Gifts and donations are largely interchangeable terms but the context is different. That’s the word from David Thomson, Senior Legal Adviser at Sanlam Personal Finance.
Gifting means the giving of a genuine gift, for example, a ‘present’, that fits within your means and lifestyle and usually marks a celebration or special occasion. If you owe your creditors or are in arrears with SARS, then obviously the ‘gift’ – especially if it’s an expensive car, house or Rolex, for example – will be investigated.
A donation differs a bit in that it comes with tax and isn’t linked to an occasion. You can make a donation or donations valued at up to R100 000, annually. Donations above this threshold are subject to a 20% donations tax.
If a parent gifts a child a flat, for example, the question will be whether this is normal maintenance in line with the parent’s wealth and desire to furnish their child with somewhere to live while at university, or an extravagant purchase that doesn’t fit the parent’s financial profile.
People need to be careful that gifts are appropriate and aligned with an occasion. Donations are commonly perceived as giving to a worthy cause or part of estate planning and setting beneficiaries up for life. For example, you could take out an endowment policy for your child and ‘donate the premiums’ tax-free, providing it’s under the allotted R100 000 per annum.
Some donations are tax-deductible
Charitable donations can be tax-deductible up to a prescribed limit, providing the recipients are listed as SARS-approved section 18A public benefit organisations (PBOs). If you make a donation to such an entity, you should be issued with a section 18A certificate, which you must submit to SARS with your annual tax return.
Trusts can help with estate planning
Many people set up trusts as part of their estate planning. If you lend money to a discretionary trust to which you’re either ‘connected’ as a trustee or that benefits you or your family, then you’ll have to charge the trustees market-related interest on the loan.
If you don’t charge interest, SARS will levy donations tax on you. If you’re making a loan to a charitable trust – or any trust to which you aren’t ‘connected’ – you don’t have to charge any interest on this. The concept of ‘connected to’ and the types of trusts affected are covered in the Income Tax Act and you should seek tax advice to see if you fall within that definition.
A note of caution:If you’re married in community of property, be wary if your partner starts making donations to a trust of which you’re not a beneficiary (or merely a discretionary beneficiary) without consulting you. Seek independent advice if you’re unsure. Unfortunately, South Africa has a high divorce rate and in some cases a spouse has cheated their partner out of assets in this way.
The tricky thing is that once the donation is done, it’s done. There’s no way for the aggrieved partner to retrieve the money from the trust, unless a lawyer can find a way to contest it in court on a technicality – such as questioning whether the transactions have been legitimate and/or proving that the trust is a ‘sham’ or simply the ‘alter ego’ of the spouse or partner.
The same rule goes for donations and gifting – once the gift or donation is given, there’s no opportunity to take it back – unless it’s a donation mortis causa (in anticipation of your death), in which case you may revoke it.
Gifts don’t always come free
Property transfer fees, conveyancing fees, deeds office fees (for property), securities transfer fees (for shares), and so on all still apply to gifts and donations, and are usually for the recipient’s pocket. It depends on what’s being given and how it’s given. For example, there’s no cost for transferring an endowment from one person to another. But when a property is given, even though its purchase price is R0, its transfer duties and conveyancing fees are based on the market value of the property, according to a professional valuation.
If you receive a donation over R100 000 in value, you also need to be cautious. Ensure the giver pays the 20% donation fee within the stipulated six months, otherwise SARS will expect you, as the recipient, to pay this. Your annual tax return form from SARS requires you to declare all donations given and received.
Final advice for gift givers
Make sure the gift is appropriate to your lifestyle and recognises a special event in some way – that all helps to prove it’s genuine, should SARS audit you. If you’re making a donation over R100 000, always consider the tax side of things and take advice from a financial professional.