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Donations

Income Tax / February 28, 2018

When your moral compass directs you to act on your social responsibility to help others or organizations that in turn benefits society.  You can qualify for a deduction and subsequently a reduction in your tax calculation.

What is a donation?

donation is a gift given by physical or legal persons, typically for charitable purposes and/or to benefit a cause.

Types of donations

Cash donation
A donation may be made in cash (money), which may include payments by electronic fund transfer (EFT), credit or debit card, or postal order.
The following payments or transfers do not qualify for a deduction under section 18A:
• Amounts paid to attend a fundraising event such as a dinner or charity golf day.
• Memorabilia and other assets donated to be auctioned to raise funds.
• Amounts paid for school fees, school entrance fees or compulsory school levies.
• Amounts paid for raffle or lottery tickets.
• Amounts paid for the successful bid for goods auctioned to raise funds.
• The value of free rent, water and electricity provided by a lessor to the lessee which is a section 18A-approved organisation.
• Payments of debt owed by a section 18A-approved organisation, for example, the cost of repairs to a section 18A-approved organisation’s vehicle paid to the service station on behalf of that organisation and not paid directly to the section 18A-approved organisation.
• Prizes and sponsorships donated to a fundraising event such as a charity golf day.
• Tithes and offerings to churches or other faith-based organisations in support of their religious activities.
• Membership fees.
• Promissory notes.
• Pledges.
• Payments made in future instalments and post-dated cheques.

Donation of property in kind
Donations of property made in kind may include the following:
• A financial instrument provided it is –
 a share in a listed company; or
 a share issued by a “financial institution” as defined in section 1 of the Financial Services Board Act 97 of 1990.
• The trading stock which forms part of the business undertaking or trading activity conducted by the taxpayer. Such trading stock may include livestock or produce donated by a farmer, goods such as computers, foodstuffs, medical supplies, furniture and motor vehicles.
• An asset used by the taxpayer in conducting the taxpayer’s trade but which is not trading stock. Such assets may include computers, furniture, office equipment, delivery vehicles, cash registers, garden equipment, crockery or kitchen utensils.
• An asset which is not trading stock and is also not used in the business of the taxpayer. Such assets may include personal assets or assets bought by the taxpayer such as vehicles, computers, furniture or sport equipment.
• Property purchased, manufactured, erected, installed or constructed by or on behalf of the taxpayer. Property of this nature may include carpets or cupboards installed, security fencing and buildings such as classrooms erected by or on behalf of the taxpayer for purposes of conducting any PBA in Part II.
A donation of property in kind must be used by the section 18A-approved organisation in carrying on any PBAs in Part II.
The Act specifies how the values to be placed on donations of property in kind must be determined – see the Tax Exemption Guide for Public Benefit Organisations in South Africa (Issue 5) in paragraph 21.6.
A specific formula must be used to determine the amount of any deduction that is claimed by any taxpayer under section 18A for any donation of immovable property of a capital nature when the lower of market value or municipal value exceeds the cost.
No deduction will be allowed for any donation of any property in kind which –
• creates or is subject to any fiduciary right, usufruct or other similar rights; or
• constitutes an intangible asset or financial instrument, unless the financial instrument meets the requirements set out above.

Donation of a service
The donation of a service such as time, skill or effort to a section 18A-approved organisation will not qualify as a deduction for purposes of section 18A since a service is not a donation of property made in kind. For example, a professional person such as an auditor, artist (including a singer, musician or entertainer), medical doctor, lawyer, accountant, plumber or electrician who renders a service free of charge to a section 18A-approved organisation will not be entitled to a tax deduction for the value of the service.

To whom can you donate? Qualifying organisations

  • You will only qualify for a tax deduction if your donation was made to approved public benefit organisations and certain qualifying institutions (‘approved organisations’).
  • There are numerous regulations that determine whether an organisation qualifies as an approved organisation. If you wish to qualify for a tax deduction, you need to establish if the beneficiary of your donation can issue a receipt as intended under section 18A of the Income Tax Act No. 58 of 1962 (the Act).

Section 18A receipts

In order for a section 18A receipt to be a valid receipt it must include the following details:
• The reference number issued to the section 18A-approved organisation by the Commissioner for purposes of section 18A.
• The date the donation is received.
• The name and address of the section 18A-approved organisation issuing the section 18A receipt to which enquiries may be directed.
• The name and address of the donor.
• The amount of the donation or the nature of the donation if not in cash.
• Certification to the effect that the receipt is issued for purposes of section 18A and that the donation has or will be used exclusively for PBAs in Part II.

How much can you claim as a tax deduction?

  • Taxpayers – natural persons, trusts, companies, or close corporations – can deduct from their taxable income, the amounts they donated to approved organisations, up to the value of 10 percent of their taxable income.
  • For natural persons, the term taxable income refers to the taxpayer’s taxable income, whether derived from trade or from a non-trading source, and after allowing all permitted deductions, but before the donation deduction. Taxable income excludes any retirement lump sum benefit, retirement lump sum withdrawal benefit and severance benefit. However, it includes taxable capital gains.
  • The donation must actually be paid or transferred during the year of assessment in order to qualify for a tax deduction in such tax year.

 

An additional concession  – roll over treatment of excess

  • As from 1 March 2014, any donations in excess of the 10 percent limit will be rolled over and carried forward to the succeeding year of assessment. It will thus be deemed a donation actually paid or transferred during the succeeding year.
  • This rollover treatment will continue to apply in respect of any future excesses.

How it affects PAYE

  • Your donation can also reduce your monthly employees’ tax (PAYE), if your employer agrees to process your donation through its payroll.
  • Essentially, any qualifying donation made, limited to five percent of your salary (subject to certain allowable deductions), can be deducted from your salary before PAYE is calculated. However, these further requirements must also be met:
    • The beneficiary must be an approved organisation;
    • The donation amount is deducted from your salary and paid to the approved organisation on your behalf;
    • The approved organisation must issue the section 18A certificate to your employer;
    • Your employer must reflect the full amount of the donation, not only the five percent, on your IRP5 certificate; and
    • The IRP5 certificate will suffice as the supporting documentation required to claim the tax deduction on your annual tax return.

What else can you give and how will it work? Donations other than cash

  • Your donation can be in the form of cash or property in kind.
  • If you donate property in kind and it qualifies for the section 18A deduction, the deemed donation amount will be dependent on whether the donation is in the form of trading stock, trading assets or other assets.
  • If the donation is in the form of immovable property, which is of a capital nature, and the cost does not exceed the lower of the market value or municipal value, the deemed donation will be calculated according to a prescribed formula.

What else should you know?

  • If you donate to any organisation that does not qualify as an approved organisation, you (the donor) are liable to pay donations tax at a rate of 20 percent on the value of such donation in excess of the exemption limits.
  • The relevant exemptions are:
    • Donations by natural persons: up to R100 000 in total per year
    • Donations by all other persons: up to R10 000 in total per year
  • Furthermore, if you donate an asset to a tax exempt entity, you can disregard any capital gain or capital loss determined in respect of such donation.
  • Donations to foreign organisations will not qualify as a tax deduction in determining your normal tax in South Africa.

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Nivesh
Nivesh Mahadeo, Managing Director of ATB Consultants (Pty) Ltd, Accounting - Taxation - Business




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