Donations Tax

At appropriate times, we as financial planners advise our clients to make donations to others in an attempt to reduce the value or our clients’ estates and possibly reduce their tax burdens. As a result of this, the fiscus will be “losing” out on revenue, as such donations are governed by sections 54 to 64 in Chapter II Part V of the Income Tax Act 58 of 1962 in an attempt to reduce or discourage donations.

Donations tax is levied at a rate of 20%[1] of all property donated[2] or deemed[3] to have been donated during the year of assessment. The initial R 100 000 of all property donated will be exempt from donations tax[4]. There are specific exemptions to donations tax and these are contained in section 56(1) of the Act. Some of these include donations to a spouse[5], donation mortis causa[6], and any donations cancelled within a period of six months after the donation took effect[7].

Section 55(1) defines a donation as “any gratuitous disposal of property including any gratuitous waiver or renunciation of a right”. For a disposal to meet the gratuitous disposal above, it must have been made for no consideration, in other words, for free. In CSARS v Welch’s Estate, 66 SATC 303, the words ‘pure liberality’ or ‘disinterested benevolence’ were used to establish whether a donation had taken place.

Section 55(1) defines property as ‘any right in or to property movable or immovable, corporeal or incorporeal, wheresoever situated.’ It is important to note that only South African residents are subject to donations tax on the property they donate irrespective of where such property is located, taking into consideration section 56(1)(g).

A donation only takes effect when all legal formalities for a donation have been complied with[8]. A donation will not take effect until such time as the donation is accepted by the donee. This does not imply that the donee has received the property, it implies that the donee has accepted the donation, even if receipt will only take place at a later date. An oral donation will take effect on the date of delivery. When a promise has been made to donate and the delivery has not yet taken place, the donation will only become effective when the promise is reduced to writing and signed.

Deemed donations take place “where any property has been disposed of for a consideration which, in the opinion of the Commissioner, is not an adequate consideration that property shall for the purposes of this Part be deemed to have been disposed of under a donation…”[9] The deemed donation will be the difference between the value of the property less the consideration received. For example: if A disposed of an asset worth R 100 000 to B for R 20 000 a deemed donation of R 80 000 has taken place and subject to donations tax.

Once a donation has taken place and donations tax becomes payable such tax must be paid by the donor to the Receiver of Revenue. “Donations tax shall be paid to the Commissioner within three months or such longer period as the Commissioner may allow from the date upon which the donation in question takes effect”[10]. Should the donor fail to pay such taxes, the donor and the donee become jointly and severally liable for such taxes[11].

Section 62 of the Act determines how to calculate the value of various types of property that are donated, these include fiduciary, usufructuary or other like interests. It is important to note that a usufructuary interest consists of two parts, namely the usufruct and the bare dominium. Here two donations take place and must be calculated separately.

In summary, the following 7 steps can be used to calculated the donations tax due:

1. Identify the various properties that was disposed of during the year of assessment.

2. Determine whether the disposal is considered a deemed donation or a donation.

3. If so, determine if such donation is specifically exempt from donations tax.

4. Should the donation not be specifically exempt, determine the value of the donation.

5. Deduct any consideration received from the donee for the property.

6. Deduct the section 56(2)(b) general exemption allowed.

7. Calculate 20% of the value at step 6 to determine the donations tax liability.

It is important that the above be applied as property is disposed of, as donations tax needs to be accounted for on the date the donation takes place[12].

When donations are properly utilised in conjunction with estate and tax planning, an adviser can reduce his/her client’s tax burden. Consideration must be given to possible VAT and in particular Capital Gains Tax implications. Section 7 of the Act also needs to be considered, as well as the General Anti Avoidance Regulations. As with all matters pertaining to tax, it is important to have a thorough understanding of the various implications of the advice we provide our clients.

[1] Section 64

[2] Section 55(1)

[3] Section 58

[4] Section 56(2)(b)

[5] Section 56(1)(b)

[6] Section 56(1)(c)

[7] Section 56(1)(e)

[8] Section 55(3)

[9] Section 58(1)

[10] Section 60(1)

[11] Section 59

[12] Section 60(2) & Section 60(3)