As explained in the first article of this series, public benefit organisations (‘PBOs’) as well as certain institutions and government departments can apply to the South African Revenue Service (SARS) to be ‘approved’ under Section 18A of the South African Income Tax Act.
This will enable any taxpayer with a receipt containing the necessary details to claim a tax deduction (limited in total across all such donations to 10% of their taxable income in a specific tax year).
I discuss the various requirements for the tax deduction in more detail in this post.
There are 3 important criteria that underlie an organisation’s right to issue Section 18A-compliant receipts.
Firstly, the organisation must be formally approved by SARS under the provisions of Section 18A.
- If it has not formally received approval from SARS, the organisation cannot issue Section 18A receipts to donors, and its donors can’t claim a tax deduction.
- Not all PBOs receive approval – approval must be specifically confirmed in a letter from SARS.
Secondly, the donation must be ‘bona fide’ – in other words, with no strings attached.
The donation cannot provide any direct or indirect benefit for the donor, or anyone related or connected to them. Therefore:
- Carefully consider any reasons for, or conditions attached to, a donation for signs of an indirect benefit.
- Watch out for any demand or expectation on the part of the donor for something in return for the donation. This could include advertising or naming rights on an item donated (or bought with the donation), such as a vehicle, building or container.
- Sponsorship of an event would generally not be considered a bona fide donation.
Thirdly, the donation for which the receipt is issued may only be used for activities specifically listed in Part II of the Ninth Schedule of the Income Tax Act.
- Some organisations receive Section 18A approval for certain of their activities but not others; in such cases they can only issue receipts for donations made towards those specific activities and must ensure the donations are used only for those activities.
- There are some surprising activities for which a section 18A receipt cannot be issued, including religious, philosophical, cultural (including arts and youth development), sports and research and consumer rights activities.
- Be careful to separately identify and track income for which a S18A receipt has been issued, to be able to show how it was spent. This is particularly important for an organisation that carries out both activities that qualify for Section 18A status and activities that do not qualify.
- Where an approved PBO carries out different activities, not all of which are S18A-approved, an annual audit certificate is required.
Our last blog in this series will highlight some surprisingly common examples of donations that could trip you up.
Cathy is the founder of CMDS, a financial management consultancy to the non-profit sector for 30 years. To ask any questions about income tax exemption and Section 18A approval and receipts, please contact CMDS through its website at www.cmds.org.za.