This tip can be controversial and was meant to feature a little later in the series. However, since I’ve had multiple questions about donations and tax deductions in recent weeks I’ve decided to bring it forward and make it Tip #1! As a topic for tax planning donations can be a little controversial. Why? Because people ‘give’ for so many reasons, most of which have nothing at all to do with tax. Even if the donations were not deductible they would still give and that’s great. However, i’m a tax accountant and this is a tax planning article so I have to address the issue from the perspective of tax management.
As my existing clients would know I’m not a fan of making donations as a tax planning measure. Nevertheless, lets run through the basics and I’ll explain my issue with it as we go along.
What can you claim
To encourage individuals and businesses to support charity organisations the ATO permits a tax deduction for donations so long as the donation meets certain criteria:
- The donation must be made to a deductible gift recipient. We call entities that are entitled to receive tax deductible donations ‘deductible gift recipients’ (DGRs);
- The donation must truly be a gift. A gift is the voluntary transfer of money or property where you receive no material benefit or advantage;
- The donation must be money or property, which includes financial assets such as shares; and
- The donation must comply with any relevant gift conditions. For some DGRs, the income tax law adds extra conditions affecting the types of deductible donations they can receive.
How much to claim
The amount you can claim depends on the type of donation made. For donations of money, it is the amount of the donation but it must be $2 or more. For donations of property, there are different rules, depending on the type of property and its value.
Typically the deduction for a donation is claimed in your tax return for the year in which the donation is made. However, you can elect to spread the tax deduction over five income years in certain circumstances. Why would you choose to spread the deduction rather than claiming it all this year? Because the overall tax outcome might be better, especially if you tax income varies significantly from year-to-year.
Proof that the donation was made
If you make a donation of $2 or more to a DGR they should provide you with a receipt for tax purposes. Many will ask you if you require this at the time you make the donation. For regular/recurring donations, which are usually direct debited from your bank account, you can use either your bank statement or the annual statement provided by the charity.
Bushfire and flood donations
One notable exemption to the evidence rule is bushfire and flood donations. If you made one or more donations of $2 or more to bucket collections conducted by an approved organisation for bushfire and flood victims, you can claim a tax deduction equal to your contribution without a receipt provided the contribution does not exceed $10.
What you can’t claim
You cannot claim a deduction where you received some sort of personal benefit in exchange for the payment. Examples of personal benefits you may receive are:
• raffle or art union tickets, for example Yourtown and Endeavour Foundation;
• items such as chocolates and pens;
• dinner – even if the payment exceeds the value of the dinner;
• payments to school building funds made, for example, as an alternative to an increase in school fees;
• Any other payments where you have an understanding with the recipient that the payments will be used to provide a benefit for you.
Why don’t I like donations as a tax planning tool?
Before you say it…No! it’s not because I’m stingy accountant who watches every dollar!
For me it’s all about your ‘why’ when donating. If you genuinely believe in the charity you are supporting and want to help, then by all means make a donation and claim the deduction. Panic Atax gives a portion of annual revenue to Beyond Blue because I genuinely believe one of the biggest issues facing long term entrepreneurs is mental health. I can only do so much to help them directly. I’m just one guy and my skills are restricted to financial management. Organisations like Beyond Blue do what I can’t!
However, if your only motivation for making the donation is to reduce your tax bill then this is a poor use of money. Assuming you pay tax at an average rate of 20% making a donation of $100 reduces your tax bill by $20. So, you just spent $100 to save $20. Don’t do it! Pay the $20 in tax and keep the extra $80 in your pocket.
How to make your church tithing deductible
Based on the rules we discussed earlier money given to your church does not qualify for a deduction as a donation. Why? Because your church is likely not a Deductible Gift Receipient which means they cannot receive tax deductible donations.
However, your church is likely to be exempt from income tax which potentially allows your accountant to make your tithing deductible through effective business structuring and tax efficient distribution of profits.
I won’t over complicate this article but drilling down into the specifics of how we achieve that outcome but flag this as a topic to discuss with your accountant as part of tax planning!