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Will Preparation – Gifts to Charities

Leaving money or assets to a charity that is a tax deductible gift recipient, in your will can be more tax
affective with good planning. Division 30 will deny your estate a deduction for the gift unless it is to a
Cultural Bequests Program, public library, art gallery etc. A distribution from you estate is not normally
considered a donation as such. It gets even worse if you leave an asset to a charity that is simply exempt
from tax but not a tax deductible gift recipient, in this case you would have to pay the CGT, in your Date of
Death tax return.

Clear as mud? Let’s look into the tax ramifications of each possible method. For example if you had
$20,000 worth of BHP shares and $20,000 worth of Rio Tinto shares. Keeping it simple, assume both
parcels were purchased in 1995 for $10,000 each so there is a capital gain of $10,000 involved in each
parcel. If you want to bequeath the BHP shares to the local community association which is tax exempt but
not a deductible gift recipient then according to section 104-215 of the 1997 ITAA the tax must be paid on
the capital gain (in the Date of Death return) before the shares go across to the exempt association because
once in the association’s hands they will not be subject to tax. The alternative is for the estate to sell the
shares first then give the proceeds to the community association. Tax here can be avoided but only with very
careful planning by the executor of your estate. The shares should not be sold until all other matters in the
estate are finalised then the estate would be in a position to make the community association presently
entitled to the capital gain, which means that the community association is the one who pays the tax on the
gain and as it is exempt no tax would be payable. If the shares are sold before the estate can be finalised it
would be the estate that would have to pay this tax which is the difference between your cost base and the
selling price or market value if not arms length. Providing this is done within the first 3 years after you die
the estate will be entitled to the same tax rates as if you were alive ie the tax free threshold and stepping up
of the tax rates as income increases. This usually means the gain does not attract a very high tax bracket but
zero tax is always much better.

Section 104-215 also catches the Rio Tinto shares which we will say, for the sake of argument, you
intend to leave to the RSPCA. As the RSPCA is an exempt body your Date of Death tax return would have
to include any capital gain on the Rio Tinto shares, except for the operation of section 118-60 which states
that if the beneficiary is a tax deductible gift recipient then the requirement of 104-215 is ignored. So all is
well if you transfer the Rio Tinto shares in specie to the RSPCA but what if the estate sells them first to
transfer the cash. As stated above a bequest to a tax deductible gift recipient is not tax deductible because it
is not a donation. If your will simply requires the RSPCA to receive $20,000 and the estate sells the Rio
Tinto shares to pay this amount then it will have to pay the CGT, something that would not happen if the
shares were transferred in specie. Again if your executor organises for your estate to be in its final stages
just before the sale of the shares the RSPCA can become presently entitled so no tax would eventuate
Another way of making the RSPCA presently entitled is to specify in your will that they are to specifically
receive the proceeds of the sale of your Rio Tinto shares.

In short something as simple as the order of events in the process of winding up your estate can make quiet
a difference to the tax payable so it is worth getting professional advice for the executor and taxation advice
when preparing your will. Section 104-215 might have been intended to prevent CGT being avoided by
leaving assets to tax exempt bodies but all it has really achieved is catching the unwary.

Cunning readers would now be thinking how about if I leave the Rio Tinto shares to my high income
earning daughter specifying she is to donate the proceeds of the sale to the RSPCA. You see section 128-10
states that providing the beneficiary isn’t tax advantaged (ie exempt) the transfer of the asset to that
beneficiary will not attract CGT. She may have to pay tax on the capital gain when she sells them to make
the donation but she would be entitled to the 50% CGT discount and then get a tax deduction at her full
marginal rate for all the proceeds of the sale, not just the gain. The trap here is that if your will specifically
stated that a donation must be made then your daughter would not be considered the true beneficiary under
section 128-20 so the rollover relief from CGT when transferring the asset to her would not be available.

You can only explain to her before you die what a clever idea that would be. Even better still, what if the
estate sells the asset to give her an amount you set in your will. In this case the estate would have to sell
early in its administration because you wouldn’t want your daughter to be presently entitled and to this end
you would not want to specify that she receive the proceeds of the sale of a particular parcel of shares. The
estate would be taxable on the proceeds instead her and if the sale takes place within 3 years of your death
then the estate could utilise the 50% CGT discount and adult resident tax rates so probably pay less tax then
your daughter. She could then receive the distribution of cash donate it to the RSPCA and the taxman would
give her a nice fat refund cheque because you organised your affairs so well. Though she should be careful,
if the donation is large, she needs to spread it over a few years rather than use up her tax free threshold and
be wary that a donation  cannot create a carried forward loss. Again you cannot specify in your will that she
makes the donation.

 

BAN TACS Accountants Pty Ltd Death and Taxes Booklet – 12 –
Created by Julia Hartman B.Bus CPA, CA, Registered Tax Agent

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