As tax cuts loom, donating to charity shouldn’t just be for the rich

With Stage 3 tax cuts on the horizon, now is the prime time to consider what future tax deductions can be brought forward while your tax rates are higher.

Benevolent taxpayers often turn to charitable giving as a means of obtaining a tax deduction, and the savvy ones among them opt for a smart strategy: bring forward multiple years of charitable giving to make a lump-sum contribution to a sub-fund within a public ancillary fund.

With all Australians set to benefit from 1 July tax cuts, it’s not just millionaires looking to charitable giving ahead of 30 June.Credit: Dominic Lorrimer

This gives taxpayers the tax deduction they need while their tax rates are higher, along with the flexibility to gradually distribute the balance to charities over time.

It’s a solution that can deliver significant tax savings, including for pre-retirees looking to maximise deductions while still working and wanting to continue to enjoy giving beyond retirement, or those facing a large one-off tax bill through the sale of assets.

It’s a straightforward tactic that contributes to the community, as well as benefitting your tax bill. Make a cash contribution to a sub fund, and you will receive a tax deduction for the full amount you contribute.

You can claim this in the current financial year when your marginal rate is higher, but if your income ends up being lower than expected, any unused portion of the tax deduction can be carried forward, spread over a period of up to five years. This means you can leverage the deduction over time, depending on your income.

The mere thought of making a large donation to a charity can be daunting. A sub-fund gives you a breather.

The cash that you contribute goes into your own sub-fund, which is your charitable giving account. You choose which charities you want to support from your sub-fund, and how much you would like to give each year.

The only requirement is that at least 4 per cent of the balance is paid out annually. This ensures a steady stream of income to charitable causes, while still allowing you the flexibility to adjust who you want to support and how much they receive each year.

While you’re thinking about the charities that you intend to support, the balance of your sub-fund is invested for growth, and investment returns are tax-free. This means that even as you’re giving money away from your sub-fund, investment returns can increase the total amount you can give, amplifying your impact.

Consider the example of my own sub-fund with the Australian Philanthropic Services Foundation. Entrusting them with the management and administration of my charitable dollars has been a wise decision.

Despite consistent and generous giving from my sub-fund every year, the balance has grown. Tax-free investment returns have increased the balance by over half my original contribution. I’ve also made a few additional donations into the fund over time. At this rate, there will be enough in the sub-fund to get the grandkids involved.

A sub-fund is a gift itself to any taxpayer scrambling to select a charity to support before 30 June. The mere thought of making a large donation to a charity can be daunting. A sub-fund gives you a breather.

You can receive both the tax deduction and time to thoughtfully consider which charities to support. Use your sub-fund to dip your toe in the water and make smaller gifts to charities until you find the perfect fit, or spread your giving over time and experience the joy of giving for the long haul.

This strategy isn’t just reserved for the wealthy. Any generous Australian looking for a tax deduction of at least $40,000 (the recommended minimum balance) can benefit from establishing a sub-fund.

And with all Australians set to benefit from 1 July tax cuts, it’s not just millionaires looking to charitable giving ahead of 30 June.

Noel Whittaker is the author of Wills, Death & Taxes Made Simple and numerous other books on personal finance. Email: [e-mail]

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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