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Donations tax is levied in terms of section 54 of the Income Tax Act, 58 of 1962 (‘Income Tax Act’). The rate of tax is currently at 20%, and is levied on the value of any property donated by South African tax residents. The tax is levied on the donor, although the Income Tax Act does make provision for the tax to also be recovered from the person receiving the donation in certain instances if the donor fails to pay the requisite amount of tax.It is no coincidence that the tax is levied at exactly the same rate as Estate Duty is. It therefore acts as an effective anti-avoidance measure for Estate Duty to ensure that an estate is not reduced by way of donations by a person in anticipation of death and in order to escape the Estate Duty.
A donation could either arise by virtue of a gratuitous disposal of property, or where property has been disposed of for less than adequate consideration. It should be noted that a donation is defined in the Income Tax Act as to specifically include any ‘gratuitous waiver or renunciation of a right’. This implies that the donations tax also potentially comes into play where a loan is waived.
Several exemptions from the tax apply though. These general exemptions include:
- Donations between spouses;
- Awards given to employees;
- Donations to public benefit organisations;
- Distributions by a trust to its beneficiaries; and
- Donations between a ‘group of companies’.
In addition to the above, any bona fide contribution to the maintenance of any person considered to be reasonable by the Commissioner will not attract donations tax. Similarly, a natural person is allowed to annually donate property to the value of R100,000 donations tax free, whilst companies are permitted donations in the form of so-called ‘casual gifts’ of up to R10,000 during a tax year without incurring a liability towards donations tax.
Donations tax is also levied on more than only donations as such. The tax is also levied on property which has been disposed of in exchange for less than what the Commissioner would consider to be adequate consideration. These ‘part donations’ would therefore also attract donations tax. For example, if a person were to sell an asset worth R1 million for R500,000, that sale would potentially attract donations tax. The donations tax would however only be levied on so much as is the difference between what would be considered to have been adequate consideration and the amount paid for the asset disposed of (in the above example, donations tax of R100,000 would thus arise). The donations tax would not apply though where an asset is disposed of at a discount which has been granted for commercial considerations.
This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.