Summary Advanced taxation 441 - theory, case law, lecture notes
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Grado
Advanced taxation 441 (441)
Institución
Stellenbosch University (SUN)
As described, these notes contain all theory, summary of prescribed cases, lecture notes, and lots of practical examples.
The notes cover: donations tax, estate duty, VAT, and transfer duty.
I obtained 80% in the exam studying from my notes.
Donations Tax
Prescribed material:
Sections 54-64 of the Income Tax Act 58 of 1962
Estate R F Welch v C SARS [2004] 2 All SA 586 (SCA), 66 SATC 303
Introduction
o Why do we have a separate donations tax (separate from income tax/ normal tax) but
the provisions are found in the Income Tax Act (even though it would have made
more sense to include donations tax in the Estate Duty Act – it is like paying estate
duty while you are alive on the transfer of capital – this is why the donations tax and
estate duty rates are identical).
If there was no donations tax, A could transfer half of his income to B (a
connected person) in order to avoid paying income in a higher bracket.
Secondly, if there was no donations tax there would be no use in having estate
duty – people would just donate everything while alive so that no estate duty
had to be paid
o Ogus v SIR (3) SA 67 (T), 40 SATC 100:
“At the outset it is necessary to draw attention to the fact that the donations
tax was introduced to make up for loss of revenue by way of income tax and
estate duty when certain types of donations are made. The mischief aimed at
was the practice by taxpayers of reducing their assets by making donations
and thereby reducing their income on which income tax is payable,
reducing their assets on which estate duty would be payable at their death,
and spreading the assets and the income derived therefrom over several
taxpayers.”
Donations tax v estate duty:
o If X has R180 available:
Donate R150 to Y and pay 20% donations tax (R30) to SARS (Y gets
R150)
Inherited by Y: R180 x 20% estate duty = R36 estate duty (Y gets
R144)
,2
Take the estate, multiply the same rate and it gives you a higher
amount of tax. Even though the rates applicable are the same, the
results will not necessarily be the same
o Donations tax: R30 / R150 = 20% (tax on the value of wealth transferred to Y
during the life of X)
o Estate duty: R36 / R144 = 25% (tax on the value of wealth transferred to Y
upon the death of X)
Important provisions:
o Income Tax Act Chapter II (“The Taxes”) Part V (“Donations Tax”) sections
54-64
o Income Tax Act Chapter III (“General Provisions”)
o Income Tax Act section 1
o Income Tax Act sections 80A-80L
o Tax Administration Act: E.g. returns (ss 25-33), assessments (ss 91-100),
objections and appeals (ss 104-107), payment & collection (ss 169-184),
representative taxpayers (ss 153-155) don’t need to study, just be aware
that TAA also regulates donations tax
Before we had the TAA those administrative provisions were found in
the ITA.
S54: levy of donations tax
o Subject to the provisions of section 56 [which contains exceptions], there shall
be paid for the benefit of the National Revenue Fund a tax (in this Act referred
to as donations tax) on the value of any property disposed of (whether directly
or indirectly and whether in trust or not) under any donation by any resident
(in this Part referred to as the donor)
o The rate of donations tax is applied to the value of the donation (s62)
o Donations tax is only payable by residents (donations tax differs from estate
tax in this regard)
If a German resident owns property in SA and donates it here, they are
not subject to donations tax
Also applies to someone emigrating: if a person is still resident but
about to leave country permanently and no longer ordinarily resident or
,3
physically present, not advisable to donate prior to emigration because
if you donate while still a resident, will be subject to donations tax.
o Directly or indirectly?
E.g. settling your sister’s account at the car dealer is an indirect
donation
o Whether in trust or not?
This means that even when assets are handed over to a trust, it will be
considered a donation.
o S55:
Def of property: means any right in or to property movable or
immovable, corporeal or incorporeal, wheresoever situated.
Def of donation: means any gratuitous disposal of property including
any gratuitous waiver or renunciation of a right;
Historic rates of donations tax:
o 20% until 28 February 2018
o 25% on gifts made on or after 14 March 1996 to 30 September 2001 (i.e. until
CGT came into effect on 1 October 2001)
o Gifts pre 14 March 1996 – 15%
o Pre 16 March 1988 – cumulative scale
S64 rate of donations tax:
o (1) The rate of the donations tax chargeable under section 54 in respect of the
value of any property disposed of under a donation shall be -
(a) (i) 20 per cent of that value if the aggregate of that value and the
value of any other property disposed of under a taxable donation on or
after 1 March 2018 until the date of that donation does not exceed R30
million; and
(ii) 25 per cent of that value to the extent that that value is not
taxed under subparagraph (i); or
(b) such percentage of such value as the Minister may announce in the
national annual budget contemplated in section 27 (1) of the Public
Finance Management Act, with effect from a date mentioned in that
Announcement.
,4
o (2) If the Minister makes an announcement contemplated in subsection (1) (b)
…
We all have a lifetime threshold of R30mil – that threshold has started to accumulate
only since 1 March 2018 (when this amendment came into effect) – a person only
pays 20% donations tax on first R30mil and 25% on any excess over and above
R30mil.
o Refers to a taxable donation: if a donation was exempt from donations tax it is
not included when checking whether the R30mil threshold has been reached.
Summary:
o 20% and 25% on all further donations, if the aggregate of all previous taxable
donations (on or after 1 March 2018) exceeds R30 million (section 64)
o Aggregate of R30m commences 1 March 2018
o R30m threshold excludes exempt donations (only take taxable donations into
account)
o R30m threshold over life and starts running 1 March 2018 (not annual)
o Also: every natural person has an annual exemption on donations tax of
R100 000 (can donate up to R100 000 each year to anyone free from donations
tax)
Example:
o X donates R15m on 1 January 2021 and R20m on 1 February 2021. These
donations are not specifically exempt. Assume X made no other donations
between 1 March 2018 and 1 January 2021. What is the donations tax
liability?
Donations tax on R15m donation: R15m – R100 000 (annual general
exemption) = R14.9m (taxable donation) x 20% (since we haven’t
reached the threshold) = R2 980 000 donations tax payable by x.
Donations tax on R20m donation:
R30m – R14.9m (previous taxable donation) = R15.1m (left of
the R30mil threshold subject to donations tax at 20%) x 20% =
R3.02m
o Don’t deduct R100 000 this time because both
donations fell within the same year of assessment for a
natural person (new YoA begins 1 March)
,5
R20m – R15.1m (the portion that has already been taxed at
20%) = R4.9m x 25% = R1.225m
o i.e. the balance is subject to donations tax of 25%
Total = R3.02m + R1.225m = R4 245 000 donations tax
o X donates R45m on 1 January 2021. This donation is not specifically exempt.
Assume X made no other donations between 1 March 2018 and 1 January
2021. What is the donations tax liability?
R45m – R100 000 (annual general exemption) = R44.9m
R30m x 20% = R6m
(R44.9 – R30m) x 25% = R3.725m
Total = R6 000 000 + R3 725 000 = R9 725 000 donations tax
Determining donations tax liability
o Disposal of property by a resident
o Is disposal a donation or deemed donation?
o Is the donation specifically exempt?
o If not specifically exempt – determine value of the donation
o Deduct general exemption(s)
o Multiply value with rate(s)
,6
‘property’
Defined in s55(1):
o “Property” means any right in or to property movable or immovable, corporeal
or incorporeal, wheresoever situated
I.e. including foreign property owned by residents, but see
exemptions such as section 56(1)(g) later applicable to foreign
properties
‘donation’
S54: there must be property that is disposed of under a donation
Common law test – when is a disposition a donation? Pure liberality / disinterested
benevolence
o For other purposes (law of contract etc), we had a common law definition of
donation. The test for whether something is a donation in common law is to
determine what the motive/intention was of the donor. In terms of the common
law must have been made motivated by pure liberality, generosity or
disinterested benevolence in terms of which the donor is impoverished and the
,7
done is enriched– the aim must be to enrich the donee for no consideration in
return either now or in the future.
o A donation is a unilateral contract – there must still be offer and acceptance
but only the donor performs and there is no counter-performance.
Section 55(1): “Donation” means any gratuitous disposal of property including any
gratuitous waiver or renunciation of a right
o Disposal? CIR v Estate Kohler 18 SATC 354 page 372: “... every conceivable
mode by which property can pass, whether by act of parties or by act of the
law… 'disposition' certainly in this sort of legislation carried a wide
meaning… as covering all acts in the law which affect property… it includes
such transactions as an allotment of shares by a company, although the
company's estate is not diminished thereby.”
o Gratuitous? For no consideration. The question which has been considered by
our courts is whether the statutory definition removes the common law
requirement that the donor must have the intention of pure liberality or
disinterested benevolence? Is the statutory definition subjective – do you take
the motive of the donor into account in determining whether the donation was
gratuitous?
Estate R F Welch v C SARS [2004] 2 All SA 586 (SCA), 66 SATC 303
Facts:
o Divorce; settlement agreement that was made an order
of court in terms of which Mr Welsh had to transfer
assets to a trust and the trustees had to pay maintenance
to Mrs Welsh and her son. The trust also had other
beneficiaries, so if the trust had other income available
in excess of maintenance, the trustees could make
distributions to people other than Mrs Welsh and her
child.
Question: whether the disposal of assets by Mr Welsh to the
trust was subject to donations tax
o SARS argued that Mr Welsh made a donation to the
trust for nothing in return.
,8
o SARS and the court a quo held that it was a donation
subject to donations tax.
o The taxpayer then appealed (by that time he was
deceased)
Majority: found in favour of taxpayer – that there was no
donation on these facts.
o The court worked with the statutory definition and
interpreted the concept of gratuitous as meaning
‘without obligation, for no return’
o Taking into account the common law meaning of a
donation, the court says that if it was the intention of the
legislature to deviate from the common law meaning of
the donation, it would have used another word than
gratuitous. The word ‘gratuitous’ indicates that the
statutory definition has the same meaning as the
common law meaning: the motive of the donor must be
pure liberality/ generosity.
o The court considers that it still remains true that the
trust never gave anything back in return, but the court
finds that although the trust gave nothing to Mr Welsh,
Mrs Welsh relinquished her claim to him for
maintenance as long as the trust paid maintenance to
her.
o Para 49&50: the court says that what SARS could have
done is to argue that there is a donation to a certain
extent here (if there was anything in the trust in excess
of the maintenance, the trustees could distribute the
excess assets to other beneficiaries and this could have
been formulated as a deemed donation – assets were
given for an inadequate consideration – there was
liberality related to the other beneficiaries). But: the
court said on the fact there were too many uncertainties;
the other beneficiaries had no vested rights, only a spes
,9
– would be impossible to calculate donations tax on that
basis.
o all donations in terms of the common law will be
“donations” for the purposes of the ITA – it is still a
subjective test.
o Therefore, if you dispose of something out of self-
interest, it would not be a donation.
Minority: don’t need to focus on minority judgment, just take
note of it
o Found that the motive is irrelevant; that the donor’s
estate was depleted and that is relevant (not the
goodness of his heart), and the trustees had no
obligations towards him so it was a donation.
o Includes “any gratuitous waiver or renunciation of a right”
Waiver of a debt can be a donation but you still need to pass the
common law test (motive of generosity/liberality) – losing your right to
claim because the debtor is insolvent, for example, would not be a
gratuitous waiver of a right.
Waiving a right that is conditional will not be a waiver – must be an
unconditional vested right that is waived for it to be a donation
Repudiation of inheritance is not a donation, since you need to accept
the inheritance for it to vest in your estate (have no rights unless you
accept them)
Donation of free services?
No – there is no disposal of property
Interest free (or low interest) loans: is there a gratuitous disposal of
property including any gratuitous waiver or renunciation of a right?
Example A: X sells rental earning property at market value of
R2m to his minor daughter and purchase price remains
outstanding on interest-free loan account:
o Donation – donations tax? No – for purposes of s54 the
fact that the loan is interest free has no consequences –
this is because you do not have a right to interest in
, 10
terms of the common law (only have an opportunity to
charge interest on a loan and if you decide not to charge
it you don’t give up anything – no gratuitous disposal of
property or renunciation of a right).
o Property sold to child, child owes the father R2mil but
she owes it to him on interest-free loan – in order to
provide for the fact that this can result in tax avoidance,
s7 states that if a minor child earns income as a result of
a donation, the income will be taxed in the hands of the
parent. We don’t have a donation here in the sense of
the father giving her the property, but rather in the sense
that he loans her the money interest-free (she does not
have to pay interest on the purchase price of the house).
o Donation – section 7(3)?1 Yes
Rental income earned by minor R200 000
Market related interest @ 6% (R2m x 6%) is
R120 000
R120 000 of rental income taxed in hands of X
The balance of what has not been
deemed to be taxed in the hands of the
father will be taxed in her hands
Example B: X sells rental earning property at market value of
R2m to TRUST (beneficiaries have no vested rights) and
purchase price remains outstanding on interest-free loan
account:
o Donation – section 7(5)?2 Yes
Rental income retained in trust R200 000
Market related interest @ 6% (R2m x 6%) is
R120 000
1
S7(3) applies when a parent donates an asset to a child and that child earns income from that asset – s7 is an
anti-avoidance provision which will deem the income to be earned in the hands of the father. For purposes of s7
of the ITA, the fact that a loan is interest free or at a loan interest rate has been regarded as a donation not for
donations tax purposes, but for the purposes of s7 in this scenario the minor child earns income as a result of
a donation (the donation being the fact that she does not have to pay her father interest). Therefore if the rental
income earned by the minor is R200 000 and the father has foregone interest at a market related interest rate of
6%, that will be taxable in the hands of the father.
2
7(5) applies when there is a relationship with a trust.
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