I own a small business (CC) and a trust. I have been making donations in my personal capacity in terms of the R100 000 allowance. I wish to make larger donations and have considered making a donation from the company directly to the trust and paying the 20% donations tax. Would there be any other taxes to be paid by me, the CC or the trust? I accept the donation will be paid out of after-tax profits and is not tax-deductible. To me, this seems a more efficient method. The alternative would be to declare a dividend and pay the 20% withholding tax, then donate it to the trust and have to pay a 20% donations tax.
Reducing one’s estate through regular donations to a trust is a very popular and simple estate planning technique to reduce your deceased estate’s estate duty liability.
As you have stated, natural persons can donate up to R100 000 per tax year free of any donations tax. Non-natural persons can also make limited annual donations free of donations tax, although this is set at R10 000 per tax year. Any amount above this will attract donations tax at a rate of 20% up to a cumulative value of R30 million and at 25% on the value above.
Interesting to note is that the person making the donation (donor) is liable to pay the donations tax and must make this payment by the end on the month following the month in which the donation was made. However, if the donor fails to pay the tax within this time period, the donor and donee are jointly and severally liable.
Before you make donations from funds in your CC, I would suggest that you first ensure that you make your tax-deductible contribution to a retirement fund. Annually, each individual can make tax-deductible contributions to a retirement fund up to 27.5% of your remuneration or taxable income, whichever is the highest (up to a maximum contribution of R350 000). If you are not making full use of this deduction, maybe consider taking a bigger drawing from the CC (bonus or increased salary, not a dividend) to maximise this benefit. In this way, you can take funds out of the CC as a payment of a bonus or salary, claim it as a tax deduction by the CC, and then contribute the funds to a retirement fund on your side and claiming the contribution as a tax deduction in your personal capacity. This will ensure that funds can be taken out tax neutral from the CC. It will have the result of reducing the funds held in the CC and thereby its net asset value and increasing your retirement savings.
As funds held in a retirement fund (excluding funds contributed which did not qualify as a tax deduction) are not included in your deceased estate for estate duty purposes, your estate has been reduced in value, similar to a donation. The benefit though is that neither the CC, nor you in your personal capacity, had to pay any income tax on the funds to get it out of your estate.
Once you have maximised your tax-deductible contribution, the next most effective place to make a donation would correctly be directly from the CC as you have mentioned, assuming your marginal tax rate is higher than the CC’s tax rate of 28%. If this is not the case, then increasing your drawings from the CC and making the donation in your personal capacity will be more effective.
The question though would be why you would want to make a donation over and above the exempt amount and incur donations tax at the same level as what your deceased estate would be liable for estate duty. In essence, you would be paying this tax upfront in order to get an asset out of your estate. Although the future growth on the asset may now take place outside of your estate, you have paid the tax upfront and the time value of money must be brought into the equation as well.
There are quite a couple of variables in this scenario and the intention behind making the donation to the trust becomes very important. I recommend you consult an estate planning expert before making any decision on further donations to your trust.