Capital gains tax on donations and bequests

Paragraph 12(5) of the Eighth Schedule to the Income Tax Act was scrapped on 1 January 2013 and replaced with a new paragraph 12(A) which, in certain circumstances, provides relief on the payment of capital gains tax when debt is written off.

These new provisions came into effect on 1 March 2013.

In terms of these changes capital gains tax is still payable when a debt of a debtor is reduced or written off, but that there are two exceptions:

1. Where the amount owed to a deceased estate is regarded as the “property” of the estate (as described in the Estate Duty Act), and this debt is reduced to the benefit of the legatee or heir; and
2. When the debt that is written off can be regarded as a donation for the purposes of donations tax.

The relevant amendments to the law therefore determine in essence that:

• It is no longer required that a donation be made in cash; and
• there will be no liability for capital gains tax if the donation represents a reduction or writing off of debt for the receiving party.

The latter provision is especially to be welcomed considering the problems that have occurred in the past with the wording of wills in cases where heirs or a family trust owe a loan debt to a testator. It is now again possible to merely bequeath a loan account between a legator and a trust as a legacy to the trust, which amounts essentially to the reduction of a debt obligation of the trust.

In view of these recent changes to the Income Tax Act we once again encourage clients to make a donation in order to ensure a saving in estate duty in the longer term.

To make the most of the benefits of a donation the following should be borne in mind:

• The donation should not exceed R100 000 otherwise donations tax of 20% is levied on the amount by which the tax-free limit (R100 000) is exceeded;
• A book entry can simply be made in the place of a cash donation; and
• The donation must be supported by a written deed of donation and, where a trust is the beneficiary, also a resolution of the trustees indicating acceptance of the donation.

For further information in this regard or for assistance with making a donation, please get in touch with Sonja Viljoen (sonjav@asl.co.za) at our office.