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Finance - Philanthropy |
 At this time of the year many higher income earners start to panic and look for quick ways of reducing their tax bill.
This can be dangerous.
Many a bad financial decision has been made in haste – particularly if it is made for the wrong reason.
The trick really is to stand back for a minute and work out exactly what you are trying to achieve. Reducing your tax bill should not be an end in itself.
It is not much use investing in some wild agricultural scheme that promises tax breaks but ultimately ends up simply costing you a great deal of money.
The latest moves by the Australian Tax Office makes these types of schemes even riskier than before. Not only can you lose your investment money but you could also be forced to repay the tax deductions made over several years, cop a 50 per cent penalty tax and pay interest to boot.
Negative gearing is an alternative but of course it too carries risks – you can lose more than you invested if markets go the wrong way.
Meanwhile the other big tax saver – superannuation – has had its attractiveness reduced because of the superannuation surcharge.
So is there another alternative?
The obvious one is simply to give your money away to a worthy cause. This is not as outrageous as some might feel. There are some pretty good reasons, some of them firmly embedded in self-interest, for giving philanthropy some consideration.
First of course is that it will do some good for the community in which we live.
As a member of that community we benefit.
Worthy causes abound – not only in the welfare area but also in other areas such as medical research, the arts and education. All these are under-funded by governments yet no-one doubts their importance.
A donation to a worthy cause will benefit not only the recipient but will have flow-on effects to the rest of the community. Unrelieved poverty that leaves sections of our community with no stake in our society is a threat to us all.
A flourishing artistic community enriches our lives and makes our lives more interesting and fulfilling.
Education is an investment in the future and if we can help some of our brighter children, through say a scholarship, to achieve their potential then we all benefit in the long run.
Secondly many of these causes attract a tax deduction. A $1000 donation to an organisation that fosters the local arts costs us only around $500 after tax. The rest comes from the Federal Government’s tax coffers.
What we are effectively doing here is directing Government funds into our local community and to a cause of our own choice.
Thirdly there is no risk that the contribution will end up costing us more than we anticipated - unlike agricultural schemes or negative gearing.
Fourthly philanthropy can be fully justified from an economic standpoint.
Economic theory is based on the assumption that people are rational (a big assumption) and that they participate in the economy because they need to satisfy certain needs.
First up we need to satisfy our needs for shelter, food and clothing. We also need to ensure that these needs will be met in the future – which is what economic security is all about. But we can get to a point when spending more and more money on these needs gives us no extra satisfaction.
Economists talk about spending money to maximise marginal utilities, or in other words maximising personal satisfaction. On a hot day spending money on the first ice cream gives a high level of satisfaction but if you follow it up with a second, the level of satisfaction falls. By the time you get to the fifth or sixth you would probably be feeling nauseous and the extra money spent would give no extra pleasure at all.
We have other wants and needs that cannot be met by simply consuming more and more goods and services. We are social animals and we derive satisfaction from being a valued member of a group. This is where philanthropy comes in.
If you can make a contribution that makes a difference in the arts, to your community, or to particular individuals and you feel good about it, that must be money well spent - just as much as if you bought an antique vase or another expensive bottle of wine.
If you choose this course of action, you can do it either openly or anonymously. It’s a personal choice. You can do it now or arrange to make a bequest when you die. You can make one-off gifts or you could set up a perpetual foundation, named perhaps after your family or say a deceased spouse.
Many Australians in the past have done just this. These foundations usually start with a capital sum that is invested in a range of assets types with the trustees held responsible for managing the capital and distributing the interest earned each year. There are even organisations around that will do the hard work for you – set up the foundation, assess the applicants, make the payments and manage the capital.
It is worth a thought. You can make the world a better place.
David Tomlinson is a freelance finance journalist based in The Channon.
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