Donations tax and qualifying tax exemptions form an important part of financial planning and should form part of the annual review of your financial plan to ensure that you are not paying tax unnecessarily. The process includes determining whether a gift or donation qualifies as a ‘donation’ in terms of the Income Tax Act, whether the donation is taxable, and the extent to which exemptions apply. Here’s what to consider.
What is a donation?
According to Sars, a donation is a gratuitous disposal of property or any gratuitous waiver of rights, which means that a donation does not necessarily have to take the form of money and can include a physical asset, such as a vehicle, or something that has deemed value. Importantly, in order to be considered a donation in terms of the Income Tax Act, there must be no expectation of reward on the part of the donor. Where the donor expects something in return from the recipient of the gift, the transaction cannot be considered to be a donation. Whether you intend helping out your child financially, selling a property at a discounted price to a family member, supporting your favourite charity, or helping your children purchase their first property, it is important to understand whether the transaction is considered a donation and what the tax implications are.
What is donations tax?
Donations tax applies to any individual, company or trust that is a resident as defined by the Income Tax Act, which means that non-residents of South Africa do not need to pay donations tax. As it currently stands, the person making a donation is liable for Donations Tax which is calculated at a flat rate of 20% on the value of the donation or gift up to R30 million. To the extent that the donation exceeds R30 million, donations tax is calculated at 25%. Note that no donations tax is payable on donations from a foreign resident to a South African resident provided that the funds donated are from a foreign source. However, there are a number of exemptions that apply, and it is useful to understand how these work in order to ensure that you don’t pay unnecessary tax.
What are the exemptions?
In terms of the Income Tax Act, there are four categories of donations that qualify for exemption from tax:
(i) Category 1 exemptions
Donations that are completely exempt from donations tax include donations made between spouses, donations made to an approved Public Benefit Organisation, and those made to any sphere of government. More detail on donations that form part of this category include:
Spousal donations: In terms of the Income Tax Act, donations made to or for the benefit of a spouse married with an ante-nuptial or post-nuptial contract are exempt from donations tax. Where a spouse married in community of property donates property that forms part of the joint estate to their spouse, the donation shall be deemed to have been made in equal shares by each spouse. Where the donated property falls outside of the joint estate, such as an inheritance, the donation is deemed to have been made by the donating spouse.
Donations to an approved PBO: Many South Africans are keen to donate to individuals and charities to assist with the alleviation of poverty and, in doing so, it pays to find the most tax-efficient way of doing so. Recognising that many organisations in South Africa are dependent on the charitable giving of the public, Section 18A of the Income Tax Act allows individuals to donate up to 10% of taxable earnings towards an approved Public Benefit Organisation on a tax-deductible basis.
All non-profits are required to register as a Public Benefit Organisation (PBO) with Sars in order to receive a tax exemption, and this tax exemption must be approved by the Sars Tax Exemption Unit (TEU). If approved, a taxpayer can claim a tax deduction if they are in receipt of a Section 18A certificate issued by the PBO. In order to become an approved PBO, the company, trust or association must have been incorporated, formed or established in South Africa.
If you are donating towards a charity, it is important to understand the difference between a PBO, as per the above, and a non-government organisation (NGO) which is not an approved Section 18A institution.While a donation to an approved PBO has tax benefits for a donor, donations to an NGO are not tax-exempt and may in fact attract donations tax if they exceed the annual threshold.
To claim the deduction from a donation to a PBO, you will need to upload your Section 18A certificate when doing your eFiling, making sure that the certificate includes the PBO’s reference number, date of receipt of the donation, the name and address of the donor, and the amount or nature of the donation.
(ii) Category 2 exemptions
In respect of a taxpayer who is not a natural person, such as companies and trusts, the donation of casual gifts up to the value of R10 000 per year of assessment are exempt from tax.
(iii) Category 3 exemptions
From a financial planning perspective, it is important for individuals to understand the legislation relating to donations made by natural persons. The first R100 000 of donations made by an individual in a year of assessment is free from donations tax, whereafter donations tax is payable at the application rate. So, if you’re planning to help your children purchase their first property by contributing towards a deposit, you will need to take this threshold into account to ensure that you don’t end up paying tax unnecessarily. It is also advisable to reduce any agreement to writing so that there is a record of whether the money was intended as a gift or a loan. Donations tax will also apply in circumstances where you sell a property to someone at a discounted price, with the difference between the market value and the sale price being subject to tax.
(iv) Category 4
Donations made by a natural person in respect of the bona fide maintenance of a person are also exempt from donations tax and, while there is currently no limit on what can be spent in terms of maintenance, the exemption is limited to what the Sars Commissioner deems reasonable.
Who pays donations tax and how?
Donations tax is payable by the person who makes the donation, although it is important to keep in mind that the person receiving the gift has a duty to declare it in their tax return ITR12 as an ‘amount considered not-taxable’. After making the donation, the donor is responsible for reporting it to Sars by completing the IT144 form. The donor must then make sure that the appropriate donations tax is paid via eFiling by the end of the month following the month in which the donation was made. So, if the donor made the donation in mid-August 2021, they must ensure that Sars is notified of the donation and that donations tax is paid by 30 September 2021. The only exception to this is where the donor fails to pay the donations tax on time. In such circumstances, the donor and the recipient become jointly and severally liable for the payment of donations tax.
Donations and tax exemptions form an important part of one’s overall financial and estate planning, keeping in mind that donations can be used to achieve a number of succession planning goals. As such, any donations that you intend making should form part of a well-constructed financial plan in order to achieve your stated goals.