LTAX Unit 9- Notes - Summary Tax Law PDF

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LTAX Unit 9 Notes and Summary...

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Unit 9 – Donations Tax  Donations tax is payable on certain transfers of assets from one person to another.  Donations tax is not a income tax. o It is a separate tax on the transfer of wealth.  Donations tax made to a certain public benefit is deducted in normal tax calculations.  2 Functions of donations tax – o It imposes a tax on persons who may want to donate their assets to avoid 1) Normal income tax on the income derived from those assets. 2) Estate duty when those assets are excluded from their estate. - Levying of Donations Tax  Donations tax is payable on the value of any property disposed ny a South African resident ITO a donations, whether directly or indirectly.  Donations tax is levied at a rate of 20% of the property donated.  Non-residents are not liable for donations tax. - Definitions  Property = Any right in or too property whether it is moveable or immoveable whether it is corporeal or incorporeal wherever it is situated. o Donations tax is levied on the donation of property in or outside the SA. o EG – Corporeal (tangible) property = Property. o EG – Incorporeal (intangible) property = Copyright, patent and trade mark. o Rendering services for free is not subject to donations tax because there is no disposal of property.  Donation = Any gratuitous disposal of property, including any gratuitous waiver or renunciation of right. o For a disposal to be gratuitous, it needs to be for no consideration/ free.

o EG – If a creditor writes off a loan owed to him because the debtor cannot pay because he is insolvent, the creditor is motivated by pure liberty.  Question = Whether the granting of an interest free loan may constitute a donation . o Property includes any right in or to property, it must be established whether the lender had any right to interest which is then waived. o If the lender is entitled to charge interest ITO agreement but then decides not to charge interest, there will be a gratuitous waiver of is right to the interest. o If no provision is for interest is made in the agreement, no inherent right to interest arises. There can be no waiver of any right to interest and no donation will arise.  In order avoid tax on an interest free loan, the loan should be made ‘payable on demand’.  Interest free loans and low-interest loans made to trusts are treated as donations to the trusts and are subject to donations tax.  Donee = A beneficiary under a donation. o Includes the trustee of a trust that receives property as a donation. o Donations tax payable by a trustee in his capacity may be recovered by him from the assets of the trust. - When a Donation takes Effect  A donation takes effect on the date in which all valid formalities for a legal donation have been complied with.  An oral donation takes effect on the day of delivery of the property donated.  A promise to donate takes effect when the donor commits the promise to writing and signs the relevant document.  The MUST be ACCEPTANCE by the DONEE for a valid donation to be constituted. - Deemed Donations  Property disposed of for a consideration that is not adequate in the opinion of the Commissioner is deemed to have been disposed of under a donation. - Interest-Free or Low-Interest Loans to Trusts or Companies

 Loans granted/given from 1 March 2017 on certain loans or credit advanced by a connected person to a trust, may result in the application of donations tax provisions to such loans or credit. o The provisions is not retrospective and does not change tax liability for previous years,  Foregone Interest = The difference between the amount of interest incurred by the trust or company and the interest that would have been incurred at the official rate of interest. o Foregone interest is deemed is deemed to be a continuing annual donation for purposes of donations tax. o The donation is deemed to be made on the last day of the year of assessment of the trust.  If a person acquires a claim to an amount owing by a trust or company that person is deemed to have made the loan to the trust or company. o The person acquiring the claim must be a connected person the trust or the person who made the loan. o The deemed loan will be for an amount equal to the persons claim to an amount owed.  No deduction, loss, allowance or capital loss may be claimed IRO a loan on which no interest is charged or where interest is charged at a rate that is less than the official rate of interest.  If the loan by a company to the trust is at the instance of more than 1 connected person the deemed donation must be apportioned based on the ratio of equity shares or voting rights in the advancing companies.  Specific Donations Tax Exclusions 1) Special trusts that are created solely for the benefit of minors with a disability . 2) Trusts or companies that fall under public benefit organisation or small business-funding entities. 3) Vesting trusts. 4) Loans used by a trust or company to fund the acquisition of a primary residence. 5) Loans that constitute affected transactions and are subject to transfer pricing provisions. 6) Loans provided to a trust or company ITO sharia-compliant financing arrangements. 7) Loans that are subject to dividends tax. 8) Loans by a company that was created solely to set up a chare incentive scheme

a. The exemption applies if equity instruments are offered by the trust to full-time employees and directors. b. The scheme must not be available to connected persons f the company.

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 Specific Exemptions: Types of Donations Exempt – Matrimonial property contracts. a. Donations to a trust in which a spouse has a special interest will be exempt. Donations made to or for the benefit of the donors spouse. a. Parties must not be separated by a judicial order or notarial deed of separation. Donations made in contemplation of death (Donatio Mortis Causa) A donation under which the donee will not maintain any benefit under the donation until the death of the donor. A donation that is cancelled within 6 months after it took effect. A donation made by or to any traditional council or traditional community or tribe. A donation of any property situated outside SA if that property was acquired by the donor – a. Before he became a resident of SA for the 1 st time, or from funds derived by him from disposal. b. By inheritance by a person who was not an ordinary resident in SA when he died, or from funds derived by him from disposal. c. A donation if at the date of donation the donor was not ordinarily a resident of SA, or from funds derived by him from disposal. d. Out of funds derived by him from the disposal of or revenue from replacement properties, where the donor disposed of property and replaced it successively with other properties. S56(1)(g) – Donations made by or to i. Government of RSA in all spheres. ii. Persons conducting scientific, technical or industrial research. iii. Any political party. iv. Public benefit organisations. v. Recreational clubs. vi. Small business funding entities. vii. Penson funds, preservation funds, provident funds, etc. viii. Share block companies or institutions. e. Trust distributions to beneficiaries of the trust.

f. A donation of right to use or occupation of farming property to the donors child. g. A donation made by a public company. h. A donation of full ownership in immoveable property to a beneficiary ITO the Land Reform programme or the NDP. i. Donations between companies where the donor and the donee form part of the same group of companies. j. Any bona fide contribution the maintenance of any person, provided the Commissioner considers it reasonable. - General Exemptions  General exemption for juristic persons = R10 000 of the sum of all casual gifts made during the year. o Casual gifts = Wedding gifts, birthday gifts and Christmas gifts.  General exemption for natural persons = R100 000 of the sum of all property donated during the year of assessment. - Donations by Spouses Married In Community of Property  S57A provides that when a spouse makes a donation out of the joint estate, each spouse is deemed to have made 50% of the donation.  When a spouse makes a donation with the property that is excluded from the joint estate it will be regarded as being made solely by that spouse.  The R100 000 per year exemption is available to each spouse.  Spouses married in community of property will be able to donate up to R200 000 annually without incurring donations tax liability. - Donations by Companies  S57 provides that donations are deemed to be made by the person who instructed the company to make the donation.  The value extracted from the company is regarded as a dividend from to the person at whose instance the donation was made.

 Payment and Assessment of Tax

 Donations tax is payable by the end of the month following the month during which a donation takes effect.  The donor is liable for the payment of donations tax.  If the donor fails to pay donations tax both donor and donee will be liable jointly and severally.

 When a donor makes more than 1 donation during a year of assessment, the amount of the general exemption must be determined according to the order in which it took effect.  A donee will be liable to pay the tax if the donors general exemption has been exhausted at the time of the donation.  When a donor has made more than 1 donation on the same date and the donees are called upon to pay the tax, the donor may choose the order in which the donations were made. o The Commissioner may determine the order whether the donor fails to choose the order within 14 days of being informed....