The new deemed donation applies to the transfer (ie disposal) of the right to receive an asset in exchange for services rendered or to be performed (section 57B). Section 57B is implemented as an anti-avoidance measure commencing on 1 March 2022.
A deemed donation must be considered in addition to actual donations.
There are now four deemed donations that must be considered: donations by a company at the instance of a holder of shares (section 57); donations by spouses married in community of property (section 57A); disposal of a right to receive an asset in respect of services (section 57B); and disposal for inadequate consideration (section 58).
Amounts received or accrued as a result of employment or in return for services performed are included in the gross income of the taxpayer who performs the services (paragraph c of the definition of ‘gross income’ in section 1). The taxpayer who provides the services is taxed even if the amount is received or accrued to another person (ie other than the person performing the services) (proviso (ii) to paragraph c).
Non-cash awards are specifically taxed under the Seventh Schedule (paragraph (i) of the gross income definition in section 1). If the benefit is an asset or the right to use an asset, the cash equivalent is determined based generally on the asset’s market value on the date of receipt or accrual to the employee. Even though the benefit is provided to someone else, the benefit is considered to have been granted to the employee, and this benefit is thus taxed in the employee’s hands (paragraph 16 of the Seventh Schedule).
Therefore, the person who provided the services is always the one who will be taxed. Some taxpayers have devised schemes to avoid paying donations taxes, by ceding the right to receive an asset or use of the asset from an employer. For example, an employee could cede the right to receive or use of the asset to which they would only be entitled to after rendering the services, to someone else (ie a family trust) before rendering the service. The exemption in section 56(1)(k)(i) only applies to the employer and not to the employee, hence donations tax can still be applicable on the donee (ie employee). Because it is difficult to value the future benefit of the right ceded at the date it is ceded, taxpayers (ie the employee in this transaction) argued that no donations tax is payable. In this way taxpayers have designed a scheme to avoid paying donations tax on the transfer of wealth.
Consequently, Section 57B is introduced as an anti-avoidance provision to target this abuse.
SCOPE AND IMPLICATIONS
It is important to note that section 7 (income attribution) and the mirror provisions in the Eighth Schedule (capital gains tax attribution rules) can also apply in addition to section 57B if the scope requirements are met.
Scope
- Employee agrees to render services to an employer,
- In exchange for the receipt of an asset or use of an asset, and
- Employee disposes of the right to the asset before becoming entitled to it
Implications
- Employee must disregard the disposal, is treated as having acquired the asset at the date he/she would otherwise have become entitled to it, for an amount that is included in his/her gross income, and
- Deemed to have made a donation equal to the amount included in gross income
Author
Muneer Hassan CA(SA)
Tax Consultant, Senior Lecturer in
Taxation at UJ and Lecturer on the Gauteng Board Course