Call for Tax Deductibility for Donating (to) FLOSS (AU)
There is cause to believe that an entity could be established in such a way as to be a deductible gift recipient under the Australian Income Tax legislation and that donations of open source software to that entity would give rise to a tax deduction to the benefit of the donor while preserving public access to the software. Such an arrangement would benefit individual FLOSS developers (who have an income against which a deduction can be claimed), including those whose FLOSS activities are pro bono at the moment. There is no reason to think the same principles would not apply to other licensing schemes, such as open content.
Some while ago Open Source Victoria (OSV) asked me to investigate some issues relating to the tax deductibility of donating FLOSS to charities as a means of promoting participation in FLOSS within Australia. OSV agreed to partly fund the work, and I mapped out some options for them at the time. I’ve recently spoken with OSV and they were happy for some aspects of work to be made public.
Policy makers too often overlook the fact that the whole of the community benefits whenever software is released under a FLOSS licence. The intended beneficiary of such a scheme are therefore the community as a whole. However, consistently with existing government policy to provide incentives for the creation of works, the donors of such FLOSS software would also benefit through a tax benefit in return for the donation. Further, as businesses will likely be able to deduct the costs of development of software which is created in the course of their business, the donors most likely to benefit are those individual developers engaged in pro bono development.
That is, such a scheme would provide an incentive to individual developers to create and donate FLOSS.
Outline of the Arrangement
In some circumstances the donation of gifts to charities gives rise to a tax deduction to the value of the gift. Such deductions are not available for all donations, but whether the gift is money or an asset does not remove its deductability. Software is an asset, so it can be a gift. The arrangement therefore involves establishing an entity which grants OSI compliant licences over software donated to it in such a way that the gift of copyright to the entity would give rise to an entitlement to claim a tax deduction for the value of that copyright.
Eligibility for a Deduction
There are a number of things to be established in order for a donation to an entity to be tax deductible. These are:
- that the donation falls into one of a number of specific categories of things which can be gifts;
that the recipient of the gift has a special character as a Deductible Gift Recipient (DGR). This involves both being entitled to endorsement as a DGR and actually receiving that endorsement;
that any additional special conditions are satisfied. Special conditions can apply to gifts based on the character of the DGR and/or the circumstances of the donation; and
that the donation has the character of a gift as defined by taxation law. This includes both the nature of the gift itself and the manner in which the gift is given.
Deductible Gift Recipient
The legislation does not make it particularly easy to become a DGR. Indeed, it has a Byzantine structure which the unkind might think was specifically designed to prevent entities becoming DGRs. The tax deductibility of gifts is dealt with in Division 30 of the Income Tax Assessment Act 1997. Section 30-15 has a table which sets out the circumstances in which a gift will be deductible (Deductibility Table). The Deductibility Table sets out not only the categories of gift recipient, but also links the gift recipient to specific categories of gift and/or special conditions on gifts and/or deductibility of gifts. A gift recipient may appear in different rows of the table, indicating that the same recipient may receive different categories of gift or that different gifts are subject to different special conditions (or both).
From a review of all of these the following seemed promising:
“(1) A fund, authority or institution covered by an item in any of the tables in Subdivision 30‑B”;
“4(b) a public library in Australia”; and
“4(c) a public museum in Australia”.
The tables in Subdivision 30-B list a large number of funds, authorities and institutions. Some of these are named specifically (eg item 2.2.19 “the Foundation for Gambling Studies”), while others are identified by category (eg item 2.1.1 “a public university”). Of all the entities listed in Subdivision 30‑B, the only ones likely to be applicable in the proposed circumstances are:
(a) 4.1.1 a public benevolent institution;
(b) 12.1.2 a public library; and
(c) 12.1.3 a public museum.
In certain circumstances, there may be other categories which are appropriate – for example, certain research arms of universities are entitled to be DGRs. In addition, there would be the possibility of having the entity specifically listed in the legislation – if a specific naming was possible it would be the easiest route home, but the least likely to be able to be achieved. Failing that, the most promising seem to be establishing a library or a museum. The detail of what constitutes a public benevolent institution is rather stringent and would be difficult to qualify under.
In addition to the entity being established as a DGR, the gifts themselves need to have the requisite character. These requirements are set out in a number of court cases and include:
(a) that there is a transfer of money or property;
(b) the transfer is made voluntarily;
(c) that there is no material benefit to the donor by way of return; and
(d) it essentially arises from benefaction and proceeds from detached and disinterested generosity.
There is no reason why the donation of code could not qualify under this definition as a gift.
In addition to the provisions qualifying what is, or is not a gift, the Act also has “anti-avoidance” provisions which are relevant. These are intended to apply to invalidate gifts where a scheme or arrangement has been contrived to avoid the spirit of the deductible gift recipient provisions. In essence a gift is not deductible where as a result of a gift:
(a) the value of the gift to the recipient is reduced (including where the reduction is from an event that happens after the gift is given);
(b) another fund other than the recipient becomes liable to another person;
(c) the donor of the gift (or an associate) receives a benefit (other than the tax deduction); or
(d) there is a requirement for the recipient or another fund to acquire other property from the donor.
There is no reason in principle why the anti-avoidance provisions should preclude software donations of the kind contemplated by these arrangements.
How Much of a Deduction?
In theory the whole value of the asset is deductible. The Act has different rules for different categories of gift. In some circumstances no deduction is available for the donation of assets worth less than $5,000. However, it is plausible that a gift of software under the arrangements contemplated would not be subject to this $5,000 minimum. There are specific procedures in the Act to establish a value of assets. For the arrangement to work could require establishing software valuers approved by the relevant department. Presumably the market value of the donation of a substantial project (Joomla? ) would be signficant.
What needs to be done?
From here there is still a fair bit of work to be done before such an entity could commence operation. A start would be to establish the infrastructure for such an entity – eg finding people to run it, creating constituting documents which would be consistent with an open source donation, establishing a valuation procedure and making an application for deductible gift recipient status.