Redistribution Agreement and Donations Tax: Understanding the Basics

When it comes to philanthropy and charitable giving, understanding the complexities of taxation and legal requirements can be overwhelming. One such legal agreement that is often used in charitable giving is a redistribution agreement.

What is a Redistribution Agreement?

A redistribution agreement is a legal agreement between a donor, a charity, and a trustee. The donor gifts assets to the trustee, who then invests the assets and distributes the income to the donor until death. At that point, the remaining assets are then donated to the designated charity.

This type of agreement allows for the donor to receive income during their lifetime while also ensuring that their assets will be gifted to their chosen charity upon their death.

What is a Donations Tax?

In South Africa, a donations tax is a tax on the gratuitous transfer of property to another person without receiving something in return. This includes donations to individuals or to organizations such as charities.

The donations tax rate is currently set at 20% of the value of the donation exceeding R100,000 in a tax year.

However, there are exemptions to the donations tax, including donations to approved public benefit organizations such as charities.

How do Redirection Agreements and Donations Tax Work Together?

When it comes to redistribution agreements, the initial gift of assets to the trustee is considered a donation and is therefore subject to the donations tax.

However, if the designated charity is an approved public benefit organization, then the donation may be exempt from the donations tax.

It is important to note that the income received by the donor from the trustee is considered taxable income and must be declared on their annual tax returns.

Additionally, the trustee must ensure that all investments made with the donated assets are in compliance with the requirements of the Income Tax Act and the Trust Property Control Act.

Conclusion

Redistribution agreements and donations tax can be complex topics, but understanding the basics is essential for anyone considering philanthropic giving.

If you are planning to use a redistribution agreement to gift assets to a charity, it is important to work with a knowledgeable financial advisor or tax professional to ensure compliance with all legal and tax requirements.