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Tax Office Warning on Charity Donation Tax Avoidance Schemes

8 December 2011 at 11:30 am
Staff Reporter
The Australian Tax Office has issued a warning over concerns about charity donation arrangements that have been found to be tax avoidance schemes and issued new guidelines.

Staff Reporter | 8 December 2011 at 11:30 am


Tax Office Warning on Charity Donation Tax Avoidance Schemes
8 December 2011 at 11:30 am

The Australian Tax Office has issued a warning over concerns about charity donation arrangements that have been found to be tax avoidance schemes and issued new guidelines.

Taxpayers may claim deductions for gifts of money or property to a deductible gift recipient (DGR) where certain conditions are met. However, the ATO says some arrangements that promote a deduction for gifts of pharmaceuticals to charities for use overseas do not meet these conditions.

The ATO says in one example, the taxpayers involved claimed a much greater deduction than the actual amount they donated. 

The ATO says in the pharmaceutical arrangement, participants who had already claimed deductions were advised to voluntarily request an amendment to their income tax assessment. Where this was not done, participants had their claim disallowed in full and were charged penalty and interest on the tax shortfall.

The ATO has called on taxpayers to be wary of arrangements with similar features and report their concerns.

The Tax office describes an arrangement where a taxpayer claims a gift deduction for pharmaceuticals and other items ('pharmaceuticals') to a charity for use overseas. The taxpayer provides cash for a vendor to purchase the pharmaceuticals from a low cost overseas supplier. They are then valued for gifting purposes at a much higher cost. The difference in these amounts is balanced by what appears to be an unsecured, long term, low interest loan facilitated by the promoter of the arrangement and purportedly funded by the vendor. The pharmaceuticals are apparently made available to the charity through an overseas bonded warehouse.

Under this arrangement, the ATO says the taxpayer claims a deduction for a donation and related costs that is much greater than the actual amount outlaid, e.g. for a cash outlay of $2,100 the taxpayer claims a gift deduction purportedly valued at $20,000

The ATO says the arrangement was investigated and found to be a tax avoidance scheme and participants had their deductions disallowed.

In the arrangement that the ATO investigated:

  • participants entered into contracts in 2009-10 to purchase and transfer pharmaceuticals for use in treatment programs to charities that are registered deductible gift recipients.
  • participants made an initial payment of about 7.5% of the purchase price of the pharmaceuticals. The balance of the purchase price is due and payable up to fifty years after the contract was entered into. The participants also made a prepayment of interest, reflecting an interest rate of approximately 0.1% per annum, on the balance of the purchase price.
  • the promoter claims:

    • the pharmaceuticals were delivered by the vendor to a bonded warehouse in a country outside Australia.
    • ownership of the pharmaceuticals was transferred to the participant, who then immediately transferred ownership to the nominated charities.
    • entities associated with the promoter of the arrangement arranged and paid for the pharmaceuticals to be shipped to places nominated by the charities.

The ATO says participants were told that they could claim a deduction for the full contracted purchase price of the pharmaceuticals in 2009-10, the year that they entered the arrangement.

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  • Anonymous Anonymous says:

    This appears to be typical flip-flopping by the ATO Aggressive Tax Dept whenever they have to give out tax deductions. The donations made by these donors were done by following Non-Profit News Service No. 0296 – Donations of property and vendor finance, where it specifically states what to do in order to claim a valid deduction for these donation of goods that is bought using long term, low or no interest, vendor financing. This bulletin was released by the ATO non-profit division to HELP the people running this initiative.

    The laws associated with buying and donating these goods are also supported by Public Ruling TR2005/13 and Private Ruling 1011347203331, not to mention Australian Valuation Office valuations stating that the goods bought & donated were equal to the purchase price of the goods donated.

    These Rulings/Bulletins/Advice were given out BEFORE the Aggressive Tax Dept released their counter-factual arguments that still remain unsubstantiated both in fact & in law and are the OPPOSITE to what this department is now saying.

    What the ATO fails to mention is that these donors are still paying off their debts for the goods purchased – some have even already paid the debt back.

    This is no different than buying a TV at Dick Smith for $1000 using your credit card and then donating it to charity. By the same logic, the ATO would say that the donor should not receive a deduction for $1000 because they have not paid it off and that Part IVA applies for trying to claim a $1000 donation (naughty boy) and that because TV’s sell for $100 in other parts of the world that the donation is almost worthless anyway. “The TV was purchased for nothing and donated at the higher value of $1000 – the difference coming from a purported loan from Visa”. Ridiculous.

    The sad thing is that hard-working Australians have borrowed to donate this life-saving medicine and have suffered financially to do so. The least they deserve is a standard tax deduction which is only a part credit to what they have to pay (have paid) for their donations.

    Not to mention the saddest fact of this whole situation – that the recipients of this medicine will soon die of AIDS if they do not receive more. Global Development Group stated in a recent report that this initiative is the ONLY thing supporting these people medically.

    Don’t believe the hype people – putting the ATO in charge of our tax dollars is like putting Dracula in charge of the blood bank. Right-thinking Australians are not going to fall for this blatent ATO tactic.

  • Avatar steveointo says:

    This is typical flip-flopping by the Aggressive Tax Office at the ATO whenever they have to give out deductions.

    This group of donors requested and received Non-Profit News Service No. 0296 – Donations of property and vendor finance to outline what they needed to do in order to make these donations to charity.  This was also supported by Public Ruling TR2005/13 and Private Ruling 1011347203331 – both of which state that the donations are valid according to the law.  The Australian Valuation Office (AVO) also valued these goods at their purchase price.

    What the ATO failes to mention is that these donors have a legally-binding debt to pay back (some already have).  By the same logic, if somebody bought a TV for $1000 from Dick Smith using a credit card and donated it to charity, the ATO would say that they should not be able to claim a deduction for $1000 as:

    1) That the donor gave Dick Smith money to buy a TV for them (i.e. Dick Smith didn't make the TV)

    2) They really didn't pay anything (now) for the TV and therefore cannot claim a deduction

    3) That the TV is really only worth $100 because you can buy it somewhere in China for that amount

    4) That the donor bought the TV for $0 and tried to claim the much higher amount of $1000 based on a "valuation" from Dick Smith substantiated by a tax invoice for the "inflated price".  (Part IVA for trying to pull a stunt like that, you naughty boy)

    5) That the difference in price ($0 to $1000) was due to a purported "loan" from Visa.

    These people borrowed heavily to donate, paid interest on their purchases, and are feeling the financial burden of their purchase and yet the ATO is refusing to give them a tax deduction. 

    The worst part is that the recipients of the medicine in Africa are running out of time.  Global Development Group did a full report on one of the groups who received the medicine & have stated that this donation initiative is the only thing that is supporting them. They need continued medicine flow to survive.

    Don't believe the hype people.  Putting the ATO in charge of our taxes is like putting Dracula in charge of the blood bank – it's only a matter of time before they help themselves instead of helping others.

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