It’s the festive season and ’tis the season for giving. Maybe it is coincidental that the topic of donations to political parties, high-profile persons and others features prominently in the press.
Donations tax is levied by s 54 of the Income Tax Act, at the flat rate of 20% on a donation, being a gratuitous disposal of property for no or an inadequate quid pro quo.
Natural persons enjoy a R100 000 exemption in each tax year. A private company is limited to R10 000 a year, while a public company, as defined in s 38, is fully exempt.
A shareholder who is a natural person making the donation in a personal capacity qualifies for the R100 000 exemption only.
A donation to a public benefit organization (PBO) is exempt, but bear in mind that a term of s 30 approval by SARS is that a PBO will not use its resources directly or indirectly to support, advance or oppose a political party. It is to be hoped that the recently tabled Political Funding Bill will ensure transparency regarding the funding of political parties, which should help ensure great tax compliance!
Paragraph (c) of the definition of ‘gross income’ in s 1(1) provides that there must be included ‘any amount including any voluntary award received or accrued in respect of services rendered or to be rendered’. Thus any additional, voluntary amount in excess of fees paid by a client to, say, a professional person is an income tax event. Thus, if the donation was declared and donations tax paid, it would be incorrect in law.
It would also amount to tax arbitrage, since a 20% rate is substituted for the higher income tax rate, probably of 45%. Section 56(1)(k) provides that an exemption from donations tax applies if a voluntary award is included in the donee’s gross income of the donee.
The fact that the underlying transaction is invalid is irrelevant in so far as the imposition of donations tax is concerned, according to MP Finance Group CC (in liquidation) v CSARS 2007 (5) SA 521 (SCA), as reaffirmed, albeit obiter, in The Abraham Krok Trust v CSARS (58/10)  ZASCA 153. Thus donations tax is payable.
If the donation has been validly accepted by the donee before revocation, the donation contract is perfected in law and, in my view, subject to donations tax. A subsequent repayment is a post facto event.
A form IT 144 is required to be completed in order to notify SARS of the transaction liable to donations tax. Sections 59 and 60 provide that, if the donor fails to pay the donations tax by the end of the month following the donation, both the donor and donee are jointly and severally liable for the tax, and SARS may assess either party for the tax.
My suggestion is that, in the fairly common circumstance in which donations are made to a trust fund account administered by attorneys, they should be the responsible party for collection and payment of tax, in the same way as the duty is imposed upon them for fixed property transfer taxes. A Christmas present to SARS.