Understanding the basics of donations tax and how it works.
Article written by Danisha Naidu, Candidate Attorney, checked Jayna Hira, Associate and released by David Hepburn, Partner at Schindler Attorneys
27 May 2021
Introduction
This article aims to investigate the concept and principle of donations tax and how it works.
What is it?
The Income Tax Act 58 of 1962, as amended (“the Act”) defines a “donation” as:
“The gratuitous disposal of property, including any gratuitous waiver or renunciation of a right[1]. This could include the donation of immovable property or the waiver of a contractual right.”
Who pays donation tax?
Donations tax arises in respect of donations made by South African tax resident donors. There is no donations tax payable in respect of donations by non-residents to residents. It is payable by the person (natural or juristic) making the donation ( i.e. the donor)
At what rate is donations tax levied by the South African Revenue Service (“SARS”)?
Donations tax is levied at the rate of 20% on the aggregated value of the donation property, provided that it does not exceed R30 million. In the event that the value of the donation exceeds R30 million[2] the value in excess of R30 million will be taxed at the rate of 25%.
The above tax rates came into effect on 1 March 2018.
How does one declare a donation to SARS?
Once the donor has made the donation, the donor must complete a Form IT144 – Declaration by the donor and submit same to a SARS branch. This form must be submitted together with the donor’s proof of payment. Whilst submission of the above form must be filed manually at a SARS branch, the donor cannot effect payment for same at a SARS branch and can only make payment via one of the below methods:
- eFiling;
- Electronic Funds Transfer (EFT)
- Payment at a bank
While the recipient of the donation (“the donee”) is not liable to pay donations tax on the donation, the donee is obliged to declare the amount donated on his or her tax return[3], as an “Amount Considered Non-Taxable”.
By when must donations tax be paid?
Donations tax must be paid at the end of the month following the month in which the donation was made. SARS, however, has the discretion to grant leniency in this regard[4].
In the event that a donor fails to pay the donations tax levied on the donation within the prescribed time, or at all, both the donor and the donee may be held jointly and severally liable for the payment of same in terms of section 59 of the Act.
When are donations exempt form donations tax?
- In terms of section 56(1) of the Act, donations that are entirely exempt from donations tax include donations made to one’s spouse, any sphere of government, a registered political party, and those donations made in terms of a testator’s/trix last will and testament.
- Donations made to approved Public Benefit Organisations (“PBOs”) are also exempt from tax, as long as the donation does not exceed 10% (“Ten Percent”) of the donor’s taxable income in that specific year of assessment.
- For donors that are juristic persons, such as companies or trusts, the exemption is limited to donations not exceeding R10,000 (“Ten Thousand Rand”) per year of assessment[5].
- With regard to natural persons, the first R100,000 (“One Hundred Thousand Rand”) of property donated is exempt per year of assessment[6].
As a brief example, if a parent donates property to the value of R1 million (“One Million Rand”) to his / her child, the parent would have to pay donations tax on the amount exceeding R100,000 (One Hundred Thousand Rand) of the said donation. The donations tax in this instance would be calculated as follows:
(The value of the property – the R100,000 exemption) x 20%[7]
(R1,000,000 – R100,000) x 20%
R900,000 x 20%
= R180,000.00 payable by the donor as donations tax.
- Any donation made toward the bona fide maintenance of another person is exempt from donations tax. However, this is subject to the Commissioner of SARS deeming the maintenance as reasonable[8].
Conclusion
While it might seem unfair to be taxed for your kindness, donations carry a tax obligation and one cannot escape it by feigning ignorance. Thus, it is important for one to fully understand the concept and principle of donations tax when making a donation.
Value
Understanding the basics of donations tax.
[1] Section 55(1) of the Income Tax Act 58 of 1962 (the “ITA”).
[2] Section 64(1) of the ITA.
[3] Form ITR12.
[4] Section 60(1) of the ITA.
[5] It should be noted that these donations are not automatically exempt, as the relevant PBO must possess a section 18A certificate, which you must then submit when declaring the donation, along with the other relevant documentation.
[6] Section 56(2)(a) of the ITA.
[7] This percentage applies as the donation is below the R30 million threshold.
[8] Section 56(2)(c) of the ITA.
