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Are gifts taxable or not?

Friday, 29 May 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: I listened to the above SAIT webinar last week.  Please could you clarify whether birthday gifts are taxable or not?  According to the presenter they are not taxable.  I checked on the SAIT website and found an article which states that they are taxable.  I am a bit confused now.

A: The answer to such a question is a complex one.  As taxpayers bear the onus of proof in the event that SARS challenges their view, many employers are wary of not treating any gift as part of remuneration.  

The tax consequences of a donation (or gift) are not specifically dealt with in the Income tax Act.  As there is a receipt one must apply the principles of the definition of gross income to determine if it will have tax consequences.  Our courts have laid down the law in this regard.  According to Judge Smalberger (in CIR v Pick ‘n Pay Employee Share Purchase Trust) "... any receipts accruing to the Trust were not intended or worked for, but purely fortuitous in the sense of being an incidental by product.  They were therefore non-revenue. That makes them accruals of a capital nature falling outside the definition of "gross income" in the Income Tax Act, and therefore not subject to tax.”  Judge Southwood in CSARS v Wyner agreed with this and stated the principle as follows: "This means that receipts or accruals will bear the imprint of revenue if they are not fortuitous, but were designedly sought for and worked for...”  

On that basis (i.e. the gift is capital in nature) the employer will be entitled to exclude it from remuneration (as it is not income then).  The problem is that paragraph (c) of the definition of gross income in section 1(1) of the Income Tax Act, specifically includes in (gross) income any amount, whether voluntarily given or not, in respect of services rendered.  At issue then is whether or not the gift was granted "as a benefit or advantage of or by virtue of … employment or as a reward for services rendered or to be rendered…”  Judge Howie (in the Stevens case) said "…there is no material difference between the expressions ‘in respect of’’ and ‘by virtue of’ in paragraph (c).  They connote a causal relationship between the amount received and the taxpayer’s services or employment.”  (The reference to paragraph (c) is to the paragraph in the definition of gross income).  We submit that the same principal will apply in this instance.  In other words, if it was granted to the person in her as an employee the causal relationship exists.  

The article that you referred to failed to address this issue and generally assumed that the gifts are in respect of services rendered.  It may well not be the case, as was made out by the presenters, but the parties (both employer and employee) must remember that they bear the onus to prove that a gift was not given in respect of services rendered and that is often difficult to do.  

Remember also that SAIT merely provides guidance.  

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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