Donations and Loss Provisions

Discussion in 'Accounting & Tax' started by Paul@PAS, 11th Oct, 2019.

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  1. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    From time to time we encounter clients who make a donation in a tax period when they have a tax loss.

    The deduction is lost and unavailable. Tax loss rules impose a test on gifts (and personal super contributions) that dont permit a gift (or personal super contribution) to create or add to a tax loss.

    There is a alternative.

    You can defer the gift deduction for up to 5 years. The deferral can also be varied so that it can be bought back for example if in 2 years time there is taxable income. The election is a form you self manage and retain.

    Election to spread gift deduction

    The issue is more complex for super contributions however. If a taxpayer advises a fund that the contribution is a concessional one and that they will claim a deduction the fund will tax the contribution at 15%. However the taxpayer will be denied the loss on lodgement. The ATO will reclassify the contribution as a non-concessional contribution in its systems. The taxpayer will have over paid tax. And if they made non-concessional contributions up to their cap or using the three year bring forward rule they may be impacted and potentially breach caps.

    We are seeing more of this since tax laws allowed most taxpayers to claim personal super contributions as deductions. Some people should NOT try to claim a deduction:
    1. Taxpayers with a taxable income under 37K (since the tax rate benefit may be marginal at best and if their taxable income is under $21K it most certainly wont be a benefit).
    2. Taxpayers who have no income (since a super deduction will create a loss) and
    3. Taxpayers with a current or prior year loss (since loss rules will prevent a super deduction and a taxpayer cannot choose to not use losses)
     
    Last edited: 11th Oct, 2019
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  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    another alternative, which may be better, is to give to someone else who then gives. This way they will get the deduction.
     
  3. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Yes. Strangely often a spouse who doesnt work is listed on the receipt (or both !!) yet the higher income earner should be the sole donator. See that a lot with church donations. Its OK God allows tax effective planning. Make sure all donations are in the high income earner name.

    What is listed on the receipt is how the deduction should be claimed.
     
  4. Marg4000

    Marg4000 Well-Known Member

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    Since we are in the no-tax super environment, any donations we make are in the name of one of our children (they take it in turns!) so they can claim the deduction.
     
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  5. kierank

    kierank Well-Known Member

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    We have tax losses in our personal names, so any donation is lost as a deduction.

    Can a trust with a surplus make the donation on our behalf (and claim it as a deductible expense)?
     
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  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Trusts can make gifts - but whether they should is a different matter!
     
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  7. kierank

    kierank Well-Known Member

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    As Pauline once said, “Please explain”

    ... or point me to a website that does (for my education).
     
  8. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Discretionary Trusts are very flexible, with the trustee able to determine who will get income. So it is generally beneficial to reduce income of persons and increase the income of a trust
     
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  9. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    If the deed permits the trustee to make gifts then the trust may claim a gift deduction provided the receipt is made to the trustee and NOT a beneficiary. Many trust deeds DONT explicitly permit gifts since the trustee has elected to give away trust assets and not hold them for beneficiaries. A beneficiary of a DT could elect to have the trustee pay the gift from the entitlement so that the individual claims the deduction. A trustee paying a gift could trigger some legal complications.

    A deceased estate cant normally make deductible gifts and some TTs experience this same problem.

    The gift deduction is a specific provision of tax law. The general principles wont apply since a gift wont be incurred in producing assessable income. The nature of each gift must be considered:

    What you can't claim

    You can't claim gifts or donations that provide you with a personal benefit, such as:

    • raffle or art union tickets – for example, an RSL Art Union prize home
    • items such as chocolates, mugs, keyrings, hats or toys that have an advertised price
    • the cost of attending fundraising dinners, even if the cost exceeds the value of the dinner. You may be eligible to claim a deduction as a contribution if the cost of the event was more than the minor benefit supplied as part of the event.
    • membership fees
    • payments to school building funds made in return for a benefit or advantage – for example, as an alternative to an increase in school fees or placement on a waiting list
    • payments where you have an understanding with the recipient that the payments will be used to provide a benefit to you eg aged care
    • gifts to family and friends, regardless of the reason
    • donations made under a salary sacrifice arrangement
    • donations made under a will.
    eg Aunt Marge's will indicates $10,000 is to be gifted to the Salvation Army on her death. This is a beneficiary entitlement and not a outgoing incurred. The executor may otherwise not be empowered to give away estate money to reduce the estate and affect beneficiaries. This wont stop a tax deduction but may be a legal issue.

     
    Last edited: 10th Feb, 2020
  10. kierank

    kierank Well-Known Member

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    @Terry_w and @Paul@PFI, we are yet to make a donation to the bushfire appeal and it makes sense to do it in the most tax effective way.

    Thanks for your replies. I will run our transaction past our accountants to ensure it is all above board.
     
  11. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The higher income earner - If you pay tax or have profits subject to entity taxes. Otherwise it doesnt matter.
     
  12. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Donations can also be salary sacrificed. This means that the employee earnings drop and the company deductions rise when it claims a deduction. Its the identical tax outcome for the employee to making the gift themself and claiming in their tax. Can be helpful for some issues eg Div 293 etc but for the sums involved its minor in 99.999% of cases. A SS donation is not a reportable fringe benefit amount.

    Many employers offer gifting by SalSac. Its a pre-tax reduction to salary.