Helping someone out may be exempt from donations tax—but as always, the devil is in the detail…
Donations tax is one of those strange taxes where people often question its existence. After all, why would SARS be so mean as to want to tax someone’s generosity? The main reason is estate duty—or, more specifically, the potential avoidance thereof.
In fact, if donations tax did not exist, this would open a massive estate duty loophole. Since estate duty is levied at 20% of the taxable value of one’s estate exceeding R3.5 million (and at 25% of the portion exceeding R30 million), the easiest way to avoid estate duty in such a scenario would be to simply give away one’s assets prior to one’s death.
It is therefore no coincidence that the rates of donations tax are aligned with those of estate duty. According to the SARS website, donations tax is levied as follows: From 1 March 2018, donations tax is levied at a rate of 20% on the aggregated value of property donated not exceeding R30 million, and at a rate of 25% on the value exceeding R30 million (Section 64(1) of the Income Tax Act).
Take note of the following:
In determining the R30 million threshold, the aggregate value of property donated commences from 1 March 2018 to date of current donation. Any donations made prior to 1 March 2018 must not be taken into account;
The aggregate value of property to determine the R30 million threshold is calculated after deducting any exemptions (Section 56); and
Where the donor has exceeded the R30 million threshold, all subsequent donations will be taxed at the rate of 25%.
As stated above, Section 56 of the Income Tax Act stipulates where a donation would be exempt from donations tax, as follows:
Section 56(1): Donations made to one’s spouse, an approved public benefit organisation, any sphere of government, or other donations that are cancelled within six months from the date that such donation took effect.
Section 56(2): Casual donations (other than those covered by Section 56(1)) not exceeding the following annual thresholds in aggregate:
Juristic persons (e.g. companies, close corporations, or trusts): R10 000 per year of assessment (Section 56(2)(a)).
Natural persons (i.e. individuals): R100 000 per year of assessment (Section 56(2)(b)).
Any bona fide contribution made by the donor towards the maintenance of any person. This exemption is limited to what the Commissioner considers reasonable (Section 56(2)(c)).
The focus of this article will be on maintenance payments, following a question posed to me by one of my clients. Other aspects of donations tax will be covered in future articles.
I recently received an e-mail from one of my long-standing clients, in which they raised a question concerning the donations tax implications regarding payments made to assist a relative in defraying medical expenses that had not been covered by such relative’s medical scheme.
The question also included the following caveats:
If the payments concerned were to fall into the donations tax net, would it be preferable to treat such payments as a loan, with any outstanding balance thereof as at the date of death being extinguished by means of a bequest?
How would such payments impact the client’s wish that their beneficiaries inherit from their estate in equal shares, given that the payments would reduce the bank balance that would ultimately fall within the estate?
Payments of this nature would fall under Section 56(2)(c) which exempts “any bona fide contribution made by the donor towards the maintenance of any person” from the levying of donations tax.
The Section itself is quite sparse and is particularly light on details of the terminology used therein. However, the following observations can be made:
Since the Act does not define the term ‘maintenance’, the ordinary meaning of the term would apply.
The reference to “… of any person” indicates that the person to whom maintenance is provided need not be a dependent, nor does it need to be a person who one would normally be considered to be obliged to maintain.
What is regarded as ‘maintenance’ is also subjective, and depends on the nature of the person being supported.
Such maintenance could therefore include sponsoring someone’s university fees, supporting a missionary, contributing towards an elderly person’s living expenses, or (as in my client’s case) helping to cover someone’s medical expenses. The amount paid in carrying out such ‘maintenance’ is also not limited to the general R100 000 annual exempt amount—this, therefore, means that my client could contribute any amount towards defraying the medical costs without falling foul of the exemption provisions.
That said, Section 63 provides that the bona fides of the donation being for ‘maintenance’ purposes is subject to the discretion of the SARS Commissioner. In establishing such bona fides, SARS takes into account the underlying reasons for the maintenance payment, and that such payment can be substantiated.
In my client’s case, I would submit that confirmation of the recipient’s diagnosis, together with actual medical bills that are not covered by the recipient’s medical scheme, would be more than adequate to satisfy SARS that such payments are bona fide maintenance payments intended to assist in covering such expenses.
It is therefore critical when it comes to maintenance payments that supporting records are kept so that these are available should SARS decide to request these in order to verify the claim that these qualify for the exemption.
Loan or donation:
Referring to my client’s second question, whether such payments should be considered to be a donation or a loan is a personal decision that the person making the maintenance payments needs to make.
However, from an estate duty perspective, it would be better to treat such payments as a donation rather than a loan, for the following reasons:
-If the payments are treated as a loan, any remaining loan amount would be treated as a claim in favour of the estate, and thus subject to estate duty if the estate exceeds the exempt amount.
-If the payments are treated as a donation, the amount is not only exempt from donations tax but will also no longer be an asset in the estate, thus reducing any estate duty liability.
Equal treatment of beneficiaries:
Treating maintenance payments as a donation doesn’t prevent the person making the payments from including a clause in their will which stipulates their wishes for their beneficiaries to inherit equally, subject to certain specific donations made to the beneficiaries during their lifetime being taken into account.
Taxpayers who are in this situation should seek professional advice from someone who is appropriately qualified in estate planning, including the drafting of wills. It is critical not only that the appropriate wording is included in one’s will, but that the necessary records are kept of such donations made during the taxpayer’s lifetime.
WRITTEN BY Steven Jones
Steven Jones is a registered SARS tax practitioner, a practising member of the South African Institute of Professional Accountants, and the editor of Personal Finance and Tax Breaks.
While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither the writers of the articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes.