The end of the year is known as a time for giving, including donating funds to charities that are close to our hearts. Giving not only feels good but can also provide generous high-net-worth Australians with some tax benefits.
2022 has presented Australians with the highest inflation in over 40 years, rising interest rates and frequent volatility in the markets. Despite these conditions, donors have been steadfast in their support of charities and causes that are important to them.
There are several tax strategies that come with donating money or other assets, such as publicly listed securities or private company shares, prior to year-end.
Below are some options for Australians to consider as part of their broader wealth management and philanthropic goals:
1. Maximize the value of the donation tax credits
Australians taxpayers can report their charitable donations on their tax return and claim tax credits, which reduces their taxes payable. Charitable donations result in non-refundable tax credits, which means you need to owe tax to receive any tax savings.
An individual taxpayer can generally claim a tax credit for donations of up to 75 percent of net income. In the year of death, the limit is 100 percent.
To calculate the charitable tax credit, Australians need to determine the eligible amount of their charitable donations and ensure the organization is qualified that can issue official donation receipts. (It’s also important to keep those receipts in the event of an audit).
2. Donating securities
Donating cash is one way to give back. Another is to donate securities, such as stocks, ETFs or mutual funds or other eligible capital assets, ‘in-kind’ to charities.
When this happens, the taxable portion of the capital gain is reduced from 50 per cent to zero. It’s why many investors chose to donate non-registered investments that have risen in value, rather than donating cash.
The donor receives an official donation receipt for the fair market value of the gifted securities on the date it was donated. If the share is not listed on a designated stock exchange, the deemed fair market value rules may apply, according to the CRA.
Another option is to donate securities that are trading at a loss, which may help offset any capital gains realized in the year. Donating the security to charity will realize the capital loss and generate a donation tax receipt, which can have multiple benefits for year-end tax planning.
If you have employee stock options for publicly-traded securities, special tax provisions can exempt the taxable benefit resulting from the exercise of the option if the shares are subsequently donated to charity.
Before donating securities, investors should check with the charity that it will accept them. As the CRA points out, a charity or foundation may refuse to accept a gift for various reasons, for instance if shares are from a company whose business conflicts with the charity’s values.
3. Donating complex assets
Donors may contribute complex and illiquid assets, such as private company shares directly to charity.
The process for making this type of donation requires more time and effort than donating cash or public securities but it has distinct advantages. For instance, these types of assets often have a relatively low cost basis. In fact, for entrepreneurs who have founded their companies, the costs basis of their private stock may effectively be zero.
Still, it’s worth noting that additional laws and regulations must be adhered to when contributing private assets to charity. It’s recommended that donors consult their legal, tax or financial professional before embarking on these types of transactions. Also, not all charities have the administrative resources to accept and liquidate such assets.
But many public charities with DAF programs, such as Harbour Investment Partners Foundation for Philanthropy, can accept these assets and can work with investors and their financial professionals.
4. Use a donor advised fund (DAF)
A growing number of Australians are opening a donor-advised funds (DAFs) to distribute wealth in a tax-efficiency way.
A DAF is a giving vehicle sponsored by a charity and provides many benefits for a donor, including the ability to make a gift and qualify for a charitable income tax credit immediately without needing to decide, until you are ready, on the charities to support. The longer timeframe is a good option for people who wish to learn more about a cause and ensure it aligns with their values before making a donation.
At the same time, it enables donors to realize capital gains in a portfolio in a particular year and receive a larger tax credit from donating the funds.
A DAF is also less work than setting up a private foundation, for example, since the contributions are handled by the group administering the fund. Donors still retain control by recommending how much to give to select charities, and when.
