Large donations can cost you in tax

Published Sep 29, 1999

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A question I am fairly regularly asked is: "Can`t I just give my shares to

my children?"

The answer, of course, is yes, but you need to be aware of the potential

donations tax consequences. Once you know the tax consequences, you may

still choose to give some of your assets to your children, or anyone else

for that matter, for very good reasons, which may include estate duty

savings (although before you do that I suggest you seek professional advice

because there may be a better way of doing it).

But first things first.

The important thing to be aware of is the potential immediate cost you may

incur if you give something away.

Firstly, what is a donation for donations tax purposes? It is the situation

where you give something to another person or entity for nothing or for a

price that is less than the market value of that something.

I have used the word "something" because donations tax can apply if what

you give away is a right in or to property which is movable (for example,

goods) or immovable (land and buildings), corporeal (a physical asset like

a precious stone) or incorporeal (something intangible like a copyright or

patent).

Subject to the various exemptions, some of which I will set out below, if

you make a donation, within three months from the date you make the

donation you will be required to pay 25 percent tax on the value of the

donation which exceeds R25 000 in any one tax year. (The R25 000 only

applies to a natural person, not a company or close corporation).

So, if you give your shares to your children and the shares are worth R100

000, you will be required to pay 25 percent of R75 000 or R18 750 to the

South African Revenue Service (SARS).

It may, therefore, be better to sell the shares to your children for their

full value less the R25 000 which is not subject to donations tax and to

leave the selling price as a debt owed by your children to you. This way

there will be no donations tax. And even if the shares are worth R300 000

in a few years time, your children will still only owe you R75 000.

It would be important to ensure that the correct documentation is put in

place to demonstrate that your children owe you the money, for example, an

acknowledgement of debt, so that you are able to demonstrate that you have

not made a full donation.

There are various situations where you are able to make a donation or use

your assets for the benefit of someone else, which will not be subject to

donations tax.

The most obvious one is where you maintain another person, for example,

your children whilst they are growing up. But the amount you incur to do

this must be reasonable in the Commissioner`s eyes.

He will clearly take lifestyle and needs into account. Giving your children

your shares would probably not qualify as being for their maintenance.

A donation to a spouse is also not subject to donations tax (provided you

are not formally separated). It is therefore possible for you to give your

spouse R25 000 and for you and your spouse to each donate R25 000 to your

children (totalling R50 000 in any one year)

There are a number of other exemptions from donations tax. I will set these

out for you next week.

In the meantime, beware of potential tax if you intend to give anything

away.

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