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| Gifts and GST: never book a gift course in the south |
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Contact: Peter Hill
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The purpose of this article is to explore some practical situations involving the making of gifts and examine their GST treatment, both in terms of a supplying donor registered for GST and a recipient donee also registered for GST.
The GST law on this issue is short and to the point. Making a gift to a non-profit body is not the provision of consideration - those are the exact and complete words of section 9-15(3)(b) of the GST Act.
Brevity in tax law is in short supply, but does that particular all-encompassing provision reward us with certainty? As the article progresses the answer becomes evident.
Given the focus of the following discussion, it is assumed that a non-profit body is registered for GST.
(In terms of the sub-heading to this article, it does not really mean anything. It just popped into the author's head. Sorry.)
A gift is not consideration
A gift to a non-profit body is not consideration. Is this just the GST law stating the obvious? After all, a gift is something given freely. The answer is no.
This is because in saying that a gift is not consideration, the GST law is focusing on the donee non-profit body and not the donor. The only points in discussing "consideration" in relation to a non-profit body are:
- A non-profit body will only be liable to GST in respect of a supply it makes for consideration. This is the effect of section 9-5 of the GST Act.
- Certain non-profit bodies (essentially, any charitable entity) will be making a GST-free supply instead of a taxable supply if the consideration for that supply is less than prescribed percentages of the GST-inclusive market value of the supply - 75% for a supply of accommodation, 50% for any other type of supply. This is the effect of section 38-250 of the GST Act.
Therefore, in determining whether or not a non-profit body will be liable to GST in respect of a supply it makes, any gifts it receives in connection with that supply will not count as consideration for that supply.
This still leaves us with the issue of what is a gift for this purpose.
A gift, by its very nature, is something given freely. In other words, a gift will never be consideration for anything given by the donee, either to the donor or any other party.
The original explanatory memorandum to the GST law tells a confused story. It states that a gift is not subject to GST because it can't be consideration for a supply (para 5.100). While this is the only reference to the exclusion from being consideration, it is nonsensical to equate GST liability on a supply of a gift to its "non-status" as consideration.
Far too often we find the Federal Government and the ATO releasing information which muddles the difference between consideration and supply. The recent draft GST ruling on grants was an example, but it was refreshing to see the final ruling on that topic focusing instead on explaining the circumstances where a grant can be consideration for taxable supply, requiring the ATO to approach the issue step by step in identifying first the supply to which a grant can relate and then eventually the requisite taxable supply.
But, getting back to this issue of what exactly is a gift for GST purposes, the first point to note is that the GST law does not provide any definition. The second point is that undefined terms in the GST law will take on their meaning as defined in the income tax law.
Is there such a definition? According to the ATO there is. In a Q&A document published on its tax reform website for charitable entities, the ATO states that the definition of "gift" is contained in Division 30 of the Income Tax Assessment Act 1997. This, however, is not true. There is no such definition.
This leaves us with having to ascertain the common law meaning of "gift".
What is a gift?
In the same ATO document as described above, there is this statement:
For a payment to be considered a gift it must be unfettered, that is, there must be no obligations to do anything in recognition of the gift and no expectation on the part of the donor to receive anything in return for the donation.
Given that this statement is immediately followed by the above reference to the definition in the income tax law, there is an implication that this "unfettered" concept stems from that mythical definition.
In truth, the ATO's view stems from its review of the common law. And in that regard, care must be taken in assuming this rather absolute view is the full extent of what is or is not a gift.
The ordinary meaning of "gift" was discussed at some length in the Federal Court's decision in Leary v FCT (1980) 11 ATR 146. The judges in that case referred to earlier cases in reviewing what constitutes a gift. Anyone hoping to find a concise and absolute meaning within the court's judgment will be disappointed, as reflected by the following extract:
The word "gift"... is a monosyllabic old English noun of norse derivation which designates a descriptive category of transfer of property. Once it is accepted that it is to be given the meaning which it bears as a matter of ordinary language, it is not to be assumed that its ambit can be properly defined, with a lawyer's or logician's precision, by reference to a number of unqualified propositions or tests or by identification with different polysyllabic words whose etymological origins provide greater scope for reasoning as to precise meaning...
Nevertheless, we can take guidance from principles, some of which are negative rather than positive propositions:
- The essential idea of a gift is the transfer of property by way of benefaction, but...
- Benefaction focuses on the effect of the transaction on the recipient, whereas "gift" focuses more on the nature of the transaction itself. This means it is possible for a transfer of property by way of benefaction not to be a gift, and it is also possible for a transfer to be a gift notwithstanding an absence of benefaction.
- When used in its non-conveyancing sense, the word "gift" usually means a transference of the beneficial interest in property from one to another without any consideration from that other. This means that a transfer of property as a quid pro quo for consideration passing from the transferee to the transferor will not be a gift by the transferor.
- A transfer of property in return for valuable consideration received by the transferor from the transferee will not be a gift.
- A transfer of property will not ordinarily, but can, be a gift if any advantage of a material character is received in return.
- The mere fact that a donor receives, either from a stranger or the donee, a valuable return that may or may not be welcome may not prove conclusively that there was no gift.
- A disposition of property would not ordinarily be a gift if it appeared that the property was not transferred voluntarily but as result of a contractual obligation to transfer it. However, the mere fact that a person has made a binding promise to make a gift may not necessarily deprive it of its character as a gift when the person does make the gift. Fact and degree are the keys, as the court found it would be rare to have a contractual obligation to make a gift in the absence of some return advantage of a material character being also evident.
- A gift ordinarily proceeds from a detached and disinterested generosity, out of affection, respect, admiration, charity or like impulses.
The above are more lampposts than signposts. As to which is more dominant, the answer depends on the circumstances of each particular transaction. Questions of emphasis and degree need to be asked. The ATO also briefly discussed what a gift is in the ruling on grants, but for current purposes suffice it to say nothing is gained from it.
Next we embark on a journey through some gift-related transactions to see if the GST law can operate clearly and cleanly. Before we do, however, it must be noted that the ATO has published in a recent GST ruling a similar discussion which limited itself to only identifying some of the above as being lampposts to a "gift". Where relevant, the ATO's views are taken into account in the following discussion.
Cash gift - no specified purpose
A GST-registered business makes an unsolicited cash donation to a non-profit body. It does so by posting a business cheque. Nothing else is sent.
GST issues? Zero.
There has been no supply made by the donor, and hence no taxable supply. There has been no supply because a unilateral supply of money is specifically precluded from being a GST supply by section 9-10(4) of the GST Act.
Similarly, there are no GST issues for the donee non-profit body connected with the gift. It is a recipient of a non-supply, with no input tax credits attached. The non-profit body is not making an identifiable supply in connection with the gift, either to the donor or to anyone else. This then makes the "a gift is not consideration" rule moot in this instance.
The non-profit body does not have to track the use of the money. Spending it on goods or services constituting taxable supplies being made to the non-profit body will generate input tax credits in their own right.
The same outcome would arise had the donor made the donation anonymously.
Cash gift - specified purpose of donee
A GST-registered business makes a gift of cash to a non-profit body seeking money from the Australian public to help fund its homeless youth programs.
In this situation, the donor may have an expectation that in response to receiving its donation, the non-profit body will do a specified thing. There may not be an expectation that the donee actually use the funds donated directly on its homeless youth programs, but there would probably be an expectation that, by virtue of giving the money, the donee is at least being assisted in being able to fund the programs. In other words, the amount donated could be used for general unspecified purposes, thereby alleviating some of the strain of funding those programs.
On that analysis, it is hard to characterise the donor's act as being anything other than a gift. The donee is not under an obligation arising from the making of the donation, and the donor certainly receives nothing material or quantifiable in return. At best there is an expectation on the part of the donor.
It follows, therefore, that the same outcomes as above arise.
Cash gift - specified purpose of donor
A parishioner (not registered for GST) donates a large amount of money to a church "for the Minister's salary".
What are the GST consequences?
For the parishioner there are no obviously GST consequences. For the church there will only be a GST consequence if a supply has been made and if that supply is a taxable supply. In this case, there is arguably no supply. At a stretch, there could be an entering into an obligation to do something.
Assuming for the purposes of the analysis there is a supply of something, is there a taxable supply? To be a taxable supply, the parishioner's payment must not be a gift. If it is a gift, the "a gift is not consideration" rule kicks in to exclude it from being taken into account for that purpose.
So, is it a gift? It would be great to use hindsight in this case, but we can't because the issue needs to be determined at the time of the making of the payment. If we could wait, it would be relevant if the donor never made any attempt to ascertain if indeed the Minister was paid from the funds. That would indicate a high level of detached or disinterested generosity.
In other words, if the payment was made for a purpose stated by the donor with no further involvement or concern that would, on balance, indicate sufficient philanthropic motivation to constitute a gift.
Cash gift - related supply
A GST-registered business makes a gift of cash to a non-profit body in direct response to a public appeal that was made on the explicitly-stated basis that all donations received will be fully spent on a specified charitable purpose.
In this situation, the donor is not acting out of a detached or disinterested motivation, one of the key characteristics of a gift. However, the absence of pure benefaction does not mean the donor has not provided a gift. Moreover, while there may be an obligation on the part of the non-profit body to do a specified thing with the money, this is not the same as an obligation to do something in recognition of the gift. It is an obligation that the gift will be utilised in a specified way.
As a question of fact and degree, therefore, the view would be that the payment of the money is a gift. (Without wishing to lose the focus of this article, for income tax deductibility purposes it is worthwhile remembering this analysis may not be necessary given the extensive statutory rules applying.)
But has the donee made a supply to the donor? That would be a moot point again, because even if it has, the conclusion that the payment was a gift would then give effect to the "a gift is not consideration" rule, thereby precluding that supply from being a taxable supply and therefore rendering the donee liable to GST. The same outcome arises in respect of any supply the donee makes to another party in relation to the amount donated (eg to a homeless youth). This is because the only identifiable consideration in connection with that supply is, in this example, the amount donated.
If the donee does receive consideration from some other source in connection with making supplies to homeless youths, it is still important to note that the issue of whether or not the donee has a GST liability must be determined without regard to the donor's gift of money. This can be highly relevant to determining whether the donor can avail itself of the GST-free concession afforded to below market rate supplies of accommodation mentioned in the introduction to this article.
Phew! Step back.
Let's assume for a moment the alternate result. That is, the amount donated is not a gift. What then?
It's simple - the donee has entered into an obligation to do something. (There is a view that the donor has an actionable right as against the donee should the donee not spend the money on the specified purpose that induced the making of the payment on the part of the donor.) This is sufficient to be a supply for GST purposes - see section 9-10(2)(g) of the main GST Act.
The payment is the consideration, thereby exposing the donee to a GST liability as the supply would then constitute a taxable supply.
This would not be a good result. Nor is it easy to believe it would be the intended result. On the upside would be the outcome that when looking at the other supply, the specified use of the money, the amount donated would necessarily be excluded. In other words, an amount can't be included be in the price of a taxable supply if it has already been included in the price for another taxable supply.
Cash gift - unilateral supply
Under the terms of a philanthropist's will, a university receives a large lump sum distribution from the person's estate after their death. There are no conditions attaching to the gift. The university decides to use the money in its capital works program, and names a new building partly constructed with the funds in honour of the philanthropist.
Are there any GST consequences?
The estate of the philanthropist has not made a supply, as money is excluded. The university has not made a supply either. The benefit of having a building named after the benefactor is not really capable of being enjoyed by anyone. Moreover, even if that benefit was treated as a supply, there was no consideration in connection with it. The money was donated without any connection to how it was spent or the outcome of making the donation.
Even if the endowment was consideration for some (unidentifiable) supply, if the payment was a gift, the specific exclusion provided by section 9-15(3)(b), discussed at the start of this article, would have the effect of ignoring the endowment when determining whether a taxable supply had been made. In this example, it is hard to see the payment being anything other than a gift.
What does the ATO say? This is what its Q&A document states:
Where a room or building is named after a donor does this become a sponsorship and therefore liable to GST?
If the naming of the building or room was a consideration for the sponsorship then the sponsorship would be treated as a [sic] consideration and therefore subject to GST.
What we have here is another classic example of a failure to communicate (if not understand) the difference between a supply and consideration for a supply. The ATO's statement is nonsensical. What the ATO is trying to say, we think, is that if the naming was an agreed term of a sponsorship arrangement involving the payment of money by the sponsor, then the entity being sponsored has made a taxable supply, the consideration being the amount of the sponsorship.
Sponsorships are discussed again later in this article.
Cash gift - condition attached
Another philanthropist provided for her alma mater in her will. In this instance, the university's entitlement to a lump sum amount of money is on the condition that a scholarship is established in the name of the philanthropist.
Are there any GST consequences?
Again, the estate of the philanthropist (the donor) has not made a supply. The university (the donee) has, however, made a supply. The donee has entered into an obligation to do something (to establish a scholarship in the name of the donor), and this act is sufficient to be a supply for GST purposes. It is not necessary for the donee to value the benefit derived by the philanthropist, if any, from having a scholarship named after her.
The donee made the supply for consideration, being the amount donated. But has the donee made a taxable supply, therefore giving rise to a GST liability?
The answer will be yes if the "a gift is not consideration rule" does not apply. In other words, if the bequest is a "gift" at common law, it can't be taken into account in determining whether the donee has made a supply for consideration. Is the bequest a gift?
Tricky. The payment in question is certainly fettered. There is a major condition attached. It is a pre-condition. That is, the university will only receive the money if it agrees to establish a scholarship named after the philanthropist. In this instance, the obligation is not only to do something in return for the money, it is also an obligation to utilise the money in a specified way.
If the transaction is structured correctly, the bequest can certainly be made deductible to the donor and exempt to the donee for income tax purposes. But, again, when focusing on the GST outcome, we need to look at the common law meaning of a "gift" before we can say the donee has no GST liability.
Given the circumstances, there is an obligation to do something with the money and implicitly in recognition of the bequest. On this score alone the ATO may view the bequest as not being a gift. However, we can't ignore the fact that ultimate benefaction is the specific intention behind the making of the bequest. And although the memory of the philanthropist will live on by virtue of the scholarship it is hard to see this as constituting a material benefit to the donor, being the estate of the philanthropist.
On balance we would argue the bequest is indeed a gift, which would remove the need for the university to account for GST on its receipt. It would be preferable, however, for this outcome to be immediately apparent, rather than on balance.
Cash sponsorship - no specified purpose
A major corporate commits to making a lump sum payment of money to a charity. There is only one condition attached to the payment - the charity is obliged to prominently display the company's logo and the statement that the charity is proudly sponsored by the company at all public events and in all newsletters and advertising material.
What are the GST consequences?
We are now moving well away from the concept of a gift. Indeed the ATO draws a distinction between gifts (not subject to GST) and sponsorships (subject to GST).
In the example above, the charity will be treated as having made a taxable supply, the consideration being the amount of the sponsorship.
There is a rather obvious issue involved here. What if the amount of the sponsorship was more than the real value of the benefits flowing back to the sponsor? Many such arrangements are in place. In essence they involve a sponsorship that, to a certain degree, really includes the payment of money as a gift. It just isn't spelt out. But now the GST outcome can all too easily be that the consideration for the taxable supply being made by the charity is the total amount of the sponsorship monies.
Many sponsorships also involve various forms of benefits to the sponsor. For example, specified numbers of tickets to specified events. It would seem prudent, therefore, that any sponsor about to commit to paying money that includes a portion that is not attributable to any discernible benefits, should reduce this fact to writing in any agreement with the sponsored entity. This would serve to categorise the payment as being both a sponsorship and a gift, with the recipient's GST liability being limited to the attributed component.
This is less easy to do when the sponsor provides goods and services to the sponsored entity either in addition to or instead of money. In these circumstances, the sponsored entity's GST liability would be determined, in part or in whole, by reference to the market value of the "in-kind" consideration. This is not something that an agreement can subvert.
Other gifts - no specified purpose
An accountant provides audit services to a non-profit body for no fee.
Are there any GST consequences?
this instance the accountant has made a supply to the non-profit body, being the services. The accountant will not have made a taxable supply, however, because the services were rendered for no consideration.
Expenses incurred by the accountant in relation to the rendering of the services may have input tax credits attached. The test for determining if the accountant is entitled to claim those input tax credits does not attempt to include having to demonstrate the expenses related to supplies for consideration. Instead, the test, in this case, is satisfied because the services were rendered in the course of the accountant's enterprise.
The ATO has confirmed this approach in a Fact Sheet on GST and the legal profession. Again, there are no GST issues for the donee non-profit body connected with the gift. It is a recipient of a non-supply, with no input tax credits attached.
Other gifts - specified purpose
A local motor vehicle dealer donates a new vehicle to a charity. The vehicle is prominently painted on all sides with the dealer's name and logo, including the statement as to the dealer being the proud donor of the vehicle. Under the terms of the transaction, the vehicle was to be maintained in clean and good order by the charity, and the charity's newsletter was also to prominently carry the dealer's name and logo and the statement the dealer is a proud sponsor of the charity.
Are there any GST consequences?
The dealer has made a supply, being the vehicle. It has been supplied in the course of the dealer's business. But was it made for consideration? Yes. The dealer will receive advertising benefits. The calculation of the consideration might be the market value of the vehicle, but technically it is the market value of the advertising benefits derived by the dealer. In the absence of a term in a written agreement relating the value of the motor vehicle to the benefits arising to the dealer through the advertising, it will be necessary for the advertising to be valued by the dealer to determine its GST liability.
The charity has also made a supply, being its obligations to do several things during its possession of the vehicle. The otherwise free usage of the vehicle was the consideration for the supply. But again, if the vehicle was a gift, it can't be held to be consideration.
Is the vehicle a gift? On balance, we would argue it is not. There are significant and material benefits flowing to the donor as a direct consequence of transferring ownership of the vehicle.
The donee's GST liability may have been a lot less had the donor and the donee entered into an agreement whereby the donee was to provide specified advertising services for a specified fee, followed by the donation of the motor vehicle in full payment.
This example is, in essence, a barter transaction between two GST-registered entities. This means a taxable supply going both ways.
Conclusion
Who said GST was simple? To some extent this article has floated upon uncharted waters. Whether anyone successfully sinks some of the suggested outcomes to the examples is beside the point. What is important are the principles involved in ascertaining the outcomes. They were consistently applied, and it is going to be the case that a particular outcome may be very different if certain facts are changed.
The writer initially believed that "a gift is not consideration for a supply" rule was pointless. After having gone through the step by step process of identifying where the taxable supplies were and also seeing how the rule relates to other provisions of the GST law, that view is acknowledged as being incorrect.
The bottom line, however, is that a gift is a gift is a gift. And for GST purposes, a lot can turn on that ancient and undefined concept. This is unfortunate.
Subsequent legislative and regulatory changes may have impacted upon the subject matter of this article.
Peter Hill
BBus MTax FTIA
Managing Writer - ATP
ATP - GST
June 2000
March, 2001
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