The adviser’s role in estate planning

Setting up an estate can become complex as there are many rules and regulations which need to be adhered to. One of the most important considerations is donations tax.

Donations tax has come under the spotlight in recent years with government rethinking the tax levied on donations. There were rumours that this would be included in the 2014 budget, but this did not materialise. However, there have been a lot of reports in the media regarding the issue of donations tax, which has caused confusion in the industry as some of these reports have been erroneously written. Gigi Nyanin, Candidate Attorney: Tax at Cliffe Dekker Hofmeyer clarifies the misconceptions that have been created.

The heart of the matter

Sections 54 to 64 of the Income Tax Act, No 58 of 1962 provide for the imposition of donations tax on the value of any property disposed of by way of a donation. Donations tax is levied at a rate of 20% of the value of the asset, or the amount of money donated, and the donor is generally liable for the payment.

“Section 56 of the Act lists various exemptions in respect of the donations tax. One such exemption is a donation between spouses. People who are married to each other may freely donate assets or money to each other for the benefit of each other, irrespective of the marital property regime that applies to them, without triggering donations tax. This exemption does however not apply to spouses who are legally separated,” says Nyanin.

She adds that a further exemption applies to the donations made between spouses under a duly registered ante-nuptial or post-nuptial contract or under a notarial contract in terms of section 21 of the Matrimonial Property Act No 88 of 1984.

All aspects of the law

While it is important to take note of the exemptions with regards to donations tax, part of giving clients the best advice is to inform them of all of the aspects surrounding the law.

Nyanin points out that despite the general exemptions from donations tax that apply to spouses, it is important to appreciate the income tax consequences of anti-avoidance, which are mainly aimed at income splitting. These may have a significant impact on donations.

“In terms of section 7(2) of the Act, income received by or accrued to a married person will be deemed to be income accrued to that person’s spouse. If the income was derived by the person in consequence of a donation and the sole or main purpose of the donation was the reduction, postponement or avoidance of the donor’s liability for any tax which would otherwise have become payable by the donor will be taxed,” says Nyanin.

She adds that if a person has made a donation to another party, including a spouse or a trust of which the spouse is a beneficiary, the donation is subject to a stipulation that the other person will not receive the income until the occurrence of a future event. The income that would otherwise have accrued to the beneficiaries as a result of the donation will be deemed to have accrued to the person, which is defined under section 7(5) of the Act.

As regulated by section 7(6) of the Act, if a deed of donation contains a stipulation that the right to receive any income as a result of a donation may be revoked or conferred on someone else, the income received, or accrued to the beneficiary, will be deemed to be the income of the donor.

“If a person donates - by way of cession or otherwise - his or her right to receive rent, dividends, interest, royalties or other income in respect of any property to another person, and the donor retains an interest in the property, including a reversionary interest, the rent, dividends, interest, royalties or other income will be deemed to be that of the donor. The same applies to the donation of a beneficial interest in a trust,” says Nyanin.

Do not get into SARS’ bad books

For the purposes of these anti-avoidance provisions, the disposal of an asset for consideration that is less than its market value, will be deemed to be a donation. “Even though donations between spouses are generally exempt from donations tax, married people should be careful when making donations to each other. This is especially true where the outcome of the donation is that income is diverted from the donor to the beneficiary,” says Nyanin.

Taxpayers are obliged to disclose such donations to SARS when submitting their tax returns. It is imperative to stress to your clients that they cannot afford to get into SARS’ bad books. SARS has been very aggressive of late and there have been a number of reports of SARS representatives targeting high net-worth individuals and companies looking for income that should be looming towards SARS.

This is not an ideal situation to be in and can be very traumatic for the person on the receiving end of a SARS investigation. While there is no indication that SARS are coming after donations and estates as yet, one must remember that they are under pressure to both increase tax revenue and to widen the collection net. Therefore, looking towards donations and estates may become a future target.

Editor’s Thoughts:|
When it comes to tax, all of the relevant parties need to be fully aware of the regulations. Donations tax is not traditionally a soft target for SARS, but it may become so if regulations are not strictly adhered to. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.