From time to time, individuals make the generous decision to transfer property for the benefit of another. This may be done by way of a gift, a transfer into a trust, or even by renouncing certain rights. Any such gratuitous disposal or renunciation of rights constitutes a donation. The result is that the donations tax becomes payable on the value of the property donated. 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.

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.

Disclaimer: This article is the personal opinion/view of the author(s) and does not necessarily present the views of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever, and no action should be taken on the basis thereof unless its application and accuracy have been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken based on this content without further written confirmation by the author(s).