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Tax Tip 97: What is a gift from a taxation point of view?

Discussion in 'Accounting & Tax' started by Terry_w, 21st Jan, 2016.

  1. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    What is a gift from a taxation point of view?

    It is important to distinguish a gift from income. This is because there are no taxes on gifts, but there are on income.

    Rather than attempting to define a 'gift', the courts have described a gift as having the following characteristics and features:

    · there is a transfer of the beneficial interest in property,

    · the transfer is made voluntarily,

    · the transfer arises by way of benefaction, and

    · no material benefit or advantage is received by the giver by way of return.


    Paragraph 13 of TR 2005/13 https://www.ato.gov.au/law/view/document?Docid=TXR/TR200513/NAT/ATO/00001


    See Private Binding Ruling Authorisation Number: 1011370948576 for an example of a lump sum gift as well as ongoing periodical gift of money which were both treated as non-assessable gifts

    RBA Content | Australian Taxation Office


    Note that tax definition may differ from the legal definition of a gift in instances such as bankruptcy.
     
  2. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Take care with the ruling. It refers to "tax deductible" gifts which are tied to DGR and ABN etc. There are non-deductible and apparent non-income forms of gift which can be made for love and affection etc.

    Many taxpayers have attempted to tell ATO that something was a gift...For the ATO opinion to be that it is income. ie : Mum gifts money to her childs company to assist with a financial difficulty. Mum says its not a loan as she doesnt require repayment. The onus on the taxpayers to object and appeal. The issue is a legal issue as common law definitions of income may need to be considered. The ATO therefore offer limited guidance that :

    Other amounts that are not taxable

    • Generally, you do not have to declare:

      • rewards or small gifts such as cash birthday presents (however, gifts may be taxable if they are large amounts or you receive them as part of a business-like activity or in relation to your income-earning activities as an employee or contractor).
     
  3. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    That TR was concerned with DGRs but the part quotes referred to gifts in general. The PBR quoted is also worth a read as it concerns one of gifts and periodic gifts received from parents - both non-assessable in this case (this PBR cannot be relied upon, but it is a good way to see the ATOs reasoning for this particular case, at one point in time).
     
  4. Rob G

    Rob G Well-Known Member

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    There is nothing in The Act which defines a 'gift'.

    Therefore it will take its ordinary meaning. This includes circumstances of determining ordinary income or general deductions for income tax.

    Better to start with something a bit more persuasive than tax rulings.

    e.g. FC of T v McPhail (1968) 117 CLR 111

    This case considers a situation in which the donor receives a benefit and so requires a careful consideration of the surrounding circumstances.
     
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  5. James Hill

    James Hill Active Member

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    How about the common situation of parents just helping out their kids with say $20,000 to help with a home deposit. (with no money making intentions or results for them)?
     
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  6. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Rob - Good point - The vibe of common law eh :) . I take the view that if a clients gets to that discussion point they need a tax law adviser. I find it comes up in some family trusts where its treated like a treasury with poor records. ATO query quantum of deposits that exceed income and call it all income. Then its a slow process of trying to recall and show how / why mum banked proceeds for her home into a family trust and so on. That came up a bit in Wickenby cases.
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Thanks Rob, will look into the case law.
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    This would depend on the circumstances.

    The case Rob mentioned involved a gift that had conditions attached.

    BarNet Jade - Find recent Australian legal decisions, judgments, case summaries for legal professionals (Judgments And Decisions Enhanced)
     
  9. Rob G

    Rob G Well-Known Member

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    Gifts of natural love & affection are not ordinary income.

    Commonly occurs in family and domestic dealings unless there is something in the circumstances that indicates otherwise.

    However, gifts of assets can trigger CGT for the parents.

    Absolute gifts might end up lost to the son/daughter in law with a relationship split.

    Centrelink deeming rules for deprivation of assets might compromise any age pension entitlement for the parents.

    You just cannot give your assets away without heaps of legal and taxation advice.

    I am sure Terry can provide numerous examples of why advice and planning could prevent any unintended consequences.
     
  10. property world

    property world Well-Known Member

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    What if my parents gifted me 20k to help invest in property for myself to reduce potentially LMI? and amount of interest as loan is now less?

    Then what happens when i repay it as returning the gift or simply a different case of a gift back?

    Cqn i claim that repayment as tax deductible? Doubt it but just asking
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    No, gifts are not tax deductible unless the receiver if a DGR. Interest on loans where the borrowed money is gifted are also not tax deductible.
     
  12. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    The above is a interesting position and quite common....Note that the "loan" and gifted are used together. The ATO issue can be that an undocumented / at call loan is called a gift (denied interest etc). And gifted money lacking supporting records etc may be called income and a loan that is forgiven may give rise to a CGT issue.
     
  13. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    If it was gifted then why would it be repaid ? You may have an undocumented loan for which interest deductions would be at risk. A critical element to a loan agreement would include a written agreement between the parties - a contract, a term, an agreed rate or basis for interest and most importantly a progressive accounting by the lender for the sum due and repayments etc. (Banks call it a loan statement). A lawyer can provide a precedent agreement and advise.

    Making an agreement well after the event may be a sham and failure to maintain the terms may support that. However a failure to properly document an agreement that is later confirmed by the parties using a legally drafted agreement may not be a concern either. If all these issues are satisfied then there may be a deduction available. Of course the interest income is then assessable to the parents (Tax and Centrelink ?) and you would be required to report the interest you paid annually and consider withholding tax.
     
  14. property world

    property world Well-Known Member

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    It was a gift for the time that was intended to be repaid also at the time.

    I didnt gain much interest from it as when it was given to me it was passed onto the loan.
     
  15. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It can't be both a loan and a gift at the same time.
     
  16. Rob G

    Rob G Well-Known Member

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    If always mutually intended to be repaid then it seems like an interest-free loan.

    Even if it was a commercial loan, you can't deduct the loan principal repayment.

    You are just giving back what was never yours!
     
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  17. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Technically I cant lend to my wife because
    1. She wont want to repay it
    2. She definitely wont pay interest
    3. She just took it anyway (Those shoes were on special)
    4. I don't agree, so we cant have a loan agreement
    5. Its not a gift (See 3 above)

    The other problem we have in our house is measuring cost. I use an example : She buys shoes and pays $100. But they were $300. She thinks she paid $100 and saved $200 so the shoes paid for themselves...Made money ! I believe we will go broke making money.

    My wife teaches kids maths.
     
  18. EN710

    EN710 Well-Known Member

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    LOL

    No, what she's doing is affording a $300 lifestyle for $100. Let her take care of items in your house and you'll be enjoying the lifestyle of 3x your income without the cost
     
  19. thegreat

    thegreat Well-Known Member

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    Can I just confirm" if a gift is given to a young adult child on a regular basis without expectation to have it paid back nor would it attract interest charge, then there is no tax implication to the gift giver, rite?"
     
  20. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    usually. See the PBR I listed in the top post.