Donations, which are in effect agreements where one party gratuitously agrees to give something of value to another, are governed by the Income Tax Act and, as such, are taxable. Therefore, before gifting your child their first set of wheels or generously helping your adult child purchase their first property, it is important to understand the tax implications of making such donations.
Generally speaking, donations fall into two main categories, being (a) donations mortis causa and (b) donations inter vivos. As the name denotes, donations mortis causa is where, with death being seemingly imminent, the donor promises to gift the donee something – with the donation being contingent on the donor’s death. This type of donation is required to be reduced to writing, should be signed by the donor and two witnesses, and should be accepted by the donee before the donor’s passing. As this form of donation is contingent on a future event, the donor is free to revoke the donation at any time before his death. Conversely, donations inter vivos are donations made between living people with transfer taking place immediately. Once the donor has transferred the gift and the donee has accepted it, the donation is considered to have taken place and is irrevocable.
In terms of legal formalities, for a donation to take place, the donor must make a promise to donate something, and this offer must be accepted by the donee, keeping in mind that both the donor and donee must have the requisite legal capacity. Generally speaking, anything that can be traded can be donated, including fixed or immoveable assets, cash, goods, services, and corporeal or incorporeal rights.
In terms of the Act, donations tax is payable at a flat rate of 20% on the value of the property disposed of by donation up to R30 million, whereafter donations tax is payable at a rate of 25%, subject to a number of exemptions which we have set out further below. From a legal perspective, a donation is deemed to be effective from the date on which all legal formalities have been complied with and once finalised, has tax implications that the donor and donee should be aware of, specifically when it comes to reporting to SARS. Keep in mind that donations tax in the context of individuals is applicable only to South African tax residents, meaning that non-residents are not liable for donations tax. Further, while donations tax is generally payable by the person making the donation, keep in mind that where the donor fails to pay the tax within a certain period of time, the donor and donee can become jointly and severally liable for the tax.
Defined by the Income Tax Act as the ‘gratuitous disposal of property including any gratuitous waiver or renunciation of a right’, to qualify as a donation it must be apparent that the donee had no expectation of receiving something in return. Remember, in terms of the Act, where an asset is disposed of for an ‘inadequate consideration’, the difference between the value of the asset and the consideration given will be considered a donation and subject to donations tax to the extent that it does not qualify as an exemption. In terms of Section 56(1), some of the exemptions include the following:
- The first R100 000 of property donated by an individual in a year of assessment is exempt from donations tax. This means that a person can make multiple donations throughout the year of assessment on a tax-free basis provided that the cumulative total does not exceed the R100 000 threshold.
- Donations between spouses are exempt from donations tax and are not required to be declared when filing tax returns. This exemption only applies to couples who are legally married and not to cohabiting couples.
- Donations made in terms of a valid Will are not taxable.
- Donations to any sphere of government or a registered political party are not taxable.
- Donations mortis causa.
- Any donation of which the donee will not benefit until the death of the donor i.e. executory donations.
- Donations made towards the bona fide maintenance of another person, subject to the SARS Commissioner deeming the maintenance to be reasonable
Once the donation has been formalised, the donor is required to complete an IT144 form and submit it to the nearest SARS office, following which he is required to pay donations tax at the end of the month following the month in which the donation was made. This means that a donor should not wait until the annual submission of his tax returns before declaring a donation, but should rather declare it immediately to ensure that timeous payment of donations tax is affected. Remember, while the donee is not liable for paying donations tax, he is required to declare the donation on their tax return as an ‘Amount Considered Non-Taxable’, bearing in mind that taxpayers are required to declare all taxable and non-taxable income.
While not tax-exempt, donations to certain approved public benefit organisations (PBOs) are tax-deductible to the extent that the donation does not exceed 10% of the donor’s taxable income. Any donations exceeding 10% of taxable income will be treated as a donation made in the following year of assessment. However, for an individual to qualify for this tax exemption, he must be in receipt of a Section 18A certificate issued by the PBO which is granted by the Tax Exemption Unit of SARS. If you have donated to an approved PBO during the year of assessment, you can upload the Section 18A certificate when doing your e-filing in order to qualify for the exemption.
As is evident from the above, it is important to think carefully before making any form of donation and to reduce all donations or gifts to writing as proof of the nature of the transaction. Keeping the annual donations tax exemption of individuals in mind, you may require advice in structuring your intended donation over time to avoid paying unnecessary tax.
Have a great day.
Sue
