Tax is one of the most important aspects of financial planning. It’s essential to make the most of all the tax breaks on offer – especially considering South Africa’s tiny and delicate tax base and the fear of consistent tax hikes.

The donations tax allowance is one of the most under-utilised exemptions, and it’s available to everyone.

“We make a living by what we get, but we make a life by what we give.” (Winston Churchill)

Donations tax 101

Put simply; you can donate an amount of up to R100 000 per year to any third party, like a child or a grandchild, without having to pay donations tax. For example, you could give R30 000 to each of your three grandchildren every year, and R10 000 to your daughter every year, without incurring any tax. If you’re donating to your spouse, there are no limitations – you can donate as much as you’d like, and the donation can take any form: cash, shares, property…

Donations tax for third parties kicks in above R100 000. Any amount above the threshold will be taxed at 20%. This rate applies to amounts up to R30 million; go above that, and you’ll be taxed at 25%. It’s important to know that if you donate investments to your children or grandchildren, the tax on interest, dividends and capital gains is your liability until the child turns 18.

To pay donations tax, you need to fill in an IT144 form and send it to SARS. It’s important to note that donations tax must be paid by the end of the month following the month in which the donation was made – it’s not part of your normal tax return.

What about the person receiving the donation?

The good news is that if you’ve received a donation or gift, it is 100% tax-free. The only time you’ll be questioned by SARS is if the donor (the person who gave you the donation or gift) doesn’t pay the required donations tax on time. In that case, both donor and donee become equally responsible for the tax payable. You certainly don’t want to pay tax on a gift, so if you’re ever on the receiving end of a monetary amount over R100 000, make sure you raise the important tax consequences with the donor.

And remember even though there’s no tax consequence for you as a beneficiary, you must declare the donation on your Tax Return as an “Amount Considered Non-Taxable”. This is because you have to declare all your income to SARS, even the non-taxable bits.

Use your donations allowance to pay for your grandkids’ education

One way for an older investor to use their donations allowance is to help pay for their grandchildren’s school fees. If you’re in this position, you can make use of further tax breaks by opening tax-free saving accounts earmarked for education. There is no tax on the growth within a tax-free fund and there is no capital gains tax payable when funds are withdrawn to pay for the school fees.

But do take note of the tax-free savings limits: You can only donate a maximum of R36 000 to each account per year, with a lifetime limit of R500 000.

What if you don’t believe in making donations?

Money is inextricably tied to emotion and woven into family dynamics. Maybe you don’t have anyone in your close circle to donate to, or you’d prefer to delay your donation until your passing, as a form of inheritance?

You can still make use of the donations tax allowance and put the R100 000 exemption to good use. The way to do it is to write promissory notes for the beneficiaries, to the combined value of R100 000 per year. These notes need to be registered with SARS by the donor and donee(s). Once you’ve navigated that minor hurdle, the process is relatively simple when you pass away. Provided everything is above board and logged correctly, a significant amount of estate duty will be saved.

The bottom line

Tax planning and financial planning are closely linked, because taxes are such a large expense item. Nobody wants to pay more tax than they absolutely have to, but you also don’t want to save on tax only to compromise growth in other investments. It’s a fine line!

Please speak to your financial advisor. We will help you create a bespoke plan that suits your lifestyle and your investment goals.

Disclaimer – *The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.
© DotNews