Donatio (Donation)

A donation is a unilateral contract in terms of which, the one party referred to as the donor is under no obligation to act, but does so out of pure liberality and benevolence by promising to give to the other party, called the donee, something without expecting to receive anything in return.  Donations may be classified into two main categories, namely: donations mortis causa (donations made in contemplation of death) and donations inter vivos (donations made otherwise than mortis causa).   Donations require acceptance, so if the donor revokes the promise made to the donee, or dies, before acceptance has been effected by the donee, the obligation ceases to take effect.

If the donee accepts the donation before revocation, the donation will be complete and the donor will be compelled to make delivery.   Prior to the coming into effect of the General Law Amendment Act, Act No. 50 of 1956 (hereinafter referred to as Act 50 of 1956) the common law set out a requirement for the registration and notarial execution of donations in excess of R1000.00 (£500).  However; Act 50 of 1956 subsequently abolished the necessity for registration. Section 5 thereof still requires that executory donations (an agreement to donate at some time in the future) be encompassed in a written document and be signed by the donor or someone else to whom the donor has bestowed written authority and by two witnesses in order for the donation to have a legal and binding effect.

A minor cannot make a donation of their property. A donation between spouses is of no force or effect unless or until the donor dies without having revoked the donation  nor can spouses, by antenuptial contract, reserve the right to make donations to each other during marriage.   In the event that the donor becomes insolvent his or her creditors are fully entitled to the property which forms the subject of the gift.  On the contrary, a parent may donate to his or her child.  A gift is also a contract whereby one person, not being bound to another, and from sheer benevolence, binds himself/herself to give something of value that they own to such other person in return for anything to his/her own advantage.  

The Requisite Formalities

In terms of the Income Tax Act, Act No. 58 of 1962, section 58, a donation is widely defined and includes property disposed of for an inadequate consideration. It is the disposal of an asset with no quid pro quo.  A donation may take various forms, including cash offerings, services, new or used assets such as motor vehicles. In cases where the asset to be disposed of is fixed/immovable property section 2 of the Alienation of Land Act, Act No. 68 of 1981 gains application. The provision stipulates that no alienation of land shall be of any force or effect unless it is contained in a deed of alienation signed by the parties thereto or by their agents acting on their written authority.  The main purpose of these provisions is to ensure that the donor seriously intended to enter into an agreement for the donation of such land or property, particularly where the asset being disposed of is land. Also, as in any other legally binding agreement, the objective is to ensure certainty as to the precise terms of the agreement.

Where a person expresses the intention of concluding an agreement of donation, it is of the utmost importance that such agreement adheres to all legislative requirements and expressly incorporates all the essential terms of the agreement. With that said, the courts do now have the power to fill in the ‘omitted terms’ of the agreement of donation by making reference to the express terms of such an agreement of donation or evidence incidental thereto.  Nonetheless, it is preferable that all the terms of the donation intended by the donor be expressly dealt with in the agreement of donation.  In essence the registration of donations has been abolished by the provisions of Act 50 of 1956; however, the requirement for registration remains in effect as far as executory donations are concerned according to section 5 of the said legislation.

Donations Mortis Causa

Donations mortis causa predicates a gift given by someone in situations where death seems imminent. The transfer of ownership to the donee is contingent upon the death of the donor. Such a donation must be executed in accordance with the formalities for a valid will; meaning that such a donation must be in written form, signed by the donor and two witnesses. The donation must be accepted by the donee prior to the death of the donor. The donation remains revocable by the donor at any time prior to his or her death, which then falls away in the event of the prior death of the donee. This means that if the death has not occurred and the donee has already taken possession, then the donee is obliged to return the gift if requested to do so.

Donations Inter Vivos

Donations inter vivos connote the grant of a gift between living people. Transfer in respect thereof takes place immediately and irrevocably.

Requirements for the Two Types of Donations:

•    The donor must make an offer/promise to donate, which offer must be accepted by the donee;
•    The donor must have the necessary legal capacity to make the donation and the donee must have the necessary legal capacity to accept the donation;
•    Anything that a person can trade can be donated;
•    A donation must be legal and feasible; and•    A donation must be identified or identifiable.

Donations Tax

Donations Tax is a form of tax that is payable at a flat rate on the value of property disposed of by donation. This is in accordance with sections 54 to and including 64 of the Income Tax Act, Act No. 58 of 1962. Donations tax is levied at a flat rate of 20% on the value of the property donated. However, the amount of donations exceeding R30 million is taxed at a rate of 25%.

Exemptions

Section 56(1) of the Income Tax Act contains a list of exempt donations, which include amongst others, donations between spouses and donations to approved public benefit organisations. The current annual exemptions are as follows:

A donation will be exempt if the total value of donations for a year of assessment does not exceed:•  

•    The first R100 000 of property donated in each year by an individual is exempt from donations tax.
•    In the case of a taxpayer who is not an individual, the exempt donations are limited to casual gifts not exceeding R10 000 per annum in total. In other words, these are casual gifts by companies and trusts: R10 000 (section 56(2)(a)).
•    Dispositions between spouses and South African group companies and donations to certain public benefit organisations are exempt from donations tax.
•    Donations by individuals: R100 000 (from 2008 to 2017 years of assessment) (section 56(2) (a) and (b)).

Any bona fide contribution made by the donor towards the maintenance of any person also qualifies for exemption. While not limited to a specific amount, this exemption is limited to what the South African Revenue Service Commissioner considers reasonable (section 56(2)(c)).

Deductions

Deductions in respect of donations to certain public benefit organisations are limited to 10% of taxable income (excluding retirement fund lump sums and severance benefits). The amount of donations exceeding 10% of the taxable income is treated as a donation to qualifying public benefit organisations in the following tax year.

Who Qualifies for it?

Donations Tax applies to any individual, company or trust that is a resident in the Republic of South Africa as defined in section 1 of the Income Tax Act. Non-residents are not liable for donations tax. The person making the donation (donor) is liable for the tax, but if the donor fails to pay the tax within the  set period the donor and donee are jointly and severally liable (the donor and donee will be jointly liable for the payment of the tax and they may work out their respective proportions of liability in respect thereof) for the tax (section 59). Public companies and public benefit organisations, amongst others, are exempt from donations tax (section 56(1) (h) and (n)).

Donations Tax Regarding Inheritance

For tax purposes, donations and gifts are treated differently to inheritances. As indicated above and regarding resident individuals, donations are subject to a donations tax of 20%, with an annual exemption of up to R100,000 of the value of all donations made during the tax year. For instance, if a once-off donation of R80,000 is made by an individual, no tax is payable, but if a donation of R140,000 is made, then Donations Tax of R8,000 is payable (20%  of the amount exceeding R100,000, which is R40,000). For companies or trusts, the exemption for casual gifts is up to R10,000 per tax year. Where the donor donates property to donee, and donor fails to pay the Donations Tax, the donee and donor will be jointly and severally liable for the tax.  There are certain donations that are exempt, for example: donations between spouses and donations made to certain public benefit organisations.

The Estate Duty rate increased from 20% to 25% on the dutiable amount of estates of more than R30 million, as announced by the Minister of Finance on 21 February 2018. Income, which accrues to the estate after the death of the deceased but before the distribution of the assets to the beneficiaries, is dealt with under section 25 of the Income Tax Act. The estate of a deceased person now is subject to 25% Estate Duty, after taking into account a deduction of R3.5 million against the net value of the estate. As an example, if the total net value of the estate is R4 million, Estate Duty will be dutiable on 25% of the amount exceeding R3.5 million which amounts to R125,000 (25% of R500,000). Estate Duty is a form of tax that is levied on deceased estates and is normally paid by the executor of the particular estate. However; there are instances in which the person receiving the benefit from the estate may be required to pay this form of tax directly. An example of this is where a policy in the estate is payable to a beneficiary. The executor of the estate will be entitled to recover the Estate Duty payable on such policy directly from the beneficiary.

What to do

You are required to fill in form IT144, which is a declaration by the donor or donee and submit it to your nearest South African Revenue Service branch with your proof of payment after making or accepting a donation.

When should it be Paid?

Donations Tax must be paid by the end of the month following the month during which the donation takes effect or such longer period as the South African Revenue Service may allow (section 60(1)). It is crucial to take into consideration the fact that a donation takes effect when all legal formalities for a valid donation have been complied with (section 55(3)).

References

Case Law

Albert v Pearce 1973 1 SA 827 (N).
Birrell v Weddell 1926 WLD 69.
Browning v Registrar of Deeds 1951 2 SA 433 (C).
Elliott's Trustees v Elliott 3 Menz 86; Thorpe's Exors v Thorpe's Tutor 4 SC 448.
Est Sayle v CIR 1944 TPD 443; on appeal 1945 AD 388.
Hall v Hall's Trustee 3 SC 3.
Oost v Reek 1967 1 SA 472 (T).
Phillips v CIR 1942 AD 47.
Scholtz v Scholtz 2012 (1) SA 382 (WCC).
Smith v Parsons NO and Others (187/09) [2010] ZASCA 39; [2010] 4 All SA 74 (SCA) (30 March 2010). The Master v Thompson's Estate 1961 2 SA 20 (RA).
Thorpe's Exors v Thorpe's Tutor 4 SC 488.
Union Bank v Spence 4 SC 341.
Van Reenen's Trustee v Versfeld 9 SC 161.
Welch v Commissioner for the South African Revenue Service (23/2003) [2004] ZASCA 40; [2004] 2 All SA 586 (SCA) (21 May 2004) at para [22].

Legislation

Alienation of Land Act, Act No. 68 of 1981.
Matrimonial Property Act, Act No. 88 of 1984.

Websites

PKF RademeyerWesson  26 March 2015 ‘Donatio Inter Vivos’ available at:
http://succeedadmin.co.za/blog/tag/donatio-inter-vivos/

South African Revenue Service 9 March 2018 available at:
http://www.sars.gov.za/ClientSegments/Individuals/Tax-Stages/Pages/Tax-and-Inheritance.aspx