Donations tax implications of maintenance payments

Taxpayers contributing to the maintenance of another person may not be aware that the value of property (cash or assets) donated does not necessarily have to be capped at the current threshold of R100,000 per year of assessment.

Donations tax

The principle aim when donations tax was introduced into the Income Tax Act 58 of 1962 (the Act) was to prevent taxpayers from donating assets during their lifetime with the aim of avoiding estate duty. Donations tax is levied at a rate of 20% on value of any property disposed of under a donation by a resident, unless a specific exemption is available to the donor.

Exempt donations

Section 56(1) of the Act provides an exemption from donations tax for certain types of donations made such as property donated to, inter alia, a Public Benefit Organisation. Section 56(2)(b) of the Act provides further that donations tax shall not be payable where, during a year of assessment, a natural person disposes of property under a donation, provided the value of property donated does not exceed R100,000. In addition, section 56(2)(c) of the Income Tax Act provides that a donor may also make bona fide contributions towards the maintenance of any person as the Commissioner considers to be reasonable without attracting donations tax.

It appears that the exemption allowed under section 56(2)(c) of the Act does not require the maintenance to be paid in relation to a dependant of the donor. Donations in the form of maintenance may therefore be made to any person whether it be an ailing parent or a relative attending university. The only requirement is that the donation must be a bona fide contribution towards the maintenance of another person.

A bona fide contribution will be a question of fact to be decided by the Commissioner in the exercise of his discretionary powers.

Commentators suggest that, in general, bona fide donations will be determined by taking into account the reasonable needs of the donee and the means of the donor. It is important to note that, in terms of section 63 of the Act, the decision regarding the bona fide nature of the donation made upon the exercise of discretionary powers by the Commissioner, is not subject to objection and appeal and can only be taken on review where the donor is in disagreement. It is therefore essential that a donor provides sufficient information to the Commissioner so as to place him in a position to make an informed decision regarding the bona fide nature of the maintenance of another person.

The term ‘maintenance’ is not defined in the Act, however, the ordinary dictionary meaning refers to any amount paid in the form of an allowance for ailment or support. Depending on the nature of the person being supported, the determination of what is regarded as ‘maintenance’ could become a very subjective analysis.

Payment of donations tax and practical implications

Once property has been donated, which is not for the bona fide maintenance of the another and which exceeds the R100,000 exemption, a donations tax liability would arise. Section 60 of the Act requires donations tax to be paid to the Commissioner within three months from the date on which the donation takes effect. During that three month period, the tax burden rests with the donor. Once the three month period has expired and the donations tax liability remains unpaid, the donor and donee becomes jointly and severally liable for the donations tax due.

It is therefore possible for an individual to fully utilise his / her annual donations threshold of R100,000 and in addition provide maintenance support, by way of further donations, without attracting any donations tax.

DLA Cliffe Dekker Hofmeyr
Tayob Kamdar and Mari Wichmann