When it comes to client philanthropy at tax time, you want John King in your corner.
A consultant for nonprofit-sector specialists Prolegis Lawyers, King has more than 30 years’ experience as a tax partner at King & Wood Mallesons. He’s gone up against the government to fight for less red tape for private ancillary funds (PAFs), and is a director of five charitable foundations.
King recently shared his advice on end-of-financial-year client philanthropy with a network of professional advisors at a seminar organised by the Sydney Community Foundation and hosted by CommBank’s Women in Focus.
“In my experience, there are two types of donors,” he said. “Those who have a genuine philanthropic bent, and those who have a tax event that makes philanthropy a suddenly attractive option: both are to be encouraged.”
King’s five tax time tips for talking giving with clients
1. Grab a government co-payment of 87 cents for every dollar that you donate
The message for high income earners on the top marginal tax rate (of 46.5 per cent, including the Medicare Levy) is pretty simple: If your client is willing to put in a buck to philanthropy that they would otherwise put in their pocket, then they get a subsidy of 87 cents from the government. For every $100 they put up, $187 ends up in the hands of the Deductible Gift Recipient – whichever one they choose.
Franked or unfranked, or capital gains tax event scenarios – they are all variations on a theme. If you can get in touch with your client’s circumstances, put the numbers on paper, show them what happens to their cash flow if they make a donation, and demonstrate how they can get the 87-cent, or soon 96-cent subsidy (thanks to the 2% high income levy and the increase in the Medicare Levy from 1.5% to 2% p.a.) – it’s an offer they shouldn’t refuse.
2. Death is a killer
Broadly speaking, once you’re dead, your estate can’t get a deduction for any gift that you make (there are limited exceptions) – so why wait? I tell clients to get in on that 87-cent offer now. Unless they are asset-rich and have no, or only modest, taxable income, philanthropy during their lifetime just makes sense. For any client who has a large taxable income, encourage them to give now. Many wait until it’s too late and just leave their donation in their will, or worse – they intend to leave it in their will but never get around to it.
3. Watch the timing
The most important issue to raise when talking about tax events and philanthropy is the timing. Typically, for capital gains tax purposes, you make a gain when you sign the contract – not when you realise it.
For example: Your client is selling a private company in which they have shares, and they sign a contract on June 29 but are settling in three months. On July 1 they say, “I want to make a sizeable donation when the sale comes through.” By then it’s too late. They are deemed to have realised the gain on June 29.
If you as the advisor had been informed of your client’s goals, you might have been able to delay the signing of the contract to synchronise with the giving. The best tax advisors and accountants are close to their clients and think about these things in advance.
4. Spread the giving
In some cases, your client might be better giving a larger sum today – even though it might be in excess of their taxable income – in the knowledge that they can spread the deduction over the next five years.
Make the large donation up front and the gift gets invested. It grows tax-free earnings, and, thanks to the compounding effect, the client ends up with a much bigger fund of money to give to their charity. If instead, your client leaves this money in the bank, they earn income on it, and inevitably pay tax on that income. Smart spreading of tax deductions can be a win-win for both the client and the charity receiving the gift.
5. Flush out retained earnings
Another good selling point for philanthropy at tax time is that it can help flush out retained profits from a small private company. Use the opportunity of making a donation to avoid paying the top-up tax. Make a massive charitable donation, attract the government subsidy, enjoy the compound effects of making a large gift, and cleaning out your balance sheet of all the retained earnings that are just sitting there. The same technique can also be used to reduce the outstanding balance of Division 7A loans by the company.
The Sydney Community Foundation hosts free, semi-regular philanthropy information seminars for its Professional Advisers Network.
The network brings together a group of like-minded professional advisers who are passionate about supporting clients in their charitable giving intentions. The workshops serve as a forum in which to share ideas, support, educate, and develop resources, and to raise awareness of charitable giving and philanthropic structures available to clients.
If you provide professional services to clients in the field of philanthropic giving and you would like to join this network, please send an email with your contact details to email@example.com.
///Coin photography courtesy of Ben Hosking ///