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What is the maximum tax-free amount a parent can donate to a child?

Monday, 09 March 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: If an individual wants to give money to children, what is the maximum amount that they can gift or donate before being taxed on the money given? Can they also loan a large sum of money to children tax-free?

A: The answer to your question is fact dependent. The following guidance should be useful in this regard:

In the event that the parent pays the monies to the children without it being in the form of a loan (thus a pure donation), then the transaction may result in donations tax at a rate of 20% in the hands of the parent in terms of section 54 of the Income Tax Act.

Where the payment to the children is made in the form of a bona fide loan, the facts and circumstances of the case must be considered to determine whether interest should be charged. It was held in the case of  C: SARS v Woulidge 63 SATC 483 2002 (1) SA 68 (SCA) that an interest-free loan (more specifically the interest that should have been charged) may constitute other disposition as contemplated in section 7 of the Income Tax Act.

If any of the provisions of section 7 apply (for example, the interest free loan is made available conditionally to the children (s 7(5)), the lack of interest may constitute another disposition in which case the parent (donor) may be taxed on income generated by the child as a result of the loan being interest free. If none of the scenarios contemplated in section 7 are applicable, the fact that the loan is interest-free may have not tax implications.

It should be noted that a loan that is interest-free from the date that it is advanced should not have donations tax implications as no property is disposed of. If the parent however waives his established right to interest, this waiver should attract donations tax.

It should furthermore be noted that a loan which is advanced with the intention of being written off (i.e. utilising the R100 000 annual exemption) may not be a bona fide loan; in such a case the risk may exist that SARS could view this loan as a simulated donation (in the case of C:SARS v NWK Ltd 73 SATC 55 [2011] 2 All SA 347 (SCA) it was held that:

"In my view the test to determine simulation cannot simply be whether there is an intention to give effect to a contract in accordance with its terms. Invariably where parties structure a transaction to achieve an objective other than the one ostensibly achieved they will intend to give effect to the transaction on the terms agreed. The test should thus go further, and require an examination of the commercial sense of the transaction: of its real substance and purpose. If the purpose of the transaction is only to achieve an object that allows the evasion of tax, or of a peremptory law, then it will be regarded as simulated. And the mere fact that parties do perform in terms of the contract does not show that it is not simulated: the charade of performance is generally meant to give credence to their simulation".

It should also be noted that should the children be required to do something (give quid pro quo) in exchange for the interest-free nature of the loan, this benefit may be treated as an amount in their hands and could be included in their gross income (see Brummeria Renaissance (Pty) Ltd and Others, C: SARS v 69 SATC 205 2007 (SCA)). This would depend on the facts of the particular arrangement between the father and the children.

Lastly, it will be different in the instance where the father instructed that the loan be made from a company where he is a shareholder, and the loan is made to a connected person in relation to that shareholder. Such a loan may constitute a deemed dividend in accordance with section 64E(4) and be subject to dividends tax if the loan does not bear interest at the official rate in terms of the Seventh Schedule. Furthermore, and assuming that the father is a shareholder of a company, and a donation is made by that company to his sons on the instance of the father (shareholder), may the father become liable for donations tax in terms of section 57 of the Income Tax Act.

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.



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