Exemption from donations tax and the net value of an estate

On 1 July 2015, the South African Revenue Service (SARS) released Binding Private Ruling 197 (BPR 197) dealing with the donations tax consequences arising from the onward or subsequent donation of funds received by way of a donation from a foreign source. BPR 197 further deals with the estate duty consequences that will apply in the event of the foreign sourced funds being retained or used to acquire property that is located and remains outside South Africa.

By way of background, the applicant, a resident of South Africa as defined in s1(1) of the Income Tax Act, No 58 of 1962 (Act), is one of a number of beneficiaries of a foreign trust (Foreign Trust). The funds held by the Foreign Trust consist solely of funds which have been sourced outside of South Africa. In terms of an agreement reached between the trustees of the Foreign Trust, a certain amount of the trust funds would be awarded to the applicant, whereafter the applicant would be removed as a beneficiary of the Foreign Trust.

Subsequent to the funds being transferred to the applicant’s offshore bank account, the applicant intends to donate an amount thereof to certain elected individuals, hereinafter referred to as the donees. The applicant further intends to invest and retain the balance of the awarded funds offshore in order to acquire property, as defined in s3(2) of the Estate Duty Act, No 45 of 1955 (Estate Duty Act), located outside South Africa.

Section 56(1) of the Act deals with certain transactions in respect of which donations tax shall not be payable on the value of property which is disposed of. In particular, s56(1)(g) of the Act provides that donations tax shall not be payable in respect of the value of any property which is disposed of under a donation:

“(g) if such property consists of any right in property situated outside the Republic and was acquired by the donor –

(i)   before the donor became a resident of the Republic for the first time; or

(ii)by inheritance from a person who at the date of his death was not ordinarily resident in the Republic or by a donation if at the date of the donation the donor was a person (other than a company) not ordinarily resident in the Republic; or

(iii)out of funds derived by him from the disposal of any property referred to in sub-paragraph (i) or (ii) or, if the donor disposed of such last-mentioned property and replaced it successively with other properties (all situated outside the Republic and acquired by the donor out of funds derived by him from the disposal of any of the said properties), out of funds derived by him from the disposal of, or from revenue from any of those properties.”

Having regard to the background set out above, SARS ruled as follows:

• the awarding of funds by the Foreign Trust to the applicant will not trigger any income tax liability in the hands of the applicant;

• the donations made by the applicant to the donees will be exempt from donations tax under s56(1)(g)(ii) of the Act; and

• the remaining portion of the award received and/or the property acquired using the proceeds of the award from the Foreign Trust will be excluded from the net value of the applicant’s estate for estate duty purposes under s4(e)(ii)(aa) or (iii) of the Estate Duty Act.

It is interesting to note that SARS specifically stated that whether or not the proposed transaction is connected with any arrangement implemented or to be implemented for the avoidance of tax falls outside the scope of BPR 197 and shall not be decided on.

BPR 197 is valid until 28 February 2025.