

The long answer is more complicated and goes like this: A tax deductible donation is either a tax deductible gift or it is a contribution that falls under s8-1 or the minor benefit rule.

If a charity has given you a receipt that says tax deductible gift, you can stop here. You got your tax deductible donation.

But if the charity hasn’t given you a receipt yet and there is a question mark whether you will, then the following is for you.

Donation

A donation is any money or property you voluntarily give to a charity – be it a gift or a contribution. 

DONATION = GIFT + CONTRIBUTION

If you get nothing in return, your donation is a gift. If you get anything in return, your donation is a contribution.  

So every donation of money or property is either a gift or a contribution. Gift v contribution – that is the terminology the legislator uses in Div 30 ITAA97. The problem is that the ATO doesn’t. They talk about ‘gifts or donations’ in D9 of an Individual Tax return as well as on their website. Messy terminology. Don’t let that confuse you. The end result is the same.

Tax Deduction

Why does it matter whether your donation is a gift or a contribution? It matters for tax purposes. It matters if you want to claim a tax deduction since different rules apply depending on whether something is a gift or a contribution.

Gift

A gift is tax deductible if it meets the conditions listed in s30-15 ITAA97 and TR 2005/13. There are many fine nuances in these rulings, but roughly speaking, a gift is tax deductible if it meets six conditions. It must be

1 – a gift;
2 – of money or property;
3 – of sufficient value;
4 – made voluntarily;
5 – with a tax receipt;
6 – to a recipient with DGR status.

Contribution

A contribution is not deductible since you receive something in return. You are basically buying something, even if it is for a bad price. And so there is no tax deduction. But … there are two exceptions – the general deduction in s8-1 ITAA97 and the minor benefit rule. 

General Deduction s8-1

The general deduction in s8-1 (1) ITAA97 allows you to claim a tax deduction whenever you pay for something to gain assessable income. To get brand exposure or to buy donor data for example.

Minor Benefit

Whenever you get a benefit in return, you didn’t give a gift. But if this benefit is so minor in comparison to what you pay – if you pay way above market value – then you must have done this to support the charity.  

The dinner and auction was just the side show. It is a minor benefit in comparison to what this is about. This is the reasoning behind the minor benefit rule.  

Minor Benefit Rule s30-15

The minor benefit rule in s30-15 ITAA97 allows you to claim a tax deduction for a contribution if your contribution passes two tests.

The contribution needs to be LIKE a tax-deductible gift …apart from the fact that it isn’t since you received something in return. So it must meet all the conditions a gift has to meet apart from being a gift. That is the first test.

The second test is that the benefit must be minor. To pass there are five conditions about you, the charity and the event.

# 1    Individual

You must be an individual. Only individuals can claim a tax deduction under the minor benefit rule, but companies, trusts and partnerships can’t. 

# 2   Fundraising Event or Charity Auction

The minor benefit rule only applies to fundraising events and charity auctions. So it doesn’t apply – for example – to the cost of merchandise you buy through a charity website.

# 3    Tickets

If you claim the price of a ticket, you can only claim up to two tickets. 

# 4   Less Than 15 Similar Events

The charity running the event must run less than 15 events of this type per year.

# 5   Minor Benefit

This is the big hurdle. 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. These are the two deciding factors – market value and what you pay.

Market Value

The market value of the benefit must be $150 or less. If it is worth more than $150, no minor benefit. So if the ticket or auction item is worth more than $150, it doesn’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 – the market value of your ticket to the event. And the market value of the auction item you successfully bid for.

What you Pay

You must pay at least 5 times more than its market value.

And this is just as important. It means that if the meal is worth $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.

The argument is that if you pay 5 times more for what it is worth, you clearly pay the money for other reasons than the benefit you get back. Your intentions are clearly altruistic.

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Here is more about the minor benefit rule. If you get stuck, please call or email us. There might be a simple answer to your question.

 

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Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation.

Who Gets My Super

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Who gets my super when I die? Did you ever ask yourself that question? 

Who Gets My Super

Our lawmakers want your super to be gone when you go. That’s why they gave you – in their eternal wisdom – minimum pension payments to contend with. That is why it gets harder and then impossible to make personal contributions past 74. And why there are caps on contributions full stop.

But let’s assume that despite all their efforts, at the end you still have some super left. Who gets it?

Your Choice

The simple answer is that you can leave your super to whoever you like. It is your super. You can make a binding death benefit nomination or leave it to the trustee’s discretion. Your choice.

But there are strict rules around how your super is actually paid out and how much tax it cops on the way out.

SIS Dependant

SIS dependant is a strange word. But it is an important one. You will shortly see why. Your SIS dependants are:

1 – Your spouse (married or de-facto but not your ex)
2 – All your children regardless of age
3 – Anybody living in an interdependency relationship with you
4 – Anybody financially dependant on you who is not your child

For an interdependency relationship think of your elderly mother who lives with you. You live together, have a close personal relationship and one of you provides financial and domestic support as well personal care to the other. 

Financially dependant means just that – somebody depends on you financially. Think of your orphaned nephew who you put through college.

Directly or Via Estate

Upon your death, your super can leave your fund in two ways.

Your super can go 1 – directly from your fund to your SIS dependants, or 2 – into your estate and then your legal personal representative (LPR) will distribute it – in accordance with your will if you left one. 

So anybody can receive your super through your estate but only your SIS dependants can receive it directly from your fund.

Lump Sum or Pension

Your super is usually paid out as a lump sum – either in cash or in specie. In specie means that the asset is transferred.

Lump sum is the default mode. It means your super leaves the low-tax super environment straight away and in one hit – the legislator’s preferred option.

But there is another way and that is a death benefit pension. With a death benefit pension your super stays within super and is only slowly paid out via pension payments.

The legislator doesn’t like this one for obvious reasons. And so they limited the circle of possible recipients to your spouse, your children under 18 as well as anybody living in an interdependency relationship with you or financially dependant on you who is not your child.

Your adult children, however, are out. They need to take their super as a lump sum.

But there two exceptions. A child between 18 and 24 and financially dependant on you can get a death benefit pension but needs to take the rest as a lump sum on their 25th birthday. And children with a disability can receive a death benefit pension regardless of age.

Now you know who can get your super and how. The next step is to look at how much tax your super cops on the way out. And for this you need to work out who your tax dependants are. 

Tax dependants

Your tax dependants receive all your super tax-free. Non-tax dependants receive your tax-free component tax-free, but pay tax on your taxable components (15% on any taxed element and 30% on any untaxed element).

So who are your tax dependants? There are 4 types.

1 – Your spouse (married, de-factor as well as former spouses)
2 – Your children under 18
3 – Anybody in an interdependency relationship with you 
4 – Anybody financially dependant on you

A child over 18 can still be your tax dependant if they live with you in an interdependency relationship or are financially dependant on you (just in case you ever want to look this up: ATO ID 2014/22).

In most cases your SIS dependants are also your tax dependants and vice versa –  but with two exceptions.

1 – Your financially independent adult children are your SIS dependants, but not your tax dependants. So they can get your super directly from your fund, but pay tax on it.  So leave your super to your spouse or dependant family members or cash it out before you go.

2 – A former spouse is your tax dependant but not your SIS dependant. So if your estate paid your super to your ex, then she or he wouldn’t pay tax on it.

For all your tax dependants you can stop here – no tax to pay.

But for your non-tax dependants here is how much tax they will pay. It all depends on how much of your super sits in your tax-free and taxable components.

Tax-free and Taxable Components

Your super consists of two components – tax-free and taxable.

In theory the taxable component consists of two elements – taxed and untaxed, but untaxed elements are rare, so most taxable components consists of just taxed elements. 

Untaxed elements usually only appear if there has been a pay-out from a life insurance policy held by the fund or the fund itself is untaxed, which only applies to certain government sector funds. 

Every recipient receives these components and elements in the same proportion as they exist in the relevant super account. So you can’t pick and choose who gets what component or element.

The good news is that your non-tax dependants pay zero tax on your tax-free component.

The bad news is that they pay tax on the taxable component. How much depends on whether your super is paid as a lump sum or as a death benefit pension.

Lump Sums

Non-tax dependants pay 15% tax on any taxed element and 30% on any untaxed element – both plus Medicare – if they receive your super as a lump sum. Age doesn’t affect the taxation of lump sums. But it does for death benefit pensions.

Death Benefit Pensions

Age only matters for the taxable components of death benefit pensions. Tax-free components are tax-free regardless of age.

If one of you is 60 or over at the time of your death, the taxable component of any pension payments is tax-free. 

However, if one of you is below 60 at the time of your death, then your beneficiary includes any taxable component in their assessable income with a 15% tax offset. But this stops the moment the beneficiary turns 60. From then on the beneficiary will receive the taxable component tax-free.

There is just one exception to all this – untaxed super funds. But these are rare and a dying specie within the government sector, so let’s not worry about those.

Death Benefit Nomination or Valid Will

So now it is time to put all this in place. You decide how you do this. You can

1 – Make a binding death benefit nomination that pays your super to your SIS-dependants and/or estate – renew every 3 years or make it non-lapsing;

2 – Make a non-binding death benefit nomination to your SIS dependants and/or estate but the trustee makes the final decision.

3 – Make no death benefit nomination and leave it up to the trustee to decide how much should go to your SIS dependants and/or estate;

And for any super within your estate:

4 – Make a will that stipulates who gets how much of your super; or

5 – Leave it up to your LPR (executor or administrator) to decide what happens to your super in your estate.

Review

Looking at all this, is this really what you want?

For example, are you sure you really want your super to go to your financially independant adult children, even when they have to pay 15% or 30% tax plus Medicare on any taxable component?

Or are you sure you really want to leave it up to others by not having a binding nomination and will?

If you aren’t, please give us a call. We will be able to help. It would be a pity to get this wrong and have your super go places or trigger tax that you didn’t want.

 

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Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

Liability limited by a scheme approved under Professional Standards Legislation