How you can reduce your tax bill through charitable giving

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As the end of the financial year approaches, it is timely to remind you of the tax incentives that encourage charitable giving in Australia.

Most taxpayers are familiar with the income tax deductions available for charitable giving and around 30 per cent of taxpayers claim a deduction each year. Giving while living also brings the joy of seeing the positive impact of your generosity.

As the end of the financial year approaches, it is timely to remind you of the tax incentives that encourage charitable giving in Australia.Credit: Dominic Lorrimer

However, some people – particularly those uncertain about their future living needs and the cost of care – instead choose to leave gifts to charities in their will. While the tax concessions are not as generous, let me share some lesser-known tax incentives for charitable giving on death.

One is the capital gains tax (CGT) exemption available for some bequests in wills. This can help maximise the value of bequests to the community through a more tax-effective distribution of a deceased estate.

CGT is imposed on the profits gained from selling or transferring certain assets, such as property and shares, that have increased in capital value. When these assets are inherited by Australian individuals, they inherit both the asset and its cost base – therefore the beneficiaries will ultimately pay the full CGT on sale. (There is an exception here for assets acquired by the deceased before the introduction of CGT in 1985; in these circumstances the cost base is reset to the value of the asset on the date of death).

However, if the beneficiary is a charity endorsed as a Deductible Gift Recipient (DGR) at the time of the donor’s death, then CGT is neither paid by the estate nor by the beneficiary. This means that charitable structures created under the terms of your will do not qualify for the exemption.

You can therefore maximise your bequest to the community and achieve a more tax-effective outcome by directing a gift of assets carrying a large capital gain, such as shares, to one or more of the 30,000+ DGR charities in Australia. Other assets in your estate can be used to fulfil other provisions you want to make to family, friends and other organisations. This clearly requires a bit of planning and careful discussion with an estate planning lawyer.

A tax-deductible donation before 30 June is also a great way to reduce or eliminate a capital gain.

Think about an older couple who sold an investment property for $1.2 million, which triggered a capital gain of $800,000. This would be reduced to $400,000 after applying the 50 per cent discount. If they made a tax-deductible donation to charity of $400,000, the entire capital gain would be wiped out.

Now I appreciate that many people who wish to do this may be hesitant about making a donation of $400,000 in one lump sum, but there is a solution. Use a public ancillary fund (PAF), like the Australian Philanthropic Services Foundation. You get the benefits of an immediate text deduction, but you can then have the fund make payments to charities of your choice over the coming years as long as your fund donates at least 4 per cent of the balance every year.

For example, I got a full tax deduction for the amount that I contributed to my subfund in the Australian Philanthropic Services Foundation. It’s set aside in my own, named giving fund, and at least 4 per cent of the balance is given to charities that I recommend. It’s invested and the returns are tax-free, meaning that while I am actively giving money to charity, the amount I can give is also growing.

Future directions for charitable distributions can be left with kids or grandkids, or through a clear Statement of Wishes as to the charities or causes that you would like to support.

Noel Whittaker is the author of Retirement Made Simple and other books on personal finance. Email: [email protected]

  • Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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