Festive cheer and the tax man

If you’re feeling generous over this festive season and you’d like to give loved ones a gift of either cash or monetary assets, you need to bear in mind that the tax man isn’t necessarily as generous as you are.

Depending on the different aspects, your altruism may have tax consequences. In this article, we set out a few considerations to bear in mind when you give something to your loved ones.

The first thing to note is that gifts of over R100,000 (the annual donations tax exemption per individual) result in donations tax. Many people erroneously think they have a R100,000 exemption per gift. However, the exemption applies annually to the person donating i.e. you only have R100,000 that you can give per year per person, without attracting donations tax.

Donations tax is currently levied at 20% on the value of assets up to R30 million, and 25% on the market value of assets that exceeds this amount. Since 2018, donations made throughout your lifetime are added together to determine the applicable donations tax rate.

The good news, however, is that if you are married, or in a life partnership, you can freely make it rain on your special person without attracting donations tax.

Maintenance assistance

If your gift is given to assist someone with their maintenance requirements, this constitutes a donations tax exemption. However, be aware that to claim this exemption, you need to convince the SA Revenue Service (SARS) that it is in fact for maintenance and the Commissioner of SARS will only allow what they consider reasonable.

Something people often forget is that the donations tax liability (where applicable) and the accompanying reporting are due within 30 days of making the donation. If the donations tax is not settled within this time, both the donor and the recipient can be held jointly and severally liable for the donations tax liability. Make sure your donation and reporting are in order, so you don’t end up on SARS’s naughty list!
 

What about loans?

If you’re uncertain whether the intended recipient of your generosity is naughty or nice, a loan offers a less permanent solution. Loans between SA tax residents can be made on an interest-free basis. However, loans advanced from an SA tax resident to a non-SA resident would need to attract an arm’s length rate of interest, or adverse tax consequences will arise. You would need to record the loan as an asset in your estate and would need to be dealt with appropriately in your estate planning and will.

Should the asset that you advance via loan or donation be held at a gain (in other words, it’s worth more what you acquired it for), capital gains tax, levied at a maximum effective rate of 18% may be applicable. Note that, capital gains tax is not levied on cash, and is exempt for transfers between spouses and life partners.

Learn more: Tax considerations associated with donations and loans

A charitable approach

‘Tis the season for giving, so why not consider making donations to registered public benefit organisations (charities) with section 18A status? These donations are exempt from donations tax, capital gains tax and estate duty (if assets are bequeathed in your will). In addition, you can obtain a tax deduction from your taxable income, generally up to 10% of your taxable income for that year. To claim this deduction, you'll need a section 18A certificate from the registered public benefit organisation(s).

Learn more: Philanthropy – why a strategic approach is best

A gift to your future self – or your children’s future

If you are fortunate enough to get a bonus or thirteenth cheque, why not consider giving something to your future self – or on behalf of your children – by contributing your funds to a tax-free savings account (TFSA). Everyone (children as well) can contribute R36,000 annually to a TFSA without paying tax on the interest, capital gains or dividends on these investments.

Find out more about tax-free investments here or download this fact sheet.