If a client transfers R50000 as a donation to her son. Is that deductible from her taxable income would it still be fine if he returned it to her as a loan a month later?
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
The general principle is that donations are made out of after-tax amounts. Section 18A is an exception to this general rule and is quite specific with regard to who the donee must be. It includes certain public benefit organisations, approved by SARS, any institution, board or body contemplated in section 10(1)(cA)(i), 'specialized agencies', certain international organisations or any department of government of the Republic in the national, provincial or local sphere. It doesn’t include a natural person. It is also not the fact that the donee is approved by SARS as a public benefit organisation (and has the PBO reference number) that entitles a taxpayer to make a deduction. It is necessary that the entity “carries on in the Republic any public benefit activity contemplated in Part II of the Ninth Schedule” – the deduction is then given for those, but requires a receipt that complies with the legislation.
The taxpayer will therefore not be able to deduct, from her income or taxable income, a donation made to a natural person, such as her son. SARS will certainly levy the understatement penalty if the amount is claimed as a deduction.
We are concerned about the statement that the ‘donation’ will be “returned … to her as a loan a month later …” This can mean that there was no intention to donate and that it was merely done to make use of the section 56(2)(b) amount. SARS may then act in terms of section 80B of the Income Tax Act.