Marvelous Tapera 
Donations can be very useful for tax planning purposes. However, the revenue authority has identified that people can somehow manipulate donations for the purpose of completely avoiding paying taxes and as such, the legislation is dotted with tax anti-avoidance rules, which are meant to discourage making donations for the purpose of avoiding paying tax to the government.
These rules are contained in most of the revenue Acts, some of which are fully explained in this article.
Donation of parents to the minor children – this donation is discouraged in terms of the Income Tax Act, were the parent has donated to his or her child that income will remain taxable in the hands of the parent.
However, it is viewed differently if the parent has made a donation to the child and the child has regenerated income from the use of the seed donation.
The connection between such donation and the subsequent income is therefore not inter-linked.
As held in CIR v Widan 1956 (4) SA 226 (A), 19 SATC 341, income is received as a result of disposition, donation or settlement if such income has causal relationship with the disposition, donation or settlement.
Regard will be hard to the real effective cause of the receipt or accrual of income. Only the proximate cause and not the remote cause must be considered (Kohler v CIR 1949 (6) SA 1022 (T), 16 SATC 312).
A donation, disposition or settlement shall not be taken to include any disposal of the property that is a wholly commercial or business or for a consideration, but an arrangement that ignores normal commercial terms or that of gratuitous.
Where an arrangement contains elements of a gratuitous and an arm’s length consideration, the income must be apportioned. A minor child refers to a child under the age of 18 years.
Efforts by some parents to counter the provisions as stated above could possible result in what is known as reciprocal donations and where the first parent makes a donation to the child of the other parent, and the second parent makes a donation to the first parent’s child, these donations too are discouraged in terms of the law and accordingly will be taxable in the hands of the parent.
Donations, where the founder or the donor remains in control of the donations and stipulate conditions for the enjoyment of such donations, which conditions may depend on future uncertain events are also set aside from an income tax perspective. Such donations will remain taxable in the hands of the donor until the fulfillment of the said event.
More importantly, donations and other income of taxpayers are guided by the principle of accrual, which postulate that amount would accrue to the taxpayer once it has become entitled to it, notwithstanding it has been reinvested or accumulated for the benefit of the taxpayer.
Hence once income has accrued to the taxpayer, tax liability cannot be avoided on a donation, which is made after income has accrued.
Also, the founder cannot avoid tax by making a contingent donation or distribution. The income tax laws assign or attribute such income to the donor or founder until the happening of the future uncertain.
Provided that where the amount has already accrued to a beneficiary, then such amount shall be attributable to the beneficiary and not the founder i.e. provisions of the income tax laws would not apply.
From a capital gains perspective, donations are deemed to be a disposal or sale of the property, notwithstanding the consideration for the sale is nil.
Therefore, where a person makes a donation to his or her child or any person, he is deemed to have sold the property under capital gains tax rules. The same applies where donations are made to a trust or to a company by the taxpayer.
Nevertheless, a capital gains tax relief is granted in the case of transfer of property or marketable securities to one’s spouse subject to an election being made.
A spouse in the case of a person who is a woman means the first wife where a man is married to more than one wives.
From an estate duty perspective, donations made by taxpayers are also deemed to be property subject to estate duty. All donations made by a person in contemplation of death are regarded as the property of the person.
They include donations made within five years prior to the person’s death. However, the donation is assessable in the estate of the donee, if that donee dies first. A donation made to a spouse under a registered ante-nuptial or post-nuptial contract does not attract estate duty.
In conclusion, taxpayers should note that income shall be deemed to accrue to the taxpayer in the year of assessment, if he becomes entitled to such income in the year of assessment, notwithstanding the fact that such amount is payable after the last day of that year of assessment.
This does not apply to any income, which accrues as a result of variation in exchange rate or under credit sale or hire purchase agreement.
Tapera is the founder of Tax Matrix (Pvt) Ltd and CEO of Matrix Tax School. He writes in his personal capacity.
