Donations and Tax Implications
Category Legal Information - Donations
Are you considering helping your children financially to enable them to buy property – beware of the donation tax implications
Currently donations tax is calculated at 20% of the fair market value of the property donated. It is therefore very important to ensure that this is handle the correct way!
Whether you are thinking of helping your son financially to enable him to purchase his first property or donating money towards a worthy cause, there are some things to keep in mind. A donation is defined in the Income Tax Act No 58 of 1962 as “any gratuitous disposal of property including any gratuitous waiver or renunciation of a right.” The donor may therefore not receive anything in return from the donee, as this will constitute an exchange agreement.
There are two types of donation, viz. donatio inter vivos (donation between two persons who are both alive) and donatio mortis causa (a donation where the donee will only receive the donation on the death of the donor).
The requirements for both an inter vivos and a mortis causa donation are:
1. The donor must make an offer to donate, which offer must be accepted by the donee;
2. The donor must have the necessary legal capacity to make the donation and the donee must have the necessary legal capacity to accept the donation;
3. Anything that a person can trade (in commercio), can be donated;
4. A donation must be legal and feasible; and
5. A donation must be identified or identifiable.
Donations can also be withdrawn. In the case of an inter vivos donation, the donor can at any time before the donee accepts the donation, withdraw such donation. After acceptance of the donation by the donee, a valid contract has been formed and the donor will only be able to withdraw the donation in the case of gross ingratitude on the part of the donee, e.g. if the donee threatens the donor's life. A mortis causa donation can be repealed at any time before the donor's death, as the donation will only be ratified on the death of the donor.
Finally, and probably of the most importance to some people, is the matter of donations tax payable to the Receiver of Revenue. Currently donations tax is calculated at 20% of the fair market value of the property donated.
In terms of article 59 of the Income Tax Act, the donor is liable for payment of donations tax within three months after the donation was made. If the donor fails to pay the tax timeously, the donor and the donee will be jointly and severally liable for the payment thereof. An individual can make a donation of R100 000 per annum, free of donations tax.
There are also a few exemptions in terms of section 56 of the Income Tax Act, which should be noted. They include the following:
1. A donation in terms of a duly registered prenuptial or postnuptial contract to the spouse of the donor;
2. A donation between spouses who are still married to each other;
3. A donation in the form of donatio mortis causa (this donation occurs in terms of the donor's will and is therefore not subject to donations tax);
4. A donation that was cancelled within six months after it was made; and
5. Donations to certain public benefit organisations.
If spouses are married in community of property they should pay attention to section 57A of the Income Tax Act. If any property, which forms part of the joint estate of both spouses, is donated by one of the spouses, such donation shall be deemed to have been made in equal shares by each spouse. However, if property that has been donated by one of the spouses belongs to only that spouse (the donor), the donation shall be deemed to have been made solely by the spouse who made the donation.
There are several factors to keep in mind when making a donation and it is therefore advisable to consult with an expert to discuss the tax and legal implications before a decision is made.
This article is a general information sheet and should not be used or relied on as legal or other 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 legal adviser for specific and detailed advice.
Source - Heyns and Partners Inc Attorneys
Author: Heyns and Partners Inc