Farmer's Weekly (South Africa)

How to avoid donations tax legally

Proper estate planning is essential to avoid transferri­ng too much of your hard-earned capital to government rather than your rightful heirs.

- FW

If you give away more than R100 000 in gifts in a tax year, you are liable for donations tax. Currently, this is set at 20% for donations under R30 million; above this figure, the rate increases to 25%. In other words, if you give R500 000 to your son or daughter, you will pay R100 000 tax. The rules that govern donations tax are found in sections 54 to 64 of the Income Tax Act.

But why is there a donations tax at all? Well, without it, a wealthy person could simply give away his or her entire estate prior to death, so no estate duties would be due.

Fortunatel­y, there are a number of exemptions from donations tax. The first, as mentioned, is an annual exemption of R100 000, which means that you can give your wealth away slowly.

anticipati­ng death

A donation given in contemplat­ion of death ( donatio mortis causa) is also excluded from donations taxes. To be valid, such a donation must be in writing, be witnessed by two witnesses, and be dated and signed by the donor.

The assets so donated are vested conditiona­lly in the recipient. If a person makes the donation while seriously ill, but then recovers, the donation can be revoked. The final vesting or transfer occurs at the death of the donor.

The value of the donation is included in the value of the estate of the donor at death, making the exemption of limited value. However, because the value placed on the assets of the donation are controlled by the parties prior to death, it certainly has a place in your arsenal of estate planning.

Donations between spouses are free of donations tax, but this is also of limited value as most estate planners want to transfer wealth to the next generation.

The best strategy is to use a combinatio­n of donation exemptions and limited rights

The best strategy is to use a combinatio­n of donations exemptions and limited rights to transfer assets during your lifetime.

Fixed property can be transferre­d in this way. Ownership of any asset, including fixed property, is made up of two elements: bare dominium (ownership) and usufruct (use). The usufruct of the asset is usually the more valuable element.

So, in a fixed property, a parent might donate the bare dominium to a child, and make use of one or more of the donations tax exemptions.

Upon the death of the parent, the value of the usufruct might be open to lawful manipulati­on, resulting in a saving of donations tax and possibly capital gains tax as well.

 ??  ?? by peter o’halloranAd­vocate Peter O’Halloran is a tax specialist. Email him at farmerswee­kly@caxton.co.za. Subject line: Tax.
by peter o’halloranAd­vocate Peter O’Halloran is a tax specialist. Email him at farmerswee­kly@caxton.co.za. Subject line: Tax.

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