Better Tax Management with charitable giving

Giving Now vs. Post Mortem – which provides a better tax outcome?

If you are considering making a charitable gift, there is merit in you making the gift before you die, rather than your estate making the gift postmortem.

The reason is tax.

Increasing number of bequests

As generational wealth continues to grow, we are seeing an increasing number of estate plans and wills that include various provisions for bequests to be made upon death.

Firstly, let’s clarify some terminology. A donation is a gift to a charity during a person’s lifetime, while a bequest is a gift to a charity from an individual’s estate, potentially specified within their will.

Secondly, let’s also agree that the messaging from charities is primarily concerned with promotional efforts that yield donors and funds that support noble causes. Charities are not concerned with what may be the optimal way to structure such payments, as they are not licensed to give financial advice nor tax advice.

As such, the marketing that promotes gifting to charities should not be read as the most appropriate way in which to structure your approach to charitable giving.

Lastly, the focus of this article is centred around charities that are registered Deductible Gift Recipients (DGRs). Under Australian tax law, generally, only gifts to DGRs provide a tax deduction to the donor.

Gifts to entities that are ‘income tax exempt’, but that are not DGRs do not provide a tax deduction to the donor.

A matter of tax

As we often say, tax is by far your biggest expense.

Under Australian tax law, gifts (donations, whether cash or assets) made to a DGR are tax-deductible to the donor. However, tax law (Division 30 of the ITAA 1997) states that this only applies to non-testamentary gifts.

Where gifts are made as bequests, through one’s estate, the tax deduction opportunity is foregone.

A sort-of-exemption is that if the bequest is made as a transfer of an asset, a capital gains tax exemption may be able to be applied. This doesn’t provide a tax deduction to the estate, it just obviates the potential of CGT.

Keep in mind that the value of disregarding a gain is rarely worth as much as a tax deduction over the value of the gift itself.

Example:

Charlotte has resolved that following her passing, she intends to bequeath $150,000 from her residual non-superannuation investments to her specified and preferred charities.

Her will calls for the liquidation of her investment assets and distribution of residual amounts to her other beneficiaries, largely her immediate family.

As her estate will continue to earn income and incur capital gains during its period of administration (that is the period following the testator’s death and the final distribution of assets), her approach to charitable giving is not tax efficient. It results in the estate, or subsequent beneficiaries, being unable to obtain a tax deduction from the bequest.

Alternatively, had Charlotte made the gift (to a DGR) during her lifetime, the value of the gift would have been tax-deductible to her.

Of course, Charlotte might request (in a ‘letter of wishes’) that a beneficiary make a gift to a DGR from that beneficiary’s bequest. The gift then is tax deductible to that beneficiary. However, there are two areas of uncertainty with this approach.

Firstly, a letter of wishes is not binding on a beneficiary. The beneficiary might spend that bequest on, for example, repaying a mortgage. Charlotte’s good intentions come to nothing.

Secondly, it is possible that Charlotte is unaware of the beneficiary’s income circumstances. Hence, they would not be aware of the capacity of the beneficiary to fully utilise the tax deduction, if at all.

Charitable giving and your opportunity

In summary, the decision to gift to charitable causes is a noble one, at the same time it provides potential structuring opportunities that might otherwise be missed.

With appropriate structuring, a donation to a DGR can provide support to the charitable cause and potentially improve the tax outcomes of the donor.

A ‘private foundation’ is a way to effectively meet both needs.

If you want to know more about how we can help you manage your taxes, talk to your
Private Client Advisor or book an obligation-free consultation.

Watch out for next month’s Wealth Intelligence: Better Tax Management: Your private foundation – future gifting with tax benefits today.

Interested to learn more? Read Trusts: Understanding Appointors and Successor Appointors

The information in this article is of a general nature and does not take into consideration your personal objectives, financial situation or needs. Before acting on any of this information, you should consider whether it is appropriate for your personal circumstances and seek personal financial advice.