Donations tax is an anti-avoidance provision. Its purpose is to prevent individuals from avoiding estate duty by merely “donating” their estate to other individuals. That’s why donations tax triggers exactly the same tax liability as estate duty with a rate of 20%.
What is considered a donation?
A donation is defined as ‘any gratuitous disposal of property including any gratuitous waiver or renunciation of a right’. This means that when a person disposes of any property or a right to property, without any quid pro quo (i.e. without an exchange of sorts taking place) that disposal will qualify as a donation. Aside from disposals of property where no exchange took place, disposals made for inadequate consideration will also rank as donations.
Notwithstanding the wide scope of the donations tax regime, certain scenarios are exempt from donations tax. We’ve listed two of them below:
Scenario 1: Reasonable care and maintenance
When a person attends to the reasonable care and maintenance of another person, the disposal of money or property to such persons would be exempt from donations tax. For example where parents look after children or where children attend to the care of their elderly parents. The exemption is not exclusively restricted to individuals who are related, but can apply between any persons. The care and maintenance must however be reasonable – and the reasonability depends on the facts and circumstances of each individual case.
Scenario 2: Disposals between spouses
Section 56 of the Act lists various exemptions in respect of donations tax. One such exemption applies to donations between spouses. This means that individuals who are married to each other may freely donate assets or money to one another (or for the benefit of each other) without triggering donations tax. This is irrespective of the marital property regime that applies to them. However, this exemption doesn’t apply to spouses who are legally separated.
Being tax efficient is an important part of great financial management. In this blog, a group of South African tax experts at AJM Tax 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.