Many people find joy in being able to assist loved ones and charitable causes financially. Gifts and donations are essential for many charities, and South Africa’s tax system recognises this generosity. However, for particularly large sums, the South African Revenue Service (SARS) implements specific tax implications for gifting and donations. Let’s explore these regulations and how they impact providing significant financial support in South Africa.
Understanding gifts, donations, and loans: tax implications in South Africa
Financial transactions can come in many forms, and understanding the difference between gifts, donations, and loans is vital, especially in relation to potential tax implications in South Africa.
- Gifts: Gifts involve transferring money or an item of value to someone without expecting anything in return. These are typically given to individuals for personal reasons, like birthdays or holidays.
- Donations: Donations are similar to gifts, but with a specific purpose – to support charitable causes or organisations working for the public good. These organisations often have a non-profit status, and donations may be tax-deductible in South Africa.
- Loans: Loans are financial advances that the recipient is expected to repay, often with interest. Unlike gifts and donations, loans create a debtor-creditor relationship.
Taxation and reporting implications in South Africa
The South African Revenue Service (SARS) monitors large gifts and donations to prevent tax avoidance.
- Gifts: Generally, gifts between individuals are not taxed. The threshold limit is R100,000, after which the amount becomes taxable at 20%. SARS will investigate significant asset transfers (like selling property below value) for potential tax implications.
- Donations: Donations to approved Public Benefit Organisations (PBOs) are often tax-deductible in South Africa, incentivising charitable giving. In South Africa, a donations tax applies to the donor (the person giving the gift). This tax is a flat rate of 20% on the value of the donation, up to a maximum limit of R30 million. Donations exceeding R30 million are taxed at a higher rate of 25%.
Reporting requirements exist for large or unusual gifts, even if not taxed. For example, the beneficiary is obliged to declare the gift/donation on their Tax Return (ITR12) as an “Amount Considered Non-Taxable,” as SARS must be informed about all income, even if it’s not taxable.
Read more: Five Important Questions on Donations Tax: what expats need to know.
Helping loved ones – the tax implications of gifts and loans
Spouses or life partners (including same sex life partners) residing in South Africa can transfer funds without incurring donation or capital gains tax. However, this assumes the transfer is legitimate and not intended solely for tax reduction or avoidance.
Read more: Hot question – my spouse works overseas, what are the implications for expat double taxation?
Exemptions for donations tax in South Africa
While donations tax applies in certain situations, South Africa offers several exemptions to encourage charitable giving and responsible financial planning.
- Public Benefit Organisation (PBO) donations: Section 18A of the Income Tax Act allows individuals to deduct donations up to 10% of their taxable income if directed towards approved PBOs. These organisations work for the public good and often have non-profit status.
- Limited company and trust gifts: Companies and trusts can make small “casual gifts” of up to R10,000 per year without incurring donation tax.
- Individual annual exemption: The first R100,000 of an individual’s donation in a year is exempt from tax. For instance, parents helping children with a down payment on their first home can leverage this exemption. However, a written agreement outlining whether the contribution is a gift or a loan is advisable for clarity. Donations tax applies if a property is sold below market value, with the tax based on the difference between the sale price and fair market value.
- Reasonable maintenance contributions: Donations used for the “bona fide maintenance” of another person, at the discretion of the SARS Commissioner, are also exempt from donation tax. While no set limit exists, the contribution must be deemed reasonable for the recipient’s needs.
Read more: How much money can I send overseas as a gift from South Africa?
Loans as an option for providing access to funds
Loans offer an alternative to outright gifts. The tax treatment for loans differs depending on the residency of the borrower.
Loans between South African residents
Interest-free loans between South African residents are possible in certain cases. However, a written agreement and inclusion in your will are essential as the loan will become part of your estate for estate duty purposes (currently 20/25% on the dutiable value, with exemptions like those for spouses).
Loans to non-residents: the tax implications
Interest-free loans to non-residents pose significant tax risks. Generally, such loans are discouraged, and transactions should occur on an arm’s-length basis (both parties acting independently for their own benefit). Seek tax advice before lending to a non-resident in order to avoid any nasty surprises from SARS later down the line.
Loans to Trusts: the tax implications
Similar to non-resident loans, lending to a trust (local or offshore) typically requires arm’s-length transactions, and not charging interest can trigger tax provisions. Section 7C of the Income Tax Act No. 58 of 1962, for instance, deems uncharged interest on loans to trusts or underlying companies as a taxable donation. Additionally, “attribution rules” could attribute trust-generated income or capital gains back to you, making them taxable in your hands. These rules activate when trust transactions are gratuitous (donations or interest-free loans).
Read more: Section 7C of the Income Tax Act: Loans to trust at preferential rates.
FinGlobal: cross-border financial and tax specialists for South Africans
Stressing about tax compliance isn’t something that should hinder your generosity. If you have any questions about your tax affairs, or you need advice on the tax implications of a gift, donation or loan that you are considering, you are welcome to contact FinGlobal. Our team of dedicated South African tax practitioners are available to assist with any queries you may have.
You can contact FinGlobal via:
Email: info@finglobal.com
Telephone (in SA): 028 313 5600
Telephone (outside SA): +27 283 135 600