Tax 3702 Tutorial Class Bloemfontein Campus Unit 10

Tax 3702 Tutorial Class Bloemfontein Campus Unit 10: Donations Tax Presented by: Mr TK Raseleka

Donations Tax • regulated by the Income Tax Act but is not levied on an individual’s income. • levied when assets are transferred from one taxpayer to another at no consideration or an inadequate consideration. • not calculated once a year as in the case of income tax, but is calculated each time a donation (gift) is made • When a donation is made, the amount may sometimes be deducted in the normal tax calculation, but its not DT

Donations Tax The donations tax payable on a donation by a resident is calculated as follows:

Donations Tax • When a South African resident donates property for no consideration (a gratuitous disposal) or for inadequate consideration, donations tax at a rate of 20% may be payable on the value of the donation. • It is important to note that South African resident taxpayers and non-resident tax-payers are dealt with separately for donations tax purposes. To be a resident, the person must have been living in South Africa at a fixed address on a regular basis and with a degree of permanence or continuity. Non-residents do not pay donations tax.

Donations Tax Persons liable for payment • The person making a donation is called the donor and the person receiving the donation is called the donee. • Normally the donor is liable for payment of the donations tax. • There may be exceptions, or sometimes property may be deemed to have been donated by someone else.

Donations ax Persons liable for payment • A donation made by someone married in community of property normally forms part of the communal estate and is therefore deemed to be made in equal portions by each of the spouses. • In such a case, each spouse is entitled to the full general exemption. Each spouse is liable for his or her portion of the donations tax.

Donations Tax Payment Period • Donations tax is payable at the end of the month, following the month in which the donation was made. • Donations tax is not an annual tax but is levied every time a taxpayer makes a donation.

Exempt Donations • donations to a spouse Ø under a duly registered ante nuptial or postnuptial contract or under a notarial contract entered into Ø provided that the parties are not separated under a judicial order or notarial deed of separation (s 56(1)(b)) • a donation in contemplation of death (a donatio mortis causa) • a donation where the donee will not obtain any benefit from the donation until the death of the donor

Exempt Donations • a donation that is cancelled within six months from the date at which it has taken effect • a donation made by or to any traditional council or traditional community or any tribe • donations made by or to any person that is: the government of the Republic of South Africa in the national, provincial or local sphere; political parties; PBOs • Donations of property from non-resident

Donations Tax – General Exemption • If no specific exemption is available to set off against a donation, the annual exemption or part thereof can be applied to reduce the taxable value of the donation. • Note that the general exemption of R 100 000 is available per annum and not per donation. • Only natural persons qualify for the annual exemption

Donations Tax – Value of Property • The value of property for donations tax purposes is normally the fair value of the property at the date of the donation. • However, different rules may apply to certain types of donations or where a limited interest in property is donated rather than full ownership. (Usufruct & Bare dominium) • The value of a donation is the market value on the date of donation and not the original cost price. The value is reduced if the donee pays any consideration for the donation.

Donations Tax – Value of Property Limited interest in property • Usufruct: This is use of the fruit or income from the property. The holder of this limited interest cannot dispose of the property • Bare dominium: This is ownership of property, without the benefit of the use of the fruit or income from that property.

Donations Tax: Calculation Fiduciary, usufructuary or other similar interests Bare dominium: This is ownership of property, without the benefit of the use of the fruit or income from that property. The holder of this limited interest can only sell the property subject to the usufruct, which belongs to someone else. The value of a fiduciary, usufructuary or other similar interest in property is determined by capitalising the annual value of the right to enjoyment of the property at 12% over a period that is the least of the life expectancy of the donor, donee, the period of enjoyment of the right (if fixed)

Donations Tax: Calculation Fiduciary, usufructuary or other similar interests The value of the bare dominium donated is determined by subtracting the value of a usufruct from the fair market value of the property in which such limited interest is donated. For example, R donates property, subject to the usufruct of X, to K, and the fair market value of such property is R 1 000 and the value of the usufruct interest is R 780 000. The value of the bare dominium will be calculated as follows: – Value of full ownership of property R 1 000 – Less: Value of X’s usufructuary (R 780 000) – Value of donation R 220 000

Exercise Mbali Mkhize made the following donations during the current year of assessment: • • 3 March - R 23 000 to her brother 15 July - R 75 000 to her granddaughter on her 21 st birthday 5 September - R 8 000 to her brother 23 December - R 5 000 to her 19 -year-old son to assist him with his study fees You are required to calculate the donations tax liability of Mbali Mkhize for each of the above donations Adapted from: A Student's Approach to Income Tax Natural Persons 2019

Exercise Solution

Solution 3 March: The donation is for R 23 000. No specific exemption is applicable. Mbali is a natural person and may therefore apply the R 100 000 annual general exemption to this donation. This R 23 000 donation is therefore exempt and the balance of the annual general exemption that can still be used in the future is R 77 000 (R 100 000 - R 23 000). 15 July: The donation is for R 75 000. No specific exemption is available. The full R 75 000 is exempt because the balance of the annual general exemption can be used. The remaining balance of the annual general exemption after this donation is R 2 000 (R 77 000 – R 75 000): Adapted from: A Student's Approach to Income Tax Natural Persons 2019

Solution 5 September: The donation is for R 8 000. No specific exemption is available. R 2 000 is exempt because the balance of the annual general exemption can be used. The remaining balance of the donation attracts donations tax of R 1 200 (20% x (R 8 000 - R 2 000)). 23 December: The donation is R 5 000. This is for the bona fide maintenance of her son and therefore qualifies for a specific exemption and the full amount is exempt from donations tax. Adapted from: A Student's Approach to Income Tax Natural Persons 2019

Next Session Prep • Collective feedback on Questions • Self-assessment questions