Tax on giving

Author: Jane Haley
Date published: 23 November, 2006

Jane Haley uncovers the devilish detail of Australian tax rules as they apply to gifts and donor programs.

What are the practical implications of the ATO’s draft ruling TR 2004/D19 and how should this ruling be applied ‘at the coalface’ of donor programs?

TR 2004/D19 requires that cultural organisations become more prudent about their donor programs. They need to be sure they know what is appropriate and to make sure that they adhere to guidelines (ie the law!).

A fundamental issue for cultural organisations is to make a clear distinction between membership programs (which can provide benefits) and donor programs (for which donors cannot receive benefits if they also get a tax deduction).

TR 2004/D19 was prompted, in part, because not-for-profit organisations were offering benefits in addition to tax deductions – a definite no-no in the eyes of the ATO. The Ruling
(TR 2005/13 - Income tax: tax deductible gifts - what is a gift ) explains the characteristics and features of tax deductible gifts:

• There is a transfer of money or property
• They are made voluntarily
• They do not provide a material benefit or advantage to the donor; and
• They essentially arise from benefaction and proceed from detached and disinterested generosity.

The criteria may not be absolute and may involve a matter of degree – for example if the giver has a personal motive for making the gift, such as a strong interest or emotional involvement in the work of the cultural organisation, the gift could still be tax deductible. It’s a question of fact in each case whether any benefit or advantage is considered material - for example, if there is a link between the benefit and the gift and the benefit is sufficiently significant in relation to the value of the gift, the benefit could be material.

There are some circumstances which may lead to a conclusion that a benefit or advantage is material;

• The benefit is sought by the giver
• The benefit is offered as an inducement to potential givers
• There is public recognition for purposes of commercial advertising;
• Membership rights and privileges are obtained as a result of the gift.

Probably the easiest way for cultural organisations to check whether their programs and practices conform to the ATO guidelines is to answer the following questions;

• Are you offering inducements or are your donors obliging you to provide benefits (eg free tickets, programs/catalogues, refreshments)?
• Are there opportunities and/or services that are exclusively available to donors (eg membership of patrons’ clubs or donors’ circles)?

What organisations are eligible for a DGR certificate?

Cultural organisations can be listed on the Register of Cultural Organisations (ROCO) and offer tax deductions for donations, if their main purpose is the promotion, preservation or study of movable cultural heritage or the promotion of one or more of the following arts-related activities: literature, community arts, performing arts, Aboriginal arts, music, crafts, visual arts, television, design, video, radio, film.

Organisations must be not-for-profit and must maintain a public fund into which the public can (and do) make donations. The public must also have a role in the administration of the fund (this can be through Board or management committee members). Donations must be paid into separate account and must be accounted for separately. Organisations on the ROCO must report to DCITA every six months on gifts to their public fund.

What constitutes an ‘advantage’ under the ATO ruling?

The ruling states that the patron has not made a tax deductible gift as they receive a material advantage for their gift. Quoting from one arts marketing manager, “It gets a bit confusing when, for example, the Artistic Director might invite a donor to an opening night with free tickets and a reception (material benefits) - who would be invited even if they weren’t a donor due to their personal relationship to the Director. Does this in put their donation at risk?”

The ATO has identified the types of benefits which could be or (importantly) which could accumulate to become of material value, including;

• Complimentary refreshments
• Free or discounted tickets to performances, opening nights, galas, exhibitions
• Free meals, drinks, supper
• Free programs, catalogues
• Free (or discount) expert advice in relation to private art collections
• Use of facilities such as dining rooms at members’ (discount) rates
• Discounts on purchases, for example at museum or gallery shops or café/restaurants.

The key issue may be whether the benefits have been offered by the organisation or sought by the donor and whether there is a clear link between the gift and the benefits. The ATO offers the following example to illustrate this point:

“D gives an unsolicited $500 to a performing arts organisation (a DGR), not as part of any patrons' program, and without expectation of any benefits being offered in return. Subsequently, in acknowledgement of D's generosity, he is invited to a dress rehearsal, a function to meet cast and artistic staff, and to interval refreshments for the season's performances. The $500 is a gift. While the benefits offered resulted from the benefaction conferred on the DGR, they were not anticipated by D when the transfer was made. Because there is no link in the relevant sense between the benefit and the transfer, the benefits are not considered material in relation to the transfer.”

The one exception to the rule about not offering benefits in return for tax-deductible donation is the 'minor benefit' associated with certain one-off fundraising events. Individuals may be entitled to claim a tax deduction for contributions to a fundraising event organised by a Deductible Gift Recipient (DGR) where the value of the contribution is more than $150 and the benefit received has a market value of not more than $150 or 20 per cent of the contribution, whichever is less.

Examples:

• A person pays $1,000 to attend a fundraising dinner. If the market value of the benefit (meal, drinks, entertainment etc) is less than $150, the person can claim a tax deduction of up to $850 (the difference between the ticket price and the benefit). If the market value of the benefits is greater than $150, the person cannot claim a tax deduction for any part of the contribution.
• A person pays $150 to attend a fundraising function. If the market value of the benefit (refreshments, entertainment, etc) is not more that $30, that person can claim a tax deduction of $120 (the difference between the ticket price and the benefit).

Note that the value of the benefit/s must be calculated at market value even if any or all of the benefit/s (drinks, food, entertainment, etc) is donated.

What are the characteristics of a tax deductible gift? What benefits are suitable and will not affect the tax deductibility of a donation?

Quoting again from an arts marketing manager, “Some benefits are acceptable – such as public recognition, attending dress rehearsals, invitations to events that the donor pays for, personalised booking services, where others such as complimentary refreshments, discounted tickets, meals, suppers, free programs, gift shop discounts etc are not.”
The ATO does not consider the following benefits to be material;

• Mere public recognition of the donor’s generosity (providing it doesn’t amount to advertising)
• Use of a private lounge, for example at interval
• Meeting the cast, management
• Attending dress rehearsals
• Free newsletters
• Invitations to special functions the cost of which is borne by the invitee
• Personalised ticket booking service, priority/preferential seat allocations.

Is it legal for patron’s ‘clubs’ or ‘circles’ to charge a membership fee equivalent to the cost of the benefits?

It is acceptable for patrons’ ‘clubs’ or ‘circles’ to charge membership fees to cover costs of benefits – but membership of these clubs cannot be exclusively for donors as the ATO regards this, of itself, as a benefit.

Many cultural organisations have found that the most practical ways to ensure their programs are consistent with the ATO guidelines are by;

• making a clear distinction between the membership and patrons program, and
• offering a choice between benefits or a tax deduction for a donation.

Unwitting breaches of the ATO rules: To what extent is it appropriate to offer discounts on purchases, complimentary or discounted tickets, access to preferential ticketing services, invitations to events, use of a private lounge, etc? At what point do donor benefits such as these put at risk the tax deductibility of the donation?

Discounts on tickets and purchases, complimentary tickets, programs, catalogues, meals and refreshments could put the donor’s tax deduction at risk. The ATO has identified as acceptable the use of a private lounge, preferential booking and seating services and invitations to events (as long as the attendee pays the cost of attendance).

Cultural organisations need to exercise sense and discretion in relation to the strategies and activities they employ to build relations with donors and potential donors. Personal visits and functions which provide opportunities to engage with artists, Board members and other prominent supporters, strengthen relationships, encourage longterm giving and increased support and, ultimately, cultivate the organisation’s greatest asset, its supporters.

Cultural organisations which have a substantial private support base emphasise the importance of capturing supporters’ interest on a personal level. Face-to-face communications (‘behind the scenes’, ‘meet the cast’, etc) keep supporters and prospective supporters connected to the organisation and its work.

Fundraising experts reiterate the importance of approaches which infiltrate donors’ “hearts and homes”. All cultural organisations face increased pressure to retain and upgrade current customers and increase private sector revenue. Special events which allow their supporters a more personal and direct link to the organisation are becoming even more important in building relations and securing donations.

Care needs to be exercised in relationship building programs and activities that breaches of ATO guidelines are not committed. If in doubt, organisations are most welcome to contact the Australian Business Arts Foundation (AbaF) (haleyj@abaf.org.au) for information and advice.