It often happens that parents transfer assets to their children at different occasions, including when they are preparing for retirement or as they age. The assets which are usually donated include cash, shares, vehicles, livestock and immovable property. These transactions are usually done for free, meaning that the recipient receives the assets without having to pay anything. But those transactions attract taxes which need to be considered before someone makes the donation. I will analyse the taxes that arise on such gifts. In this article, words importing the masculine shall be deemed to include the feminine.
Donations tax is a tax that is charged by the Capital Transfer Tax Act and it is payable by the receiver of the gifts or donee. The donee must pay the tax on the market value of the gifts received if such gifts do not consist of money. For example, if a parent transfers shares in a company to his child, those shares should be valued by a professional valuer and the value determined will be used as the basis of determining the tax. The donee must submit a tax return by the 30th of September each year, being the same deadline of submission of income tax returns. The tax will only become due within 30 days of the date of issuance of an assessment to the donee. I must highlight that the donations tax is a totally different tax from income tax. However, it is administered in exactly the same fashion as income tax. The tax is charged, at the highest bracket, at 5% on the excess of P500 000 plus P16 000. Assuming that a child receives shares worth P1m, they will pay tax of P 41 000.
Practically, a donee needs to have a Capital Transfer Tax number created for them by BURS, which is basically like an account where their taxes will be accounted for. This is done when a person submits an application to register for such tax. The fact that a person is registered for income tax does not automatically mean that they will have a Capital Transfer Tax account. These accounts need to be created the first time a donee receives a donation. If an assessment is issued, it will appear as a debit, and when a payment is made, it reduces the tax debt.
CAPITAL GAINS TAX
Depending on the type of gift, the donor may have to pay capital gains tax. This is a tax that is chargeable on the capital appreciation that occurs on specified assets such as shares and immovable property. Since gifts come at no price, the market value of the assets is used to determine the tax. For example, if a parent donates shares to a child, that parent is taxed on the appreciation that occurred from date of acquisition until the date of donation of the shares. If the shares cost P1m and they have a market value of P3m at the date of donation, the donor would have realised a capital appreciation of P2m. However, the P2m will be discounted to 75%, which means that the actual tax will be determined on P 1.5m. The tax is determined at 25% on the amount exceeding P144 000 plus P13 950, for individuals. The tax on the P1.5m is therefore P 52 950. If the donor is a company, the tax rate is 22%.
Just like donations tax, capital gains tax is supposed to be declared in one’s return which is due by 30 September of each year, for individuals. Companies follow their financial year in determining the tax year. The tax is only due within 30 days of the issuance of a tax assessment by BURS.
From the above, it is apparent that both the donor and the donee need to plan for taxes before the actual donation occurs. Failure to plan may result in unexpected tax burdens. It is also important to state that failure to pay the taxes may attract penalties and interest. Professional tax advice is usually handy in such cases.
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Jonathan Hore is the Managing Tax Consultant of Aupracon Tax Specialists. Feedback can be relayed to firstname.lastname@example.org or 7181 5836. This article is of a general nature and is not meant to address the particular matters of any person.