Donations & tax

From an estate planning perspective, a donation has several benefits, and is likely to save you money.

Donations & tax
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If a person of means has the ability to divest themselves of assets and if such divestment isn’t subject to negative tax repercussions, the effect of such freedom to deal with one’s assets would be that numerous tax and estate planning opportunities will present themselves to the person. For instance, a person who holds a large amount of liquid assets is obviously taxed upon the fruit of those assets or the interest that the assets produce. Being the owner of the assets, the fruits cannot but accrue to the person.

READ:Saving your assets

High income generates high taxes as South African tax rates for individuals are progressive. The higher the income, the higher the rate of tax payable. If the divestment of assets without adverse consequences was allowed, such a person would have the ability to apportion liquid assets among family members. When assets of this nature are split, the income that follows such assets generates lower taxes, because the rate of tax each asset holder would pay might be far less, as the income is less, and would intersect the progressive tax scale at a lower point. The result is that the amount of tax as a sum of the taxes payable by the asset holders must be less than the tax payable upon the income generated by a large sum held in one person’s hands.

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Estate planning
From an estate planning perspective, the benefits of a donation free of adverse consequences are very easily ascertained.
Assets donated prior to death generate no estate duty. Thus we have a tax regime where donations and estate duty are levied at the same basic rate of 20% after taking exclusions and abatements into account. Assets held in trust aren’t subject at this point in time to donations taxes upon distribution to beneficiaries of the trust and neither, generally speaking, is estate duty levied upon the assets held in trust.

There are two types of donations: mortis causa, a donation made in contemplation of death; and inter vivos, a donation made during life. A donatio mortis causa is perfected at death, because the donor, who has to make the donation out of pure benevolence, has the power to revoke the donation while still alive.

A donatio inter vivos takes effect once the formalities for a valid donation have taken place or, in absence of the formalities, the time period for prescription of any claim against the donation after delivery of the asset has passed. SA is one of very few countries in the world where both capital gains taxes and estate duty or donations taxes are payable on the same transaction/s. The donations tax exemption is currently R100 000/annum. This amount can be donated to a family trust, for instance, free of donations tax, and if cash is transferred, there will be no capital gains tax repercussions.

About trusts

South Africans have lately been subjected to many opinions regarding the use of trusts, some of which might not be wholly accurate. In my opinion, a trust set up to receive annual donations from a husband and wife could give rise to a meaningful saving in both capital gains tax and estate duty, while also making a nest egg available to the trust beneficiaries that’s out of reach of creditors.

Peter O’Halloran is head of tax at BDO, Gaborone. Contact him on 00267 390 2779 or at [email protected]. Please state ‘Tax’ in the subject line of your email.