Deductibility of payments to charitable institutions nominated by clients

Is the taxpayer (a mortgage broker) entitled to a deduction under Division 30 of the Income Tax Assessment Act 1997 (ITAA 1997) or under section 8-1 of the ITAA 1997 for contributing a percentage of the taxpayer's trailing commission to a charitable institution nominated by the taxpayer's client, where the taxpayer undertakes to make such a contribution at the time of arranging the loan?

Yes. Although the taxpayer is not entitled to a deduction under Division 30 of the ITAA 1997 as the contribution of a percentage of their trailing commission to a charitable institution nominated by their client that is undertaken to be made at the time of arranging the loan is not a gift, the taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 as the contribution is an expense incurred in gaining or producing the taxpayer's assessable income.

The taxpayer carries on a business of mortgage broking. The taxpayer receives trailing commissions from the loan originator over the life of the loan when the taxpayer successfully arranges a loan, with the loan originator, for a client.

At the time of arranging a loan for a client, the taxpayer undertakes to contribute a specified percentage of the trailing commissions from the loan originator to an eligible organisation that is nominated by this client.

The taxpayer's business charter specifies that a client can only nominate an organisation to receive the contributions if that organisation's core objectives and activities contribute to the local community or to society as a whole. An eligible organisation can be, but does not need to be, a registered charitable institution or deductible gift recipient. However, organisations that have political alliances or are involved in political activities are not eligible to receive contributions.

Provided that the organisation nominated by the client is an eligible organisation, the taxpayer does not have any discretion to refrain from contributing the specified percentage of the trailing commission to that organisation. An organisation that is nominated by a client is called a 'supported organisation'. In this case, the supported organisation is a charitable institution.

The taxpayer encourages supported organisations to use their list of subscribers and members to market the possibility of taking out loans using the taxpayer's mortgage broking services as the more loans that are taken out by using the taxpayer's services, the more funds the supported organisation will receive.

Division 30 of the ITAA 1997 deals with the deductibility of gifts and certain contributions. The table in section 30-15 of the ITAA 1997 specifies a list of gifts and contributions that a taxpayer can deduct. As the taxpayer does not make contributions to organisations that have political alliances or are involved in political activities, the contribution of a percentage of the trailing commission to the charitable institution is deductible under Division 30 of the ITAA 1997 only if that contribution is a gift.

The term 'gift' is not defined in the income tax legislation, and thus takes on its ordinary meaning. The meaning of the word 'gift' had been considered by the High Court in Federal Commissioner of Taxation v. McPhail (1968) 117 CLR 111; (1968) 15 ATD 16; (1968) 10 AITR 552 (McPhail's Case). Owen J confirmed that the word 'gift' was used in the sense in which it is understood 'in ordinary parlance'. He noted that the Shorter Oxford Dictionary defined the act of giving as 'a transfer of property in a thing voluntarily and without any valuable consideration'. He then went on to say: 'But it is, I think, clear that to constitute a "gift", it must appear that the property transferred was transferred voluntarily and not as the result of a contractual obligation to transfer it and that no advantage of a material character was received by the transferor by way of return.'

Therefore, the contribution of specified percentage of the trailing commissions will constitute a 'gift' if: (a) the contribution was made voluntarily and not as the result of a contractual obligation; and (b) no advantage of a material character was received by the taxpayer by way of return, either directly or indirectly.

The two tests in McPhail's Case have been applied in a long line of cases. In Case [2000] AATA 100; Case 3/2000 2000 ATC 132; (2000) 43 ATR 1337, a contract for the purchase of land required the purchaser to pay $8.1 million to the vendor and $2.7 million to an unrelated charity. The AAT applied McPhail's Case and upheld a private ruling that the payment to the charity was a contractual payment and not a gift.

At the time of arranging the loan for a client, the taxpayer undertakes to contribute a percentage of the trailing commissions from the loan originator to a charitable institution that is nominated by this client. The charitable institution nominated by the client is an eligible organisation and the taxpayer does not have any discretion to refrain from contributing the specified percentage of the trailing commission to that charitable institution. It is considered that the taxpayer's lack of discretion to refrain from making the contribution, once the client takes out the loan, indicates that the contribution is made as a result of a contractual obligation. Further, it is considered that the taxpayer would receive an advantage of a material character by way of return because the supported organisation would be motivated to use its mailing list of members and subscribers to promote the taxpayer's mortgage broking business as the preferred mortgage broking services to its members. Accordingly, it is considered that the contribution of the specified percentage of the trailing commission does not satisfy both the requirements of a 'gift'.

As the contribution is not a gift, the taxpayer is not entitled to a deduction under Division 30 of the ITAA 1997.

Under section 8-1 of the ITAA 1997, an outgoing is deductible to the extent that it is incurred in gaining or producing assessable income; or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income; and the outgoing is not of a capital, private or domestic nature.

In Ronpibon Tin NL & Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236, the High Court stated, 'that for an expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income, it must be incidental and relevant to that end'.

It is considered that the contribution of a percentage of the trailing commission to the charitable institution nominated by the client is an outgoing that is incidental and relevant to the earning of the commission from the loan originator. This outgoing is not of a capital, private or domestic nature.

Therefore, where the taxpayer undertakes to make such a contribution at the time of arranging the loan, the taxpayer is entitled to deduct under section 8-1 the contributed percentage of the trailing commission to the charitable institution nominated by the taxpayer's client. Note 1: The taxpayer can claim the deduction under section 8-1 whether the taxpayer makes the contribution to a supported organisation that is a registered deductible gift recipient, a charitable institution or any other organisation that is compatible with the undertaking given by the taxpayer to the client. Note 2: The term 'charitable institution' has been replaced by the term 'registered charity'. The table in section 50-5 of the ITAA 1997 was amended, in association with the ACNC registration rules which became effective from 3 December 2012, by Act No 169 of 2012. Item 1.1 in the table formerly read 'charitable institution' and was replaced by 'registered charity'. Note 3: Item 3 in section 30-15 of the ITAA 1997, dealing with the deductibility of contributions and gifts to political parties, was repealed by No 65 of 2006.

Date of Amendment Part Comment 16 January 2015 Decision Wording amended to clarify content Reasons for Decision Amendment to correct error in case citation Amendment to correct grammatical error Notes Notes 2 and 3 added to clarify content

Date of Amendment | Part | Comment

16 January 2015 | Decision | Wording amended to clarify content

Reasons for Decision | Amendment to correct error in case citation Amendment to correct grammatical error

Notes | Notes 2 and 3 added to clarify content