It’s a cautionary tale for anyone who is serious about raising philanthropic dollars in the arts.
Recently, in an effort to raise the profile of its bespoke philanthropic donor group, a large not-for-profit arts organisation entered into what on the surface looked like a simple cross-promotional campaign with a local membership-based business whose the target audience is a perfect match for its donor circle demographic.
Yet on closer inspection, the two business’ promotional arrangement, which entitled members of the arts organisation’s donor circle to a discount deal at the local business, blurs the lines between what is a tax-deductible philanthropic donation and what is a discounted membership with a commercial business.
In investigating this story, ArtsHub is not accusing either of these entities of breaching the laws around philanthropic giving, nor is it claiming that either party has acted in deliberate ignorance of the standards. ArtsHub is also in no way suggesting that anyone in the arts organisation’s donor circle is deliberately attempting to evade or avoid the laws pertaining to tax-deductible philanthropic donations.
A perfect brand partnership, but for one small thing
Early last month, if you were following the two organisations in question on social media, you may have encountered a joint-post by them promoting a deal whereby if you supported the arts organisation’s donor program via an existing or new membership to it, and joined up to the local business member-only club at the same time, you would receive a $500 gift voucher to spend at the local business in return for taking up this special promotional offer.
The promotional deal was open to existing members of the not-for-profit arts organisation’s donor circle, but not to current members of the local member-only business.
From the philanthropic donor’s point of view, this is where elements of this deal blur the lines between what is a tax deductible philanthropic donation and what is a consumer purchase, and its tax implications become confusing.
This is because, even if the offer is being made by the membership-based business, anyone who takes it up is effectively tying their tax deductible philanthropic donation to the not-for-profit arts organisation to a membership of a commercial business.
Read: Let experts help you get over your fear of ‘the ask’ – for free
But the laws around philanthropic giving in Australia stipulate that any money given to a DRG (Deductible Gift Recipient) registered not-for-profit organisation or company by way of a tax deductible donation must represent a gift that is free from direct financial benefit.
Your philanthropic donation must be given unconditionally, and you cannot receive anything in return.
The only financial benefit, good or service that a philanthropic donor is legally allowed to receive for their tax deductible donation is via the tax deduction it entitles them to at the end of the financial year.
If in doubt, seek advice from the ATO
Advice provided by the Australian Taxation Office (ATO), which was unable to comment on this specific situation due to taxpayer confidentiality law obligations, outlines that “generally, a gift is a donation when it is made voluntarily with no material benefit to the donor” and “where donors receive a material benefit in return for the donation, the donation is not a gift and is not tax deductible”.
The ATO’s advice also states that “membership fees paid to a DGR endorsed organisation are not a gift for tax purposes, as the donor receives the benefit of the membership in return”.
Therefore, one of the problems with this recent promotional partnership is that it effectively ties one’s philanthropic donation to a transaction where the donor is receiving a material benefit.
In effect, this small oversight in the deal’s structure exposes the donor to the not-for-profit arts organisation to potential issues with the ATO at the end of the financial year, because their philanthropic donation may not meet the requirements needed to qualify as a legitimate tax deductible donation.
Read: When just $500 can matter: new initiative for emerging arts philanthropists
While it’s true that some philanthropic donations can include minor benefits to the donor (these rules most commonly apply to scenarios where donors have paid a donation to attend a fundraising event, and therefore receive food, drink and/or other goods and services as part of that donation), in these cases, the value of the philanthropic donation must be more than $150, and the minor benefits received in return for that donation must be no more than $150, or no more than 20% of the value of the contribution.
Additionally, in scenarios where your donation includes a minor benefit received as part of your donation, you can only claim the tax deduction on the total donation minus the cost of the minor benefit you have received. For example, you pay $750 to attend a fundraising dinner, and the dinner is valued at $150, so you get a tax deduction on the $600 part of your donation only.
Yet in the case of the recent cross-promotional offer, neither of these requirements were being met.
Timely reminders about tax obligations
So, what does this story tell us about philanthropic giving?
For individual philanthropic donors, it’s a reminder to think carefully about what donor programs you are signing up for, and make sure you know the rules around what your philanthropic gifts entitle you to (remembering that your donation should be defined as a gift that is free from direct financial benefit, except for the tax deduction it may entitle you to).
For not-for-profit arts organisations, it’s to think carefully about which businesses your philanthropic fundraising program is aligning itself with, and what the potential financial benefits these brand alignments or promotional partnerships may entitle your donors to. This is because, depending on the structure of the partnership arrangements and any deals offered to your donors, you could potentially put your organisation in breach of the rules.
Read: Giving Day to Art Micro Grants
Finally, in the lead-up to tax time, an additional useful reminder was issued last week by CPA Australia (Australia’s leading professional accounting body).
CPA’s statement, authored by its Tax Lead Jenny Wong, urged Australian tax payers not to rush completing their tax returns, and to check their claims and expenses carefully before lodging.
Wong warned that, “getting your tax return right is your responsibility”, adding that “this means declaring all of your income and claiming the appropriate expenses”.
CPA’s statement also included the advice that, “failure to properly declare your income increases your chances of being audited by the ATO”, in another prompt to be sure of the rules around your tax deductible expenses.
