IMAGINE making a kind gesture to a family member by gifting them a sum of money or a property but then being slapped by the taxman for your good deed. Yes, you can be taxed for money you give away! Welcome to the world of donations tax. The Income Tax Act defines a donation as ‘any gratuitous disposal of property and any gratuitous waiver of a right’.
This definition includes all gifts, allowances and any items given away for ‘free’ or below their fair value.
It is not a well-known fact that, in South Africa, we have a donations tax levied at 20% of the value of the donation. Remember, donations do not always take the form of money.
They can be in kind, which means the donation of an actual physical asset. The deemed value of these donations is dependent on the form of the asset.
If it is trading stock, trading assets or other movable assets, it will be deemed to be the fair value regardless of what you ‘sell’ it for.
Immovable property, like your house for example, has a prescribed formula.
Understanding this, how often do you think you are making donations?
Before all hope is extinguished and you panic about the amount of tax you owe, there is an annual exemption of R100 000 that every natural person in the country receives. This exemption removes the need to pay any tax on donations up to an amount of R100 000.
Essentially, this covers most donations in ordinary, everyday lives.
This exemption is only applied to natural people (you and me), whereas a company would only have a R10 000 exemption.
Amounts donated above the exemption would attract tax at an amount of 20% of the donation value. For instance, if you buy your child a car for R140 000 and have made no other donations in the year then you are liable for tax on R40 000 at 20%. This means that Sars expects a payment of R8 000.
Further to the individual exemption mentioned above, there are specific donations that are excluded from the tax and would not be included in your R100 000.
The main exclusions are:
- donations between spouses (all the more reason to buy your wife that diamond necklace);
- donations to charity organisations and other public benefit organisations. (Don’t forget your S18A Certificate – more on this in our next article);
- donations in terms of a will of a deceased person;
- donations to spheres of government and tribal councils.
As mentioned earlier, the value of a donation is always deemed to be at fair value to avoid individuals trying to be smart and donate cars to each other at a nominal amount (e.g. R100). This specifically applies when property and other similar assets are being donated.
All in all, donating can be an expensive or a lucrative endeavour, depending on how you do it.
Despite donations tax being very difficult to ascertain and monitor by SARS, it is worth being aware of the implications of this piece of law.
Contact any of Nexia SAB&T branches nationally for assistance in your tax affairs.
Please note that the above is for information purposes only and does not constitute tax advice. As each individual’s personal circumstances vary, we recommend they seek advice on the matter. Please note that while every effort is made to ensure accuracy, Nexia SAB&T does not accept responsibility for any inaccuracies or errors contained herein. If you are in doubt about any information in this article or require any advice on the topical matter, please do not hesitate to contact any Nexia SAB&T office nationally.
Article prepared by: Aysha Osman
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