IT CAN COST YOU TO BE GENEROUS: DONATIONS TAX

What is donations tax apart from obviously being yet another tax? When and how does donations tax affect you and who is liable for or exempted from paying donations tax?

 WHAT IS IT?

Donations tax is not a tax on income but is a tax on the transfer of assets from a donor to a donee; which is dealt with in Sections 54 to 64 of the Income Tax Act No. 58 of 1962 (the Act).  In terms of the Act, donations tax can be applied to any individual, company or trust that is resident in South African domiciled. Non-residents are not liable for donations tax. You will pay 20% of the donated amount less the annual R100 000,00 exemption while companies and trust may donate up to R10 000,00 per annum.

 WHAT IS A DONATION AS FAR AS THE RECEIVER OF REVENUE IS CONCERNED?

You need to understand what donation means in tax terms and it is defined in the Act as follows:

  • “donation” means any gratuitous disposal of property including any gratuitous (unjustified/unreasonable) waiver or renunciation (abandonment) of a right;

A donation will attract donations tax if it is given or received for no remuneration or less than the market value, without the payment of duty (i.e. tax) in return.

You must also be aware that the Receiver will also tax you on the enhancement of value if you agree to cancel a restriction over any property such as a right of way servitude or a usufruct.

DEEMED OR HIDDEN DONATIONS

You must also be careful about the possibility of deemed donations as Section 58 of the Act provides that:

  • “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 be deemed to have been disposed of under a donation”

Many people fall into that trap when arranging a sale of property involving family members or other related parties. They may think they are doing the recipient and themselves a favour by valuing the property at a nominal amount or even at nothing but that simply means they have disposed of the property for less than a fair market value. The Receiver will require duty to be paid on what it accepts as being the fair market value and may even initiate a tax audit for all parties involved.

Always find out the current fair market value for any property involved then declare that to be the dutiable amount and pay any tax applicable on that figure. If you do not do so, either the Receiver will require valuations to arrive at a dutiable figure or you may find that you are suddenly asked for donations tax some months later when the transaction is reviewed.

WHO MUST PAY AND ARE THERE ANY EXEMPTIONS?

If there is a donation, the donor must pay the donations tax and such tax must be paid within three months from the date the donation was made.  If the donor fails to pay the donations tax, then both donor and donee will become jointly and severally liable for the tax.

An annual exemption of R100 000,00 on the sum of the value of all property donated during any year of assessment is available to natural persons whilst donations between spouses married out of community of property who are not separated are entirely exempt .

Donating to somebody or an entity may seem to be a simple task, but there are issues which need to be taken into consideration especially when such donation is below the market value or exceeds the exemption amount allowed in each tax year.

For more information on this or any other legal related queries please contact us at 033 392 8000

By: Yvonne Clowes

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