The payment of lobola: The Tax consequences
This article will count 0.25 units (15 minutes) of unverifiable CPD. Remember to log these units under your membership profile.
Lobola is a deeply established customary practice in South Africa. But when money or cattle changes hands between families, an interesting tax question arises: does SARS have any interest in the transaction?
For accountants and tax practitioners, three questions are particularly relevant:
Could the payment of lobola constitute a donation subject to donations tax?
Is the amount received by the bride’s family taxable?
Could VAT apply?
In a conventional lobola arrangement, the answer to all three is generally no. Here is why.
Is lobola subject to donations tax?
At first glance, the transfer of money, cattle or other property from one family to another might appear to be a donation.
However, section 56(2)(c) of the Income Tax Act specifically provides an exemption from donations tax where a payment is made in the maintenance of family ties or in the discharge of an obligation arising from custom.
Lobola is ordinarily negotiated between the families and paid as part of fulfilling a recognised customary family obligation associated with marriage. It is therefore not simply a gratuitous gift from one family to another.
Accordingly, where the payment genuinely forms part of the customary lobola process, it would generally fall within the exemption in section 56(2)(c) of the Income Tax Act and should not attract donations tax.
Does the bride’s family pay income tax on lobola received?
The next question is whether the family receiving lobola must declare it as taxable income.
Ordinarily, lobola is not received as part of carrying on a trade, business or income-producing activity. The receipt arises from a family and customary arrangement associated with marriage.
On this basis, the receipt would generally be regarded as being of a capital rather than revenue nature and would therefore fall outside “gross income” to the extent that it is an amount of a capital nature.
But what about capital gains tax?
A lobola transaction should not be understood as the sale or transfer of a person. A marriage does not involve the disposal of the bride as an asset for tax purposes. Accordingly, the ordinary payment and receipt of lobola should not, merely by reason of the marriage arrangement, create a capital gain for the bride’s family.
What about VAT?
VAT requires a taxable supply of goods or services by a vendor in the course or furtherance of an enterprise.
A family negotiating and receiving lobola as part of a customary marriage is not, merely because of that transaction, conducting an enterprise for VAT purposes. The payment is also not ordinarily consideration for a commercial supply of goods or services.
Accordingly, the conventional payment or receipt of lobola should not give rise to VAT.
The practical answer
For accountants and tax practitioners advising clients, the important point is to consider the true nature of the transaction, rather than simply the fact that money or property has changed hands.
A genuine lobola payment made in fulfilment of customary family obligations will generally:
qualify for the relevant donations tax exemption;
not constitute taxable revenue in the hands of the recipient family; and
not constitute consideration for a taxable supply for VAT purposes.
The tax position could, however, require separate consideration where a transaction described as lobola contains unusual commercial arrangements or is intertwined with another transaction. As always, the facts matter
But this point requires an illustrative example in order to enhance its credibility.
Illustrative example
It is possible that an employer may wish to contribute towards the lobola of a favoured employee. Needless to say, an employer–employee relationship must exist between the parties.
Although the payment may be described as a “contribution” towards the employee’s lobola, the substance of the payment remains remuneration for services rendered. The contribution arises solely because the groom is an employee of the employer. Had the groom not been an employee, the employer would not have made the contribution towards the cost of the lobola. Accordingly, the payment should be regarded as remuneration and treated as salary for tax purposes.
Essentially, two separate and consecutive transactions arise:
Payment of remuneration
The employer makes a payment to the employee, albeit described as a contribution towards the employee’s lobola. In substance, this constitutes remuneration for services rendered and is therefore subject to the applicable tax consequences.
Payment of lobola
The employee subsequently uses the funds to pay the lobola to the bride or her family. This payment represents the lobola itself and, based on the principles discussed earlier, does not give rise to tax consequences for the recipient.
And what about dowry or maskawi?
The contents of this article also apply to the payment of dowry, a practice followed by many Hindu and Muslim families. In the Cape Malay community, dowry is commonly referred to as maskawi, which is given by the groom to the bride as part of a marriage contract, widely known as nikah.
Essentially, the underlying principles and purpose governing dowry, maskawir and lobola are similar. `Maskawir’ is simply an Arabic word for dowry.
Although a dowry is given to the “bride” rather than to the bride’s family, this distinction is irrelevant for tax purposes. A dowry is essentially a gift arising from the cultural practices and customs of the respective families. It is often recorded in a marriage contract or agreed to verbally.
A dowry satisfies the relevant provisions discussed earlier and, consequently, should be excluded from any tax consequences. It is capital in nature and therefore does not constitute “gross income” in the hands of the receiving spouse. It is also not subject to capital gains tax, as it constitutes a “personal-use asset”.
From a VAT perspective, the definition of “enterprise” in the VAT Act is likewise not satisfied. The receipt of a dowry does not arise from the carrying on of an enterprise and therefore falls outside the scope of VAT.
Communities that do not practise these cultural customs generally agree on which family will bear the various wedding expenses. Such arrangements therefore also fall within the scope of this article.
In conclusion
The broader lesson for practitioners is straightforward: not every transfer of money or property is income, a taxable donation or consideration for VAT. The legal and factual character of the transaction determines the tax treatment.
Trending
