The Role of Tax When Giving Donations and Gifts

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Most taxpayers are aware that donations of $2 or more to statutorily endorsed deductible gift recipient entities are deductible, and there is flexibility in the rules around donating to emergency relief bodies in that no receipt is required if giving less than $10 (so called “bucket” donations).

The ATO stipulates that there should be no “material benefit” or advantage arising for the giver through the action of the gift or donation. The outcome is that if a donating taxpayer receives a material benefit in exchange for their donation, they cannot claim a deduction for the donation in their tax return.

Relevant material benefits and advantages listed by the ATO include:

  • Raffle tickets;
  • Items such as chocolates and pens;
  • The cost of attending fundraising dinners, even if the cost exceeds the value of the dinner;
  • Membership fees;
  • Payments to school building funds made, for example, as an alternative to an increase in school fees; and
  • Payments where you have an understanding with the recipient that the payments will be used to provide a benefit to you.

Note however that the ATO recognises that a donor being given a lapel sticker to acknowledge their gift, or being mentioned by name in an organisation’s newsletter for the same reason, is not deemed to be a disqualifying “advantage”, and it will not deny a deduction.

Where the donor is a corporate entity, however, acknowledgement, especially for example by way of signage, may constitute a benefit, and render the donation ineligible for deduction. There may be a case however to treat the contribution as a business expense, or even as a “sponsorship supply”, premised on it constituting expenditure necessarily incurred in the course of carrying on business.

A significant limitation to the deductibility of gifts or donations is that a gift or donation cannot increase or create a tax loss. However, a donating taxpayer can in certain circumstances choose to spread the tax deduction for a donation over a period of up to five financial years.