Tax Tuesday: Donations from non-residents

In Episode 166 of The Fat Wallet Show, Ben sent the below question about donations tax on non-residents. Our Tax Elves were intrigued, and decided to tackle Ben’s question head-on.

Question:

My parents stay in France (not near Champagne unfortunately) and they are UK citizens. They have a unit in a complex in SA that they are going to sell. They would like to gift/loan us the money to help us buy a house with a granny flat where they can then stay when they visit.

My understanding is that the tax on gifts are 20% for everything above R100k, so we thought of doing something like a low-interest loan in order to circumnavigate that tax. Do you perhaps know who can advise us on this to ensure we do this right?

Here’s what our Tax Elf, Ernst, had to say:

I will assume that Ben’s parents were renting the flat out and thus earning rental income. This would mean that even though they are non-residents, they have been submitting tax returns every year with regards to the rental income.

Considerations:

Section 54 of the Income Tax Act states that donations tax is only levied to residents of the Republic.

Thus, Ben’s parents will not be subject to any donations tax. Ben’s parents could donate the full amount in cash to Ben.

However, paragraph 2 of the 8^th Schedule states that capital gains tax (CGT) will be applicable to non-residents if they have more than 80% interest in immoveable property within the republic. Thus, when Ben’s parents sell the unit in the complex, they will have to consider the CGT effect on the transaction.

In summary, if Ben’s parents paid R1m for the flat and sell it for R3m in 2019, they will make a gain of R2m. There will be no primary exclusion available to Ben’s parents. When Ben’s parents submit their tax return they will have to include an amount of R800,000 (R2m x 40%) as income and will be taxed at their marginal rate.

The remaining of the R3m Ben’s parents can donate to Ben tax-free, as donations tax is not applicable to non-residents.

Being tax efficient is an important part of great financial management. In this blog, a group of South African tax experts share their tips and explanations on tax issues. Learn everything you need to know about tax, from deductions you never knew about to retirement savings and capital gains. The first Tuesday of every month is Tax Tuesday, but this week’s special edition is courtesy of our Tax Elf Trainee, Ernst Jordaan.