If you have money invested in an interest bearing investment and the interest is reinvested, or it is, at your instruction, to be paid to someone else ... who gets taxed? If your children earn income, who gets taxed?
These are some questions I have been asked recently. To some the answers might seem quite clear, but are they?
If interest is earned on an investment you have and you instruct the bank to reinvest it, this benefits you as the reinvestment has increased the amount of the investment on which you will earn interest in the future. But you are still required to declare it on your tax return and to pay tax on it.
For some investments, the interest only arises at certain intervals, for example with a fixed deposit the interest may only be reflected after two years. However, the tax legislation still requires you to show that interest has accrued to you at the end of the tax year on the basis that it accrues on a daily basis.
If you have instructed that, for the time being, interest or, perhaps, an annuity, must be paid to, say, your spouse, the interest or annuity will, generally, still be taxable in your hands.
However, if you are married in community of property half will be taxed in your hands and half in your spouse's hands.
In addition, if you cede your right to the income to another person in advance of it accruing to you, it may be taxable in that other person's hands. This only applies in certain circumstances though. For example, you cannot cede income relating to services you have physically rendered, and I would suggest you seek professional advice before you embark on such an exercise.
To be a taxpayer in South Africa you do not have to be a certain age. If a five-year-old child earns income in his or her own right because he or she has received an inheritance which earns income or the child is a model/actor for TV commercials, and the income exceeds R17 000 a year, he or she must be registered as a taxpayer, submit a tax form and pay tax.
Such income is not, contrary to popular belief, taxed in your, the parent's, hands.
However, this does not open up opportunities for you to avoid tax on your own income by giving money to your children so that the income is accrued to them. This is because the legislature saw through that trick many years ago. The tax law deems any income received by a minor as a consequence of a donation, settlement or "other disposition" (this includes a non-interest bearing loan) made by its parent to be income of the parent and therefore taxable in the parent's hands.
Equally so, you can't get around the situation by asking your friend to give your child a donation on which your child will earn income, whilst you give a donation of an equal amount to your friend's child. The law will still tax the income received or accrued as a consequence of the "donation" in your hands.
Neither will donating or making an interest-free loan to a trust, of which your minor children are beneficiaries, help. The law will deem the income to be yours.
In addition, before making any donations, you need to consider the implications of donations tax. Most donations (those which are not specifically exempt) will be taxed at 25 percent.
So, when you fill in your tax return, don't forget to include the income which hasn't necessarily been paid out to you.