The layered tax impact of donations
At first glance, one might assume that once the donations tax has been paid, the donor’s tax liability has been fully discharged. However, this is far from the truth. A donation also constitutes a disposal in terms of paragraph 11(1) of the Eighth Schedule to the Income Tax Act 58 of 1962. A disposal includes any event, act, forbearance or operation of law which results in the creation, variation, transfer or extinction of an asset, whether movable or immovable, corporeal or incorporeal, as well as any right or interest relating to such property. A donation is listed as a specific example of a disposal in terms of paragraph 11(1) of the Eighth Schedule.
The consequence of a disposal is that any gain or loss realised must be considered under the capital gains tax (CGT) framework. Paragraph 38 specifically addresses disposals by way of donation, providing that the property so donated is deemed to have been disposed of at its market value. The capital gain (or loss) is then calculated, and the resulting CGT liability rests with the donor. While a portion of the donations tax already paid is considered for the CGT calculation, there may still be a net CGT liability payable by the donor on the donation of the property.
In addition to donations tax and CGT, certain donations may also give rise to income tax consequences. The attribution rules, contained in section 7 of the Income Tax Act 58 of 1962, prevent taxpayers from avoiding or reducing their tax liability by shifting income to another person through a gratuitous transfer. Where there has been a donation, settlement, or other disposition with a gratuitous nature, any income generated from the income-earning property so donated may be taxed in the hands of the donor rather than the donee.
The result is a triple-layered tax liability: donations tax, CGT, and potential income tax.
What may begin as a simple act of generosity can quickly become a complex tax event. The result of a three-layered tax liability highlights the importance of careful planning before making any donation, particularly a valuable or income-producing property. While tax laws are riddled with rules and exceptions, it is better not to be caught off guard – ensure that you consult one of our skilled advisors to structure your affairs most efficiently.
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