A taxpayer has been denied deductions for donations of HIV medicines and a gift certificate to deductible gift recipients (DGRs).

The first deduction was claimed in the 2010 year. The taxpayer alleged that, on 30 June 2010, she purchased HIV medicines for $40,000 which she donated to an eligible DGR operating in Kenya. The medicines were stored in boxes in a warehouse in the UK. The taxpayer bought 200 treatment kits. Each kit was made up of 7 doses of 3 different types of tablets.

The AAT, however, said that as the medicines remained in their boxes in the warehouse and had not been assembled into kits, they were “unascertained goods” for the purposes of the Sale of Goods Act 1923 (NSW). To become ascertained goods, an act of appropriation was required. That would have necessarily involved the boxes being opened. That did not happen and therefore title to the medicines did not pass to the taxpayer. Accordingly, she she did not make a gift of property for the purposes of s 30-15 of the ITAA 1997. In any event, any deduction would have been limited to the market value of the medicines which was US$665.20 (Kenya being the relevant market).

The second deduction was claimed in the 2011 income year, the taxpayer alleging that she purchased a gift certificate for $560,000 which she pledged to “Australia Metamorphic International for Global Development Fund”, which was an eligible DGR. Under the agreement, the taxpayer was required to pay $28,000 within 30 days with the balance being due 10 years later. Interest on the unpaid portion was payable at 0.5% pa.

The AAT rejected the taxpayer’s claim as there was no evidence the taxpayer had paid any money for the gift certificate.

Shortfall penalties were assessed at 50% as the taxpayer had been reckless in claiming the deductions. This was because she had ignored a warning letter from the ATO in September 2010 about her involvement in a potential tax exploitation scheme involving the purchase of pharmaceuticals. The letter recommended that she not claim any deductions other than the cash donation to the DGR. In addition, the safe harbour of s 284-75(6)(b) in Sch 1 to the TAA was not available because the taxpayer had failed to show the ATO’s warning letter to her tax agent.

(Arnold and FCT [2017] AATA 1318, AAT, File No: 2012/4203, 2013/0273, 2014/4923, 2015/4019, Perram DP, 18 August 2017.)

This involved the same facts as in FCT v Arnold (No 2) [2015] FCA 34, where the Commissioner successfully obtained orders for a civil penalty for promoting a ‘tax exploitation scheme’ (under Div 290 of the Schedule 1 to the TAA). I covered this is a Related TT article in 2015.

In this case, The Court said the promoter brought the scheme to Australia in 2009 and 2010. Under the scheme, participating entities incurred a liability to pay for pharmaceuticals for use in foreign markets, but liability for payment of 92.5% of the purchase price would be deferred for 50 years at very low interest. Participants would claim immediate deductions for the full amount of the purchase price.

In commenting on the case, at the time, ATO Deputy Commissioner Tim Dyce said the so-called philanthropic scheme was modelled on an arrangement, which previously failed in Canada, and involved the purchase and donation of AIDS pharmaceutics to charities in Africa. “As we discovered, the purchasers only paid 7.5% of the grossly inflated price of the drugs, yet claimed tax deductions of 100%”.

Mr Dyce said that, in delivering his judgment, Justice Edmonds noted at least 5 grounds why the scheme [benefit] was not available under the law, including that there was no actual delivery of the pharmaceuticals to the charities concerned at the relevant time.

[LTN 162, 25/8/17; TM August]

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