Tax implications of a gift of depreciable property



Article from our Outlook magazine. Published July 2019.

Scenario

A company operates a small business and depreciates its assets for tax purposes using the small business pool method. The company operates a catering business and it has decided to replace some of its key equipment. Rather than trading in the equipment, it decides to donate that equipment to a local hospital.

Question

What are the tax implications of making the gift of the equipment to the hospital?

Guidance

There are two key issues that need to be dealt with. The first is the question of the amount of the deduction that can be claimed in respect of the gift. The next issue is how the gift is treated for the purposes of the small business pooling provisions.

Please note that this Q & A does not deal with the deductibility of gifts under the Cultural Gifts Program. The recipient of the gift in this scenario is a hospital.

Deductions can be obtained for the gift of property to certain institutions. There is a table in subdivision 30-A 1997 ITAA that sets out:

  • who the recipient of the gift or contribution can be,
  • the type of gift or contribution that can be made,
  • how much you can deduct for the gift or contribution, and
  • any special conditions apply.
Where gifts of property are concerned, there are some important factors that need to be taken into account. These are the value of the property and the time that has elapsed between the purchase of the property and the making of the gift.

Where the property was purchased during the 12 months before making a gift, the amount that can be deducted is the lesser of the market value of the property on the day the gift is made and the amount the taxpayer paid for the property.

If the property was purchased more than 12 months before the gift is made different rules apply. For there to be a deduction, the Commissioner must value the property at more than $5,000. This valuation must be requested by the taxpayer and the amount deductible is the valuation arrived at by the Commissioner.

In relation to donations of property where the gift is made more than 12 months after the property has been purchased and the property has a value of $5,000 or less, no deduction can be claimed for that property gift.

In this scenario most of the items had been purchased greater than 12 months prior to the gift. Further, there were several assets with differing potential values. Each asset needed to be examined to determine whether its gift was deductible.

It should be remembered that there is a limit on the amount that can be deducted in respect of gifts and donations. Under s.26-55 ITAA 1997, the amount of the deduction is limited to the assessable income, less all your deductions except tax losses and the amount you can deduct for farm management deposits. Essentially, a claim for a donation or gift cannot put you into carried forward tax losses. However, note that the deduction for a gift of property valued by the Commissioner at more than $5,000 can be spread over the current income year and up to four of the immediately following income years. (See s.30-248 ITAA 1997)

Turning to the operation of the small business depreciation pool, the closing pool balance is determined by using the method statement in s. 328-200 ITAA 1997. Under step two of that method statement, the taxable purpose proportions of the termination values of depreciating assets allocated to the pool and for which a balancing adjustment event occurred during the income year, must be subtracted. The gift of the catering equipment is a balancing adjustment event. The taxable purpose proportion of the equipment was 100%.

The key issue in determining the closing balance of the pool is the termination value of the assets that have been gifted. The termination value of an asset is determined under s.40-300. You are first asked to determine whether an item in the table of that section applies. If no such item applies you then refer to s.40-305. The items in the table in s.40-300 can be, broadly, described as special cases. Of particular relevance to this scenario is item 6 in the table. This item applies if you stop holding a depreciating asset under an arrangement and:
  • there is at least one party to the arrangement with whom you did not deal at arm’s length, and
  • apart from this item, the termination value would be less than its market value.
If item 6 is applicable, the termination value is deemed to be the market value of the asset just before you stop holding it. Accordingly, if this item is applicable, the taxpayer is required to determine the market value of the equipment in respect of each item.

The issue that arises is whether the making of the gift to the hospital is a dealing not at arm’s length. If an asset is disposed of for no consideration, on its face, the parties are not dealing with each other at arm’s length. This is probably the better view, however, more thought could be given to this issue where the other party to the transaction is a hospital or charity that regularly is given assets.

Perhaps, it may be possible for the taxpayer to argue that the market value of the various assets was nil. Nevertheless, because the hospital is to accept the assets, on its face, the hospital seems to consider the assets have value.
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