In this article, Charmaine Prout, Director of Chartered Tax, helps us understand the tax implications of donations that we may make – to family, friends or charitable institutions – and guides us on how to make benevolent contributions without having to donate to the Taxman at the same time.
You may have heard of or read those encouragements to give away your treasured items to loved ones or favoured friends before you pass away. That way you get to see them enjoy what once gave you joy, and they get to express their gratitude. A win all round, you might say … but is the taxman also winning?
Let’s start with what SARS understands by the term ‘donation’. The definition is a ’gratuitous disposal of property, including any gratuitous waiver or renunciation of a right”. This means that simply giving an asset away is not the only way to donate; you are also donating if you sell an asset for less than its actual market value. The difference between the price paid and the price that should have been paid is considered a donation.
The Income Tax Act indicates that donations tax – 20% of the value of the donation – must be paid by the donor within three months of making the donation.
If you want to see your family or friends enjoying your magnanimity, while reducing your Estate Duty at the same time, take advantage of the annual exemption per natural person of R100,000 per year – you can donate to anyone, be it a child, a grandchild, or a trust (you can make this a recurring annual investment). The R100,000 can take the form of money or assets, like property.
A loan account in a trust can also be reduced by using the R100,000 annual donation.
This is one way to benefit from using the exclusions perfectly legally and thereby shift the value of your estate into the hands of your ultimate beneficiaries now rather than only on your death.
If you donate to your spouse, that donation is completely exempt from tax, as are donations to any sphere of Government or any registered political party.
All these exemptions apply to companies as they do to individuals.
You can donate up to 10% of your taxable income annually to a recognised Public Benefit Organisation.
SECTION 18A Tax Deductible Donations
Section 18A of the Income Tax Act provides individuals, trusts and companies with a tangible incentive to make donations to non-profit organisations, within certain limits. It is the onus of the NPO to prove that its work provides a public benefit.
For example, an individual with an annual taxable income of R280,000 can donate a maximum of R28,000 to a S18A organisation and claim this donation as a deduction on his personal income tax return. This translates into an effective out-of-pocket expense of R15,400 or 55 % of the amount donated.
A company with an annual taxable income of R1,000,000 can donate a maximum of R100,000 to a S18A organisation and claim this donation as a deduction on the company’s corporate tax return. This translates to an effective out-of-pocket expense of R72,000 or 72% of the amount donated.
As I often say to my clients, the focus of SARS is to level the playing field. So, whether you pay 20% in donations tax or 20% in Estate Duty, it’s all the same revenue to SARS. You, however, can make decisions that result in the best outcome for your Financial Plan. For the sake of the country’s growth and the goodwill of the taxpayer, so do we.