Donations tax – a summary of calculations

August 1st, 2019
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Picture source: Gallo Images/Getty

Donations tax is payable on the total value of property disposed of, whether directly or indirectly, by a resident by means of a donation. A ‘resident’ is defined in the Income Tax Act 58 of 1962, (the Act) as a –

‘(a) natural person who is –

(i) ordinarily a resident in the Republic; or

(b) person (other than a natural person) which is incorporated, established or formed in the Republic or which has its place of effective management in the Republic.’

‘Donation’ is defined as the ‘gratuitous disposal of property including any gratuitous waiver or renunciation of a right’ that is without expecting something in return (s 55(1) of the Act). The test for a donation in our common law is well-established and is that the disposition must have been motivated by ‘pure liberality’ or ‘disinterested benevolence’ (see Avis v Verseput 1943 AD 331).

‘Donee’ is defined as ‘any beneficiary under a donation and includes, where property has been disposed of under a donation to any trustee to be administered by him for the benefit of any beneficiary, such trustee: Provided that any donations tax paid or payable by any trustee in his capacity as such may, notwithstanding anything to the contrary contained in the trust deed concerned, be recovered by him from assets of the trust’ (s 55(1) of the Act).

Where any property has been disposed of for a consideration, which in the opinion of the Commissioner of the South African Revenue Service (Sars), is not an adequate consideration for that property, that property shall be treated as having been disposed of or under donation (s 58(1) of the Act). The value of the donation will be the amount by which the donation does not reflect an adequate consideration. Where property is disposed of by what is called an ‘inadequate consideration’, the difference between the value thereof and the consideration given, is deemed to be a donation (see Estate Welch v Commissioner for SARS [2004] 2 All SA 586 (SCA)).

According to Adri Ludorf ‘Tax implications of making donations’ (www.goldbergdevilliers.co.za, accessed 5-7-2019),  donations tax is a ‘tax payable at a flat rate on the value of property disposed of by donation’ (ss 54 to 64 of the Act).

‘Property’ is defined for donations tax purposes, as ‘any right in or to property, movable or immovable, corporeal or incorporeal, wheresoever situated.’

Ludorf (op cit) states that ‘[d]onations tax is levied at a flat rate of 20% on the value of the property donated.’

Should the amount of the donation or donations, however, exceed R 30 million, the rate will be 25% on the value of all the donations.

When is a donation effective?

In terms of s 55(3) of the Act, a donation is deemed to be effective from the date on which all legal formalities for a valid donation have been complied with.

A donation may be contracted verbally, except when by law it is required that the contract be in writing. The contract needs to be in writing, when immovable property is donated or in the case of executory donations. In terms of s 43 of the General Law Amendment Act 70 of 1968, an executory donation (that is a donation promised for a date in the future) must be in writing and signed by the donor or by a person acting on their written authority granted by them and two witnesses. An executory donation takes effect when the property donated is actually delivered (TC (unreported case no 11372, 13-10-2004) (Traverso DJP).

Until the above formalities have been completed, no donation takes place.

Exemptions

Section 56(1) of the Act, contains a list of exemptions from donations tax, as set out hereunder.

Annual exemptions

A donation will be exempt if the total value of donations for a year of assessment does not exceed:

  • Casual gifts by companies and trusts (taxpayers who are not individuals):
    R 10 000.
  • Donations by individuals: R 100 000.

Donations between spouses

The following exemptions between spouses are allowed in terms of the Act –

  • donations to or for the benefit of the spouse of the donor under a registered antenuptial or post-nuptial contract; and
  • donations to or for the benefit of the spouse of the donor who is not separated from them by judicial order.

Section 57A of the Act, stipulates that a donation made by one of the spouses, who is a party to a marriage in community of property, and such property falls in the joint estate of the spouses, such donation shall be deemed to have been made in equal shares.

Section 57A further stipulates that a donation made by one of the spouses, who is a party to a marriage in community of property, where the property was excluded from the joint estate, shall be deemed to have been made solely by the spouse making the donation.

Further exemptions from donations tax

  • Donations mortis causa.
  • Any donation of which the donee will not benefit until the death of the donor.
  • Any donation, which is cancelled within six months from when it took effect.
  • Any donation made by or to the benefit of any traditional community, traditional council or any tribe as referred to in s 10(1)(t)(vii) of the Act.
  • Donations to charitable, ecclesiastical and educational institutions, and certain public bodies in the Republic of South Africa (SA).
  • Donations made by companies, which are recognised as public companies for tax purposes in terms of s 38 of the Act.
  • Donations between companies forming part of the same group of companies.
  • The donation of assets situated outside SA, subject to certain conditions as set out in s 56(g) of the Act.
  • Any donations by or to any person referred to in subss 10(1)(a), (cA), (cE), (cN), (cO), (cQ), (d) or (e) of the Act. This includes government, provincial administration, local authorities, political parties or retirement funds.
  • Any voluntary award of which either the value is required to be included in the gross income of the donee in terms of para (c), (d) or (f) of the definition of ‘gross income’ in terms of s 1 of the Act or a voluntary award of which the gain must be included in the gross income of the donee in terms of s 8A, 8B or 8C of the Act.
  • Any donation of which such property consists of a right (other than a fiduciary, usufructuary or other like interest), to the use or occupation of property used for farming purposes, for no consideration or a consideration which is not an adequate consideration, and the donee is a child of the donor.
  • Any donation where such property consists of the full ownership in immovable property if –

–     such immovable property was acquired by any beneficiary entitled to any grant or services in terms of the land reform programme as contemplated in the White Paper on South African Land Policy, 1997; and

–     the Minister of Land Affairs or a person designated by him has, on such terms and conditions as such minister in consultation with the Commissioner prescribe, approved the particular project in terms of which such immovable property is acquired; or

–     such immovable property was acquired in terms of land reform initiatives by virtue of measures as contemplated in ch 6 of the National Planning Commission, Presidency of the Republic of South Africa.

  • Donations to approved Public Benefit Organisations (PBO’s) – see s 56(1)(h) of the Act. This will only apply to PBO’s registered with Sars in accordance with s 30 of the Act.
  • Any donation if made under a trust.

Who is liable to pay donations tax?

Donations tax applies to any individual, company or trust that is a resident of SA (as defined in s 1 of the Act).

Non-residents are not liable for donations tax. If your brother lives and works in Australia and donates some of his hard-earned Dollars to you, from funds generated while working overseas, he will not be liable to pay donations tax in SA.

The donor is liable for the payment of donations tax. However, if the donor fails to pay the donation tax in time, the donor and donee become jointly and severally liable for the donations tax
(s 59 of the Act).

Paying donations tax

After a donation is made, the donor needs to complete an IT 144 form and submit it to the nearest Sars branch.

Donations tax must be paid at the end of the month, following the month in which the donation was made. Sars may in certain circumstances allow for a longer period of payment (s 60(1) of the Act).

Valuation of property for donations tax

In the case of any fiduciary, usufructuary or other like interest in property, the annual value of the right of enjoyment of the property over which such interest was or is held, is capitalised at 12%, over the life expectation of the donor, or if such right is to be held for a lesser period than the life of the donor, over such lesser period (s 62 (1)(a) of the Act).

In the case of any right to any annuity, the value is also determined by capitalising the annual value of the annuity at 12% percent, over the expectation of the life of the donor, or if such right is to be held by the donee for a lesser period than the life of the donor, over such lesser period (s 62(1)(b) of the Act). (Note that the calculation is made over the life of the donor and not the life of the person enjoying the right.)

In the case of a right of ownership in any movable or immovable property, which is subject to a usufructuary, fiduciary or other like interest the value of such property will be the amount by which the fair market value of such property exceeds the value of such usufructuary, fiduciary or other interest
(s 62(1)(c) of the Act).

If the Commissioner, however, is of the opinion that the property donated will not be able to provide a 12% yield over the period, the Commissioner may use such other value that he deems reasonable.

Where the fiduciary, usufructuary or other like interest is to be determined over the life expectancy of a natural person and where it is not a natural person – like a company or a trust – the value of such right shall be determined over a period of 50 years.

In the case of other property, the value of the property will be the fair market value of the property, on the date that the donation is made, without any limitations placed on the donation by the donor. If the Commissioner is of the opinion that conditions were imposed by the donor, by which the value of any property is reduced in consequence of the donation, the value of such property shall be determined as though the conditions in terms of which the said valuation of the property is reduced in consequence of donation, had not been imposed (s 62(1)(d) of the Act).

An owner of immovable property on which a bona fide farming undertaking is being carried out in SA, the fair market value is determined by reducing the price, which could be obtained on a sale between a willing buyer and willing seller dealing at arm’s length in an open market by 30%. The fair market value is 70% of the normal market value.

Any company not quoted on the stock exchange or close corporation, which owns immovable property on which bona fide farming operations are being carried on in SA, the value of such immovable property shall also be determined as 70% of the normal market value.

If the Commissioner is not satisfied with the fair market value placed on the property, they may fix the fair market value of the property (s 62(4) of the Act). When determining the fair market value, the Commissioner shall take into consideration, inter alia –

  • the municipal or divisional council valuation of such property;
  • any sworn valuation provided by the donor or the donee; and/or
  • any valuation made by a competent and disinterested person appointed by the Commissioner (s 62(5) of the Act).

Conclusion

To summarise, in order to calculate donations tax, the following should be taken into account:

  • Which various movable and immovable properties were disposed of during the year of assessment?
  • Was the disposal a donation or deemed to be a donation?
  • Was the donation specifically exempt from donations tax?
  • What was the value of the exemption?
  • Was any consideration received from the donee?
  • Were the yearly threshold amounts for yearly donations by a natural person or a person other than a natural person taken into account?

The donations tax will then be calculated on amounts not exempt from donations tax at a rate of 20% or 25% – if the donations are over R 30 million.

Petro Krüger BLC LLB (UP) is a legal practitioner at VZLR Inc in Pretoria.

This article was first published in De Rebus in 2019 (Aug) DR 16.