New tax measures to encourage philantropy

On March 26, the Prime Minister announced a package of new tax incen-tives for gifting. These incentives will appeal to philanthropically inclined financial planning clients considering large donations or bequests to charities, libraries, universities, museums or other ap-proved bodies.

On March 26, the Prime Minister announced a package of new tax incen-tives for gifting. These incentives will appeal to philanthropically inclined financial planning clients considering large donations or bequests to charities, libraries, universities, museums or other ap-proved bodies.

The initiative highlights three reasons why financial planners should include advice on giving in their tax and estate planning services. First, it adds more complexity to the laws of gifting. Second, it en-courages gifts and legacies as major financial transactions which will increasingly impact on funds under advice. And finally, it's a good thing to do.

The changes

The new arrangements will apply to donations made and distributions from an estate transferred from July 1. The income tax law will be amended to provide an income tax deduction for non-testamentary dona-tions of property with a market value of more than $5000, regardless of when the property was purchased or acquired by the donor.

It is also envisaged that a bona fide collection or parcel of market-able securities which is valued over the threshold will also qualify for a deduction.

Valuations will be determined by the Australian Valuation Office with a cost to be borne by the donor or recipient body.

The law remains unchanged for property with a market value of $5000 or less. That is, the donor must have purchased the property within the 12 months preceding 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 Commu-nication, Information Technology and the Arts.

The special rules that apply to the cultural Gifts and Cultural Be-quests Programmes are not changed by this measure.

There is also a capital gains tax (CGT) 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 re-purchased by the deceased's estate, a beneficiary of the estate, or an associate of these, capital gains tax will be imposed on the do-nor.

A new category, private funds, is to be included in the gift provi-sions. 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.

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.

There will also be 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,

* Allowing deductions for all gifts accepted by the Programme to be apportioned over a period of up to five years. The amount of the to-tal value claimable in each year would be determined by the Committee on Taxation Incentives for the Arts after consultation with the do-nor, and once established could not be altered. (The Committee cur-rently certifies the value of the donation for the purpose of tax de-ductibility.)

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 indi-viduals and businesses that are inclined to give assets valued at over $5000 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 (aside from a cultural gift) so the new incentive sim-ply 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 Valua-tion 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 are made to benefi-ciaries, 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 percentage 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. Many of the recommended Form of Bequest currently provided by charities encourage cash payments, after payment of du-ties and taxes. This type of wording could well preclude the estate from enjoying CGT relief on the sale of assets to pay the bequest. This difference in CGT treatment within an estate will become an at-tractive estate planning opportunity when a will includes a bequest to a public fund.

Public Funds - Existing funds and charities should expect to receive donations and bequests of valuable items of property more often. They should also work with major donors to assist them with the valuation process. It may also be beneficial to take responsibility for the re-ceipt, 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.

Private Charitable Trusts

While there are many reasons why a charitable trust could be denied tax deductibility status, only one has now been eliminated, and that is the need for public fundraising. This will have limited practical benefit for existing and prospective trusts. Existing trustees might consider changing the trust deed to gain approval.

However, the required changes may cut across their desire to retain control over the fund, to follow a non-approved charitable purpose or to operate outside Australia. The task of appointing suitably quali-fied pro bono directors can also be considerable.

Similar issues apply for prospective trusts. A benefactor whose phil-anthropic intentions are within the bounds of approved public funds can easily establish their own endowment fund within a community foundation, United Way or trustee company fund such as the Perpetual Foundation or ANZ Charitable Trusts.

Some of these funds offer benefactors a high degree of involvement in how distributions are applied and even choice in how the corpus is invested. This service comes at no initial fee and an annual fee which compares favourably to the cost of running a deductible private charitable trust.

Michael Walsh is the principal of Givewell.