Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 26

Tax-effective charitable bequests

Many people plan their charitable bequests well in advance and these are stated clearly in their wills. Bequests form a major part of the revenue of many charities. With some extra thought in estate planning, a bequest to a charity could be made in a more tax-effective way, creating the potential for larger charitable bequests or a greater amount leftover for other beneficiaries.

Consider this simple example. There are circumstances in which assets such as shares can be directly bequested to a charity. These assets may have significant capital gains attached to them. If the charity has zero tax status then these assets can be transferred without tax being incurred on the capital gains. Compare this to the situation where all the assets of the estate are sold down: capital gains will be incurred, and the amount of money that can be distributed amongst beneficiaries, including the charity, is smaller.

Check the tax rules

The Australian Tax Office (ATO) website explains the rules around estates, bequests and taxation. In summary:

-       Generally, capital gains tax (CGT) applies to any change of ownership of a CGT asset (unless it was acquired pre-CGT (20 September, 1985)).

-       However any capital gain or capital loss made on a post-CGT asset is disregarded if, when a person dies, an asset they owned passes directly through to a beneficiary. The beneficiary receives the asset and assumes the capital gains or loss position. Similarly, the capital gain on a testamentary gift of property is disregarded in the estate if the gift is made to a deductible gift recipient (DGR) and the gift would have been income tax deductible if it had been made before the taxpayer’s death. In this case ‘property’ is not specifically defined by the ATO and thus takes on its dictionary meaning (broadly, possessions) which we interpret as including shareholdings.

-       A DGR does not have to pay taxes on income earned, thus the collective outcome (that of the DGR and the estate combined) is improved compared to converting all estate assets to cash or if a CGT event is deemed to have occurred and included in the ‘date of death (tax) return’.

-       It appears that the ATO and the government are aware of this technique. A 2004 case confirms this (reference: ATO ID 2004/641) and was withdrawn because it was a straight application of the law and no interpretation was required. The 2004 Federal Budget removed the requirement that testamentary gifts of property to a DGR must be valued at greater than $5,000.

Charities need a checklist of actions

To make the most of this opportunity, charities need to:

-       Ensure they are registered as a DGR.

-       Consider whether they know their potential testators (people making the bequest) well enough to suggest that there may be a more effective way (for all parties involved) to design their estate planning. This may at first appear to be an awkward conversation but this may not always be the case. For instance some people may indicate to a charity beforehand that they intend to make a bequest to them out of their estate. Many charities develop deep personal connections with potential testators through the provision of assistance to people or associated family members, in some cases lifelong. It is quite common for the beneficiaries of charitable assistance to seek to allocate some of their estate to the charity. These situations may present opportunities to have such a discussion around how this bequest could be structured.

-       Ensure that the contacts within charities handling bequests are also aware of these rules so that when they discuss the transfer of these assets with the solicitors tasked with winding up estates, the actual shares are transferred, as opposed to liquidating the shares and transferring the cash, as is often, by default, the action taken.

-       Finally, be able to handle the assets that have been bequeathed. Can they easily take custody of these assets? Can they dispose of these assets if they do not fit the investment strategy of the charitable funds? Do they have the ability to understand how a particular asset will affect the overall risk profile and liquidity of their charitable funds. I am aware of some charities which are quite comfortable receiving bequests in the form of Australian equities as they have arrangements in place with fund managers to accept shares as in-specie application funds (indeed there are some interesting funds which target charitable groups and zero tax entities in general, seeking to maximise the benefit of franking credit refunds). This removes the need for the charity to perform their own transactions.

Note that this article is focused on assets held outside of superannuation. There will be different outcomes for assets held in superannuation which will depend on a number of issues including the type of super fund (whether it is a SMSF or not). For an individual planning a bequest strategy for their assets in super, it is recommended they seek specific advice on this issue.

Overall, funding remains a constant ongoing challenge for charities. This strategy results in more efficient estate planning amongst those intending to make a bequest, which in turn can lead to better outcomes for charities. Of course we recommend you seek professional advice if you intend to formalise such a strategy.


David Bell’s independent advisory business is St Davids Rd Advisory. Ben Kurtz is a Senior Accountant at Nortons Business Advisors.



Death and taxes on your own terms

Seven steps to easier management of your estate

Seven items your estate plan may have left out


Most viewed in recent weeks

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Latest Updates


Stop treating the family home as a retirement sacred cow

The way home ownership relates to retirement income is rated a 'D', as in Distortion, Decumulation and Denial. For many, their home is their largest asset but it's least likely to be used for retirement income.


Hey boomer, first home buyers and all the fuss

What is APRA worried about? Most mortgagees can easily absorb increases in interest rates without posing a systemic threat to the banking system. Housing lending is a relatively risk-free activity for banks.


Residential Property Survey Q3 2021

Housing market sentiment has eased from record highs and confidence has ticked down as house price rises slow. Construction costs overtook lack of development sites as the biggest impediment for new housing.

Investment strategies

Personal finance is 80% personal and 20% finance

Understanding your own biases and behaviours is even more important than learning about markets. Overcome four major cognitive biases that may be sabotaging your investing and recognise them in others.

Where do stockmarket returns come from over time?

Cash flow statements differ from income statements and balance sheets, and every company must balance payments to investors versus investing into the business. Cash flows drive the value of the business.

Fixed interest

How to invest in the ‘reopening of Australia’ in bonds

As Sydney and Melbourne emerge from lockdown, there are some reopening trades in the Australian credit market which 'sophisticated' investors should consider as part of their fixed income portfolios.


10 trends reshaping the future of emerging markets

Demand for air travel, China’s growing middle-class population, Brazil’s digital payments take-up, Indian IPOs, and increased urbanisation are just some of the trends being seen in emerging economies.



© 2021 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.