When you give an asset away for no value, this would be considered a donation.
Furthermore, if you sell an asset for less than its actual open market value, the difference between the price paid and the price that should have been paid will also be considered a donation. SARS determine when the price paid is inadequate by applying willing buyer (ie. What a willing buyer would be prepared to pay) and willing seller (ie. What a willing seller would be prepared to receive) test.
Donations tax, levied at a rate of 20%, must be paid by the donor (the person disposing of the asset for an inadequate price) to SARS by the end of the month following the month that the donation was made. The donor must complete an IT144 form and submit this to SARS. Payment can be made using SARs eFiling or manually to SARS. It is worth noting that – should the donor fail to pay the donations tax to SARS – SARS may hold the donee (ie. Recipient of the donation) liable for the donations tax payable.
There are 3 donations tax exemptions
- the first R100 000 donation per person (total of all donations aggregated) in a tax year is exempt from donations tax
- donations between spouses are exempt (only between spouse – not to children or grandchildren)
- up to 10% of your taxable income can be donated to recognised public benefit organisations (for which you also receive an income tax deduction).
High net worth individuals should consider donating R100 000 per annum (or R200 000 for a couple) to someone other than their spouse, for example their children, grandchildren or possibly a trust. In this way they can transfer assets to their heirs tax-free (as these assets will be owned by the heir at death of the person the assets will not be subject to estate duty on the person’s death).
Also bear in mind that a loan account owing by a trust to the person who sold their assets to the trust on loan account can be reduced by using the R100 000 annual donation. It is important – following a court ruling – that this R100,000 be actually paid from a bank account (as a donation) and reimbursed (as a loan repayment) as opposed to simply processing accounting entries in this regard.