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Donations By A Company At The Instance Of’ Any Person

Sunday, 03 June 2012   (0 Comments)
Posted by: SAIT Technical
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Donations By A Company At The Instance Of’ Any Person

PWC Tax Synopsis May 2012

Donations tax is payable on donations by a resident company, save that public companies are exempt from donations tax in terms of s 56(1)(n) of the Income Tax Act 58 of 1962.

To protect the fiscus against the stratagem in which an individual taxpayer makes a donation via a controlled company in order to avoid incurring liability to donations tax,

s 57 in its newly-amended form (which takes effect from the date that the dividends tax comes into operation) provides that, if ‘any property’ is disposed of by ‘any’ company ‘at the instance of any person’ and that disposal would have been treated as a donation had the disposal been made by that person, such property must, for the purposes of donations tax, be deemed to be disposed of under a donation by that person.

In its previous incarnation (in terms of the now repealed proviso to s 57(1)) this provision went on to say that such a person was entitled to recover any donations tax so payable from the assets of the body corporate (and such right of recovery was arguably available to the Commissioner in the event that the person in question failed to pay the tax) but this provision has been omitted from the amended version.

Deemed donations by non-resident companies:

A ‘company’, as defined in the Act (as with the term ‘body corporate’ in the repealed s 57(1)) is not confined to resident companies.

It follows, therefore, that liability for donations tax under this deeming provision will be incurred where property is disposed of under a donation by a non-resident company at the instance of a resident individual.

For example, if X (Pvt) Ltd, a non-resident company, were to donate an asset at the instance of X, who is resident in the Republic (and perhaps, though not necessarily, the sole beneficial shareholder of the company), s 57 will apply. As a result, X will be deemed to have made the donation and, as a resident, will be liable for donations tax on the deemed donation, irrespective of whether the donee is a resident or whether the donated property is situated in the Republic.

The now-undefined expression ‘at the instance of’ a person:

The now-repealed s 57(2) prescribed the circumstances in which a donation made by a body corporate was deemed to have been made ‘at the instance of’ a particular person, namely, if, having regard to the circumstances under which the donation was made, the Commissioner was of the opinion –

  • that the donation was not made in the ordinary course of the normal income-earning operations of the body corporate, and
  • that the selection of the donee who benefited by the donation was made at the instance of that person.

Any decision of the Commissioner under s 57(2) was subject to objection and appeal.

Surprisingly, s 57(2) has been repealed by the Taxation Laws Amendment Act 24 of 2011, leaving the meaning of the phrase ‘at the instance of any person’ undefined. This is an extremely elastic expression and, shorn now of s 57(2) which ascribed a reasonably clear deemed meaning to the phrase, its interpretation is a matter for speculation. Inter alia, it is unclear whether it is necessary that the recipient of the donation should have been selected by the person at whose instance the donation was made, and whether ‘at the instance of’ encompasses a mere suggestion or connotes exercising a decisive influence in respect of the decision to donate.

If a mere suggestion suffices, it would cast the tax net preposterously wide. Any company director who floated a proposal that the company should make a donation - even a charitable donation - could incur personal liability for donations tax. If the phrase connotes exercising a decisive influence, any company with more than one director could argue that no single director exercised such influence in relation to the donation.




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