Question:
I intend to donate my home and property worth R1.5-million to a church, to be used solely for church work. Do I pay any tax on this donation?

Answer:
In terms of the Income Tax Act, donations tax is payable in respect of all property donated on or after 16 March 1988. However, although this seems like the most obvious tax it is not the only one that may be applicable. The question of capital gains tax should also be considered.

Being taxed on your generosity may be seen as a slap in the face from the Receiver, but there is method to this seemingly ridiculous tax. Donations tax was introduced in 1955 to prevent taxpayers from making donations that would effectively reduce the value of one?s estate for estate duty purposes and/or one?s liability for the payment of income tax. In other words, it was introduced to ensure that taxpayers did not donate assets purely to limit their tax liability.

With effect from 1 October 2001 all donations made on or after this date will have donations tax levied at a flat rate of 20 percent, with the donor being liable for the tax. As with most taxes, there are some exclusions that make this type of tax far less burdensome and logically fair. Section 56(2) of the Income Tax Act allows for individuals to enjoy an annual exclusion to a maximum of R100 000 of all donations. This means that only amounts in excess of this exemption will become liable for the 20 percent levy. In addition to this, Section 56(1) details a comprehensive list of all other applicable exemptions with the following, by in large, being the most apparent:

• Donations made between spouses

• Donations mortis causa (i.e. in contemplation of death and therefore included in the estate with estate duty levied at 20 percent)

• Donations made to certain essentially non-profit organisations (e.g. municipalities, governmental organisations, PBO?s and churches)

With this in mind, and assuming that the church in question is properly recognised by SARS as a duly registered non-profit organisation for the purposes of Section 56(1)(h), the donation would benefit from this exclusion. To check this, it would be prudent to ensure that the church has the relevant certificate issued by SARS confirming its non-profit status. If not, then only the R100 000 annual exemption would apply (assuming no other donations were made in the current tax year). Of course, the assumption has been made that this donation is intended in your lifetime and not as a bequest upon death. Where this may have been the case, you would benefit from the donations mortis causa exemption with the acknowledgement that this asset would remain in your estate for Estate Duty purposes and taxed accordingly.

So, what role or impact could capital gains tax (CGT) have on the above scenario?

A donation is included in the definition of a disposal upon which CGT may become payable and therefore requires further consideration. Essentially, CGT may be levied on capital appreciation of an asset. This gain is determined by the difference between the base cost (cost at which the asset was obtained or purchased) and the proceeds (value at which the asset was disposed of or sold). In the case of a donation, the proceeds would generally be the market value of the asset (i.e. the price that could have been obtained upon sale of an asset between willing buyer and willing seller dealing at arms length in the open market). This gain is then represented in one?s income tax liability by an inclusion rate. In the case of a natural person, this inclusion rate is 25 percent. This means that for an individual with a 40 percent tax rate, the effective 'rate' of CGT (after exclusions being applied) would equate to 10 percent.

As with donations tax, CGT also enjoys a liberal smattering of exclusions with the potentially relevant areas highlighted below:

• Annual exclusion for natural persons to a maximum of R17 500 (2009/2010 tax year)

• Primary Residence Exclusion of gains to a maximum of R1.5-million
  • A further addendum to this exclusion is now applicable where any capital gain or loss is excluded when the proceeds of the sale does not exceed R2-million (provided, in general, that neither the donor, beneficiary or spouse of either of these parties is a non-resident nor was any trade carried out at the residence).

Essentially, this means that provided the guidelines above are observed and the criteria for your specific scenario qualifies, there should be little concern of tax liability.

acsis Limited is an authorised financial services provider. The response to the question covers some of the issues in a general and factual manner and does not constitute advice. It is important to consult with a financial planner who, after an analysis of the individuals? personal needs, goals and circumstances, will be able to provide comprehensive and appropriate advice.