Donations and Deductible Gift Recipients

With Telethon breaking donation records and our Partner Charity Ronald McDonald House Charity Ball being held this month, it is a good time to discuss what constitutes a donation or a gift. Are the golf clubs I won in the silent auction for charity tax deductible? If I receive a pen with my donation is it still tax deductible? Are donations to a school building fund tax deductible?

In order for any gift or donation to be deductible it needs to be made to a Deductible Gift Recipient (DGR). This means the organisation is entitled to receive tax-deductible gifts and tax-deductible contributions. Unless an organisation is a DGR, the supporter/donor cannot claim a tax deduction for a donation or contribution made. It is important to keep this in mind especially when donating to Foreign Organisation as they may not be registered as a DGR for Australian Taxation Purposes.

An organisation can be a DGR with DGR endorsement or listed by name in tax law. Interestingly Political parties are not DGRs, donations made by an individual however may be tax deductible, entities carrying on a business that make donations are not tax deductible.

To be entitled to ATO endorsement, an organisation must meet several requirements including falling within one of the general DGR categories described in the tax law. Examples include public hospitals, registered public benevolent institutions and school building funds.

For a full list of the Deductible Gift Recipients the Australian Business Register has a full list in the link below:

http://abr.business.gov.au/DgrListing.aspx

DGR endorsement is determined by the ATO (or named in tax law). It is a legal endorsement that operates separately from charitable status. Although the vast majority of organisations with DGR status are charities, charitable status is not technically a prerequisite for gaining DGR status. Some examples of organisations that have DGR status that are not charitable are government-run institutes such as the Royal Children’s Hospital.

In order to claim your donation or gift to a DGR as a deduction, you cannot receive a material benefit in return for your donation. When you make a contribution, for example, purchasing a ticket to attend a fundraising dinner, you are receiving a benefit in return with the entertainment and or dinner provided.  The golf clubs won in silent auction would also not be deductible donation.

Please also be aware that a gift/donation cannot add to or create a tax loss. However donors can choose to spread the tax deduction for a gift over a period of up to five income years.  You may want to make an election to spread tax deductions over multiple years because:

• otherwise you may have a tax loss that prevents you claiming the whole amount;
• you earn a higher income in some years than others.

In summary when looking to claim a tax deduction for a Donation or Gift the following points need to be considered:

• The gift must be made to a DGR.
• The gift deduction claimed is the amount of money donated to a DGR.
• Retain receipts or records.
• Claim the tax deduction in the income year in which the donation is made.
• The deduction cannot add to or create a tax loss.
• The option to make a written election to spread the tax deduction.

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The Importance of Due Diligence

When considering the acquisition of a business, a thorough due diligence should be undertaken to ensure you know exactly what you are buying and any potential risks associated with the acquisition. The due diligence process allows you to ascertain the true value of the business.

The Due Diligence process is undertaken after you have expressed interest in the purchase but before a binding contract is negotiated.  However some vendors may allow you to make a conditional offer on the business subject to the business passing the due diligence. The vendor may insist you sign a non-disclosure agreement due to the confidentiality of information you will have access to.

A thorough due diligence will investigate all aspects of the business, including, but not limited to:

• Financial performance
• Business operations
• Tax compliance
• Legal compliance – Contracts, Leases, Licences
• Key stakeholders
• Customer contracts
• Cash flow assessment
• Equipment valuation and inspection

When reviewing a potential business purchase, the past financial performance needs to be reviewed in detail. We usually expect to see the last 3-5 years of financial data to ensure the reported profits are stable if not rising, and margins are consistent. The information contained in the financial reports of a business should be compared to the information reported to the Australian Taxation Office (ATO). Business Activity Statements and Income Tax Returns lodged with the ATO should contain the same reportable figures as those declared in the business’ financial statements.

Although a thorough review of the businesses financials is a critical aspect of the due diligence process, there are other factors within the business that need to be considered in conjunction. As part of the due diligence, the industry the business operates in, the main competitors and their market share need to be analysed. You also need to consider who the target customers are and the mix of current customers; for example if one customer makes up 50% of the customer base this may leave the business exposed to significant risk.

Our office specialises in the due diligence process ensuring you can comfortably ascertain the viability of a purchase and rest easy knowing you are getting what you are paying for!

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