End of financial year is looming, and if you're thinking of ways to maximise your deductions, what better way than donating to a good cause.
It’s the season to be giving!
And no, we’re not talking about end-of-year holidays, we’re talking about tax season. As we come up to the end of the financial year, it’s the time that many of us realise how much of our income we’re actually giving to our tax overlords (aka the Australian Tax Office).
But there is one way you can reduce your tax bill this financial year, while also doing some good. Donations.
Yep, believe it or not, your charitable donations are tax deductible.
Here’s how it works:
Let’s assume you’re earning $60,000 per annum from your employer (known as your assessable income for tax purposes).
If you make a $1,000 donation to your favourite charity, this would be considered a tax deduction and would reduce your taxable income (the income you have to pay tax on) to $59,000.
In the example below, you can see that your tax bill will be $325 less than if you didn’t give the donation.
This means that your $1,000 donation to your favourite charity is effectively costing you $675 ($1,000 - $325 reduction in tax).
This is why donations are so appealing before June 30th.
But to make sure you’re able to make the most of your donations, there are a few things you need to look out for.
Specifically, the ATO calls out four conditions that have to be met for a donation to be tax deductible.
The ATO’s conditions
The organisation you donate to must be registered to receive tax deductible gifts or donations.
These organisations are known as DGRs, and it’s important to check this because not all charities are CGRs.
Most charity websites will tell you if the charity is a DGR or not. You can also check on the Australian Charities and Not-for-profits Commission website.
Crowdfunding campaigns for example usually aren’t DGRs, so while they might be good causes, you might not be able to claim a tax deduction for your donation with them.
That means you need to be voluntarily giving money or a gift without getting any material benefit back.
Things like buying raffle tickets, or membership fees might be for a good cause, but aren’t tax deductible because you’re receiving something in exchange.
In the cases where you get something in return, they can be considered as contributions rather than donations.
Contributions can sometimes be tax deductible, but there are some specific conditions that apply.
Property also includes financial assets like shares or property. There are more specific rules that apply in these cases.
For some registered charities, there are rules on the type of deductible gifts they’re allowed to receive.
Once you know your donation is tax deductible, you can claim it as a tax deduction given you’ve got your receipts.
Yep, don’t forget to keep your receipts!
If you’ve done the hard yards of researching a worthy cause and making a donation, don’t sleep on the paperwork.
When you file your tax return you’ll need your receipts to claim your deduction.
Many DGRs will automatically issue you a receipt when you donate.
And if you’re donating through a third party, eg. donating at a supermarket to a charity, you can get your receipt to claim your tax deduction.
Final step, claiming the deduction
Once we tick into the new financial year, it’s time to file those tax returns, and that’s when you’ll be able to claim your tax deduction.
You’ll be able to claim a deduction for the full amount of your donation, as long as it complies with the ATO rules and you’ve made a donation of $2 or more.
Charitable actions have been a core part of fostering communities for centuries, whether people were donating their money, their time, or their skills.
If there’s a cause close to your heart, now is a great time to show your love and support to it.
A big part of living a financially healthy life is about connecting your spending decisions to your values.
Plus, getting a small win out of a good act definitely doesn’t hurt!
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