Australia Tax: Feel-good end of tax year deductions
The number of disasters both within Australia and around the world in the past few years has focused people's attention on wanting to give. Giving to a worthy cause not only helps that organisation, taxpayers can also benefit by receiving a tax deduction - something to think about as the end of the financial year approaches.
Philanthropy involves wanting to improve the welfare of people through the giving of money, time or other services. The easiest way to carry out philanthropy is by giving to a deductible gift recipient [DGR], such as a charity that has been endorsed as such by the Australian Taxation Office.
Such charities can provide you with a tax receipt for the amount that you give which you can then use to deduct from your income. Donations over $2 are tax deductible.
Andrew Thomas, general manager of philanthropy at investment services firm Perpetual says people that donate directly tend to give to between three and eight charities over the year.
"The tax deadline is a motivating force for many people to give, with many charitable organisations experiencing their highest income month in June each year," he says.
When claiming a tax deduction check the institution you want to give to has been endorsed as a DGR by the ATO otherwise your deduction may be disallowed. For example, some art galleries and hospitals may not necessarily have this status. Ones that are eligible and popular among Australians include the Red Cross and the Salvation Army.
James Embelton a division director with the Macquarie Group says at the other end of the donating scale, many wealthy philanthropists can set up a private ancillary fund.
"A PAF requires a board to be set up and one of the directors on the board needs to be a 'responsible person' and must be arm's length to the fund - that is they must not have a shareholding in it," he says.
Embelton says with PAFs, a minimum 5 per cent of the net asset value of the fund's assets must be distributed on an annual basis.
"PAFs are attractive from an investment point of view because you are not paying tax on the growth and it can receive franked dividends which can be rebated back to the charity when a tax return is filed," he says.
People who don't have the many thousands - usually $500,000 - it takes to justify setting up a PAF can set up a donor-advised fund, which is a vehicle established by a third party and created for the purpose of managing charitable donations. One well known one is Charities Aid Foundation. The funds are conservatively managed and the donor has a say in which charities it wants the money to go to each year.
Thomas says establishing your own foundation or endowment is a good idea for those who want a lasting legacy. "These days establishing a foundation or endowment is tax deductible," he says. "In doing so you create a longer term commitment to the community. Your donations are tax deductible, subject to ATO endorsement, and can be invested tax-free, allowing the tax-free income to distribute a sustainable income stream to the community."
Perpetual is trustee of 450 charitable trusts and Thomas says when people establish their own foundation or endowment they become far more engaged in making a difference, as well as more strategic in their giving.
"Many think to create your own endowment you need to be a millionaire, however this is not the case at all," Thomas says.
"For instance the Perpetual Foundation allows you to create your own endowment and name it (usually with your family name) with as little as $20,000 - and it can be established in as little as 48 hours providing a great last-minute tax solution to people."