I have received a large sum of money from a friend in the US as a graduation gift. What are the tax implications? I am still studying full-time, so currently I don’t receive enough income to pay tax.
Cheryl van Rooyen - Efficient Wealth
Firstly, congratulations on your commitment to your studies. An education is extremely important for various reasons, and it seems that you are on track for a great future ahead.
In answer to your question, you have not indicated the actual amount gifted or donated to you. I would like to point out a few important factors for consideration as follows:
Gifts from abroad:
Reminder: Your bankers have to report information about foreign financial assets and accounts.
The Foreign Account Tax Compliance Act (Fatca) is an important development in US efforts to combat tax evasion by US persons’ holding accounts and other financial assets offshore. There are serious penalties for not reporting these financial assets.
Fatca will also require financial institutions to report directly to the IRS information about financial accounts held by US taxpayers or by foreign entities in which US taxpayers hold a substantial ownership interest. The reporting institutions will include not only banks, but also other financial institutions, such as investment entities, brokers, and certain insurance companies.
Therefore, if you set up a new account, or investment with the proceeds of this ‘large sum of money’ with any financial institution, it may ask you for information about your citizenship, source of the funds, etc., that needs to be declared.
Donations tax (gift tax in the US)
The friend who provided you with the graduation gift will need to disclose or file a ‘gift tax return’ on this transaction to the IRS in the US, and would be liable for gift tax, allowing for an exclusion amount currently of $14 000. There are a few notable exceptions to the $14 000 annual limit: if the gift was used to pay for someone’s tuition or medical expenses, however the funds have to be paid directly to the institution or provider. In your case, it has been paid directly to you, and therefore don’t qualify for the exception.
Donations tax in SA
Donations tax is tax payable at a flat rate (currently 20%) on the value of property donated (in terms of sections 54 to 64 of the Income Tax Act, 1962). A donation is widely defined and includes property disposed of for an inadequate consideration (section58).
Section 56(1) contains a list of exempt donations which include amongst others, donations between spouses and donations to approved public benefit organisations. 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: R10 000 (section 56(2) (a)).
- Donations by individuals: R100 000 (from 2008 to 2017 years of assessment) (section 56(2) (a) and (b)).
Also qualifying for exemption is so much of any bona fide contribution made by the donor towards the maintenance of any person. While not limited to a specific amount, this exemption is limited to what the Commissioner considers reasonable (section 56(2) (c)).
Therefore the only exemption in your scenario is the R100 000 abatement. Since you are a resident individual, the donation made during the tax year is subject to donations tax of 20%, in excess of R100 000.
For an example:
- If R100 000 is made by an individual, no tax is payable, but if a donation of R250 000 is made, then donations tax of R30 000 is payable (20% of the amount exceeding R100 000, which is R150 000).
Where the donor donates property to a donee, and donor fails to pay the donations tax, the donee and donor will be jointly and severally liable for the tax.
Who does it apply to?
Donations tax applies to any individual, company or trust that is a resident as defined in section 1 of the Income Tax Act, 1962.
Non-residents are not liable for donations tax, (as mentioned your donor would need to disclose this to their authorities.)
The person making the donation (donor) is liable for the tax but if the donor fails to pay the tax within the set period the donor and donee are jointly and severally liable for the tax in terms of (section 59 of the Income Tax Act, 1962).
What steps must you take?
After making a donation one should fill in form IT144 (declaration by donor/donee) and send it to Sars with your payment. You would therefore need to adhere to this, and submit a duly completed IT144 to your local Sars office.
When should it be paid?
Donations tax must be paid by the end of the month following the month during which the donation takes effect or such longer period as Sars may allow (section 60(1)). Payment must be accompanied by form IT144 (section 60(4)), or can be paid via eFiling.
A donation takes effect when all legal formalities for a valid donation have been complied with (section 55(3)).
Are you liable to pay tax?
People who pay income tax are generally individuals who earn an income e.g. from a salary, commission, fees, etc. If you earn under R350 000 for a full year from one employer (that’s your total salary income before tax) and have no other sources of additional income (for example, interest or rental income) and no deductions that you want to claim (for example medical expenses, travel or retirement annuities), then you don’t need to submit a return.
Generally, if any of the following applies to you for the tax year March 1 2016 to February 28 2017, then you do need to register as a tax payer:
- Did you conduct any trade in South Africa?
- Did you receive an allowance such as a travel, subsistence or office bearer allowance? Check your IRP5/IT3 (a) if unsure.
- Do you hold any funds or assets outside South Africa that have a value of more than R225 000 at any stage during the tax year?
- Did you have capital gains or capital losses exceeding R40 000?
- Was any income or a capital gain in foreign currency or assets outside the republic attributed to you?
- Do you hold any rights in a controlled foreign company?
- Did you receive an income tax return, or were you asked to submit an income tax return for the tax year?
Based on all of the above information, my advice is for you to contact your local Sars office, and rather disclose the gift and take the matter from there.