Donations tax and tax exemptions

Donations and tax exemptions form an important part of one’s overall financial and estate planning.

Donations tax and qualifying tax exemptions form an important part of financial planning and should form part of the annual review of your financial plan to ensure that you are not paying tax unnecessarily. The process includes determining whether a gift or donation qualifies as a ‘donation’ in terms of the Income Tax Act, whether the donation is taxable, and the extent to which exemptions apply. Here’s what to consider.

What is a donation?

According to Sars, a donation is a gratuitous disposal of property or any gratuitous waiver of rights, which means that a donation does not necessarily have to take the form of money and can include a physical asset, such as a vehicle, or something that has deemed value. Importantly, in order to be considered a donation in terms of the Income Tax Act, there must be no expectation of reward on the part of the donor. Where the donor expects something in return from the recipient of the gift, the transaction cannot be considered to be a donation. Whether you intend helping out your child financially, selling a property at a discounted price to a family member, supporting your favourite charity, or helping your children purchase their first property, it is important to understand whether the transaction is considered a donation and what the tax implications are.

What is donations tax?

Donations tax applies to any individual, company or trust that is a resident as defined by the Income Tax Act, which means that non-residents of South Africa do not need to pay donations tax. As it currently stands, the person making a donation is liable for Donations Tax which is calculated at a flat rate of 20% on the value of the donation or gift up to R30 million. To the extent that the donation exceeds R30 million, donations tax is calculated at 25%. Note that no donations tax is payable on donations from a foreign resident to a South African resident provided that the funds donated are from a foreign source. However, there are a number of exemptions that apply, and it is useful to understand how these work in order to ensure that you don’t pay unnecessary tax.

What are the exemptions?

In terms of the Income Tax Act, there are four categories of donations that qualify for exemption from tax:

(i) Category 1 exemptions

Donations that are completely exempt from donations tax include donations made between spouses, donations made to an approved Public Benefit Organisation, and those made to any sphere of government. More detail on donations that form part of this category include:

Spousal donations: In terms of the Income Tax Act, donations made to or for the benefit of a spouse married with an ante-nuptial or post-nuptial contract are exempt from donations tax. Where a spouse married in community of property donates property that forms part of the joint estate to their spouse, the donation shall be deemed to have been made in equal shares by each spouse. Where the donated property falls outside of the joint estate, such as an inheritance, the donation is deemed to have been made by the donating spouse.

Donations to an approved PBO: Many South Africans are keen to donate to individuals and charities to assist with the alleviation of poverty and, in doing so, it pays to find the most tax-efficient way of doing so. Recognising that many organisations in South Africa are dependent on the charitable giving of the public, Section 18A of the Income Tax Act allows individuals to donate up to 10% of taxable earnings towards an approved Public Benefit Organisation on a tax-deductible basis.

All non-profits are required to register as a Public Benefit Organisation (PBO) with Sars in order to receive a tax exemption, and this tax exemption must be approved by the Sars Tax Exemption Unit (TEU). If approved, a taxpayer can claim a tax deduction if they are in receipt of a Section 18A certificate issued by the PBO. In order to become an approved PBO, the company, trust or association must have been incorporated, formed or established in South Africa.

If you are donating towards a charity, it is important to understand the difference between a PBO, as per the above, and a non-government organisation (NGO) which is not an approved Section 18A institution.While a donation to an approved PBO has tax benefits for a donor, donations to an NGO are not tax-exempt and may in fact attract donations tax if they exceed the annual threshold.

To claim the deduction from a donation to a PBO, you will need to upload your Section 18A certificate when doing your eFiling, making sure that the certificate includes the PBO’s reference number, date of receipt of the donation, the name and address of the donor, and the amount or nature of the donation.

(ii) Category 2 exemptions

In respect of a taxpayer who is not a natural person, such as companies and trusts, the donation of casual gifts up to the value of R10 000 per year of assessment are exempt from tax.

(iii) Category 3 exemptions

From a financial planning perspective, it is important for individuals to understand the legislation relating to donations made by natural persons. The first R100 000 of donations made by an individual in a year of assessment is free from donations tax, whereafter donations tax is payable at the application rate. So, if you’re planning to help your children purchase their first property by contributing towards a deposit, you will need to take this threshold into account to ensure that you don’t end up paying tax unnecessarily. It is also advisable to reduce any agreement to writing so that there is a record of whether the money was intended as a gift or a loan. Donations tax will also apply in circumstances where you sell a property to someone at a discounted price, with the difference between the market value and the sale price being subject to tax.

(iv) Category 4

Donations made by a natural person in respect of the bona fide maintenance of a person are also exempt from donations tax and, while there is currently no limit on what can be spent in terms of maintenance, the exemption is limited to what the Sars Commissioner deems reasonable.

Who pays donations tax and how?

Donations tax is payable by the person who makes the donation, although it is important to keep in mind that the person receiving the gift has a duty to declare it in their tax return ITR12 as an ‘amount considered not-taxable’. After making the donation, the donor is responsible for reporting it to Sars by completing the IT144 form. The donor must then make sure that the appropriate donations tax is paid via eFiling by the end of the month following the month in which the donation was made. So, if the donor made the donation in mid-August 2021, they must ensure that Sars is notified of the donation and that donations tax is paid by 30 September 2021. The only exception to this is where the donor fails to pay the donations tax on time. In such circumstances, the donor and the recipient become jointly and severally liable for the payment of donations tax.

Donations and tax exemptions form an important part of one’s overall financial and estate planning, keeping in mind that donations can be used to achieve a number of succession planning goals. As such, any donations that you intend making should form part of a well-constructed financial plan in order to achieve your stated goals.

This article is posted with thanks to MoneyWeb

VAT Refunds: Is An Imbalance In Law Allowing SARS Too Much Power?

The South African Revenue Service ("SARS") has set its sights on non-compliant taxpayers through a very active and focused compliance programme. It seems that SARS has realised the enormous powers it enjoys under the Tax Administration Act, 2011 ("TAA") to administer tax laws and enforce compliance and it has been going from strength to strength ever since. This is particularly evident when it comes to the audit and verification of value-added tax ("VAT") refunds. But is the law allowing SARS perhaps too much power when viewed against taxpayers' rights to conduct business?

Entitlement vs Enforcement

The design of the South African VAT system is such that it entitles a vendor to claim VAT on expenses that have been incurred in the course or furtherance of its taxable enterprise. A vendor's entitlement to a VAT refund claim is subject to certain requirements and the vendor bears the burden of proof. On the other hand, SARS' right to conduct an audit of a taxpayer's tax affairs is embedded in Chapter 5 of the TAA which contains various enforcement tools ranging from verification to audit to criminal investigation. In practice, however, there seems to be difficulty in distinguishing between errant compliant taxpayers and errant criminal taxpayers. The result is that a broad brush approach to enforcement is emerging which is impacting the timing of VAT refund payments with trends reminiscent of the findings from the erstwhile Nugent Commission.

Musts vs Need Nots

Section 190(1) of the TAA requires that SARS "must" pay a refund if a person is entitled to it together with interest thereon. However, section 190(2) provides that SARS "need not" authorise a refund until such time that a verification, inspection, audit or criminal investigation of the refund has been finalised. In other words, the sub-section preserves SARS' right to initiate and finalise an audit of a refund before the refund is paid out. The trouble is that there is no prescribed time period within which SARS is required to finalise any such audit activities. The TAA is silent on this aspect and the Value-Added Tax Act, 1991 ("VAT Act") merely provides that interest starts accruing on the outstanding refund if it is not paid within 21 business days from the date on which the particular VAT return was received by SARS. Even so, interest may be suspended in certain prescribed instances (eg if a vendor has any outstanding tax returns, or has not furnished its banking details to SARS, etc).

General Audit vs Audit of the Refund

Notwithstanding that the audit must be "of the refund" before SARS is entitled to withhold payment thereof, section 190(2) of the TAA is often (erroneously) interpreted to mean that SARS is not required to pay a VAT refund if any aspect of that person's tax affairs is under audit, until such time that the audit has been finalised. This practice has coincided with a recent increase in the use of special "stoppers" on the SARS system which block the payment of any VAT refund claims made by the vendor after the date on which an audit has been initiated, even if such subsequent VAT refund claims fall outside the period that is under audit. This notion has also had the effect that VAT refunds are being withheld on a large scale where SARS is conducting an industry-wide audit as opposed to an audit "of the refund".

Recent trends noted that support this notion include:

Vendors whose VAT returns are frequently in a net VAT refund position will receive a verification request each and every time they submit a VAT return to SARS. The VAT refund will not be paid out until the verification is finalised. This carries on for multiple tax periods without any indication that the vendor is able to build up a good compliance history which could relieve it from constant SARS scrutiny.

The initiation of a VAT refund audit will in all likelihood mean that payment of any subsequent VAT refund claims will automatically be withheld until the audit of the initial VAT refund is finalised. When a vendor enquires with the SARS call centre, it is usually informed that a stopper has been placed on the system with no indication as to when the stopper will be lifted or when the audit will be finalised.

It has also been noted that a vendor will receive a notification of audit and related request for relevant material in respect of the same VAT returns that were previously subjected to verification requests, even though the verifications were finalised and no adjustments were made.

In some instances an audit will be continuously extended to include an additional tax period each time the vendor submits a VAT return to SARS (eg, an audit may start of as relating to VAT refund "A to E" but will be extended to include VAT refund "F" the moment this VAT return is submitted to SARS and so forth).

But VAT is a tax on the final consumer. By design, VAT is not intended to be a cost to business. It merely has a cash flow impact where goods or services are acquired by the vendor for taxable business purposes as the vendor is entitled to claim the VAT back from SARS. VAT refund payments are needed to stimulate business activity, but where VAT refunds are continuously locked up in audit activities the much needed cash flow to business is delayed, sometimes for months on end. It is not surprising that vendor frustration is mounting where VAT refund claims are constantly met with suspicion and intensely scrutinised at length.

The current lack of timeframes within which an audit must be concluded creates the impression of a lack of commitment to finalise audits, even where no indication of wrongdoing has been advanced (audits can be kept in abeyance seemingly for years without progression to any kind of end). It seems then that a taxpayer's only option is to seek recourse from the Courts to either compel SARS to finalise its audit within a reasonable period of time or to pay out any VAT refunds that do not fall within the scope of the audit. In the recent matter of Rappa Resources (Pty) Ltd v C:SARS the High Court cautioned that "SARS cannot be allowed an indefinite time to complete an audit" and, accordingly, the court directed SARS to conclude the audits by no later than a particular date. The Supreme Court of Appeal reinforced this judgment by declining SARS' application for leave to appeal.

Balance of Audits and Business

The taxpayer may have won this round, but litigation is costly, lengthy and not without risk. It simply is not a feasible option available to all and, in some instances, vendors may not emerge intact on the other side. What is needed instead is a balance, in law, between SARS' right to conduct an audit and a taxpayer's constitutional right to conduct business. Clear and reasonable timeframes need to be outlined and extensions should be the exception and only invoked when warranted in limited circumstances.

It is welcoming to note that various stakeholders are currently engaging with National Treasury and SARS in this regard. But until SARS' powers in this area are curtailed and the balance restored, there will continue to be a tug of war between SARS and taxpayers on the payment of VAT refunds with the vendor at a distinct disadvantage.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Article originally posted on Mondaq