This article explains the different types of legal entities that charitable donations can be made to and the tax consequences of those donations. The aim of this article is to educate donors in order that they can organize their tax affairs in the most tax efficient manner possible within the parameters of our law.
What is a Donation?
A donation is a disposition of an amount of money or of some kind of property including (any waiver or renunciation of a right) to a person (the donee) which is made gratuitously and without any “strings attached”. Essentially the donation must be made out of the goodness of the donor’s heart and not for any other reason.
Tax Consequences of Donations to Charities
Individuals and corporates make donations to charities for different reasons. The reason might be purely from an altruistic perspective, or because it assists them with complying with BEE requirements or corporate social responsibility obligations. Alternatively, the donation might be made for tax reasons. The tax consequences of the donation will depend on the type of entity to which the donation was made. It is thus critical to understand the nature of the entity to which you are donating, especially when the donation is material, as the consequences that attach (as explained below) could be relatively advantageous or disadvantageous to you as the donor for tax purposes.
These are companies registered in the Companies’ Office as “NPC”s. This type of registration in the Companies’ Office as a Non-Profit Company does not accord the entity any special tax treatment (as will be explained more fully below) and donations made to an entity that is solely registered as an NPC with the Companies Office will not afford the donor any tax break whatsoever.
In addition to being registered with the Companies Office as an NPC, a company (or any other type of association of persons, incorporated or not) could be registered with the Department of Social Welfare as a Non Profit organisation (“NPO”). Registration as an NPO also does not give the organisation any special tax treatment, and a donor who makes a donation to an entity that is registered as an NPO with the Department of Social Welfare will not, for this reason alone, obtain any tax benefits.
Public Benefit Organisation
A company or other entity can (in addition to being registered with the Companies Office as an NPC, and in addition to being registered with the Department of Social Welfare as an NPO) be registered with SARS as a Public Benefit Organisation (“PBO”). It is only when a donation is made to an entity that is registered with SARS as a PBO that a donor will be entitled to claim the donation as a tax deduction in terms of sec 18A of the Income Tax Act . SARS will require proof that the donation was made in the form of a Section 18A certificate, which can be applied for and obtained from the PBO concerned.
Annual Donations Exemption
In terms of part 5 to the Income Tax Act, every year in the budget speech the Minister of Finance sets a limit for donations by natural and juristic persons. A natural or juristic person can donate any amount to any other person or organisation to up to this limit (currently R 100, 000.00 for natural persons and R 10, 000.00 for companies and Trusts), and this will not attract any donations tax.
Any donations made over and above this limit will attract donations tax (which is currently set at the rate of 20% of the value of the donation) unless are made to an organisation that can provide the donor with a certificate in terms of section 18A as explained above.
Donations tax is ordinarily payable by the donor but may in certain instances be claimed from the donee (where the donor fails to pay the tax within the set period of time). In some cases, donations tax can be recovered from other parties to the transaction (such as the case where a trust is involved, and SARS cannot claim the donations tax from the donor or donee, in which case it can claim it from the trust).
Although donations to persons or entities that are registered as NPC’s or NPO’s may count for BEE or social corporate responsibility purposes, if these entities are not registered with SARS as a PBO the donor will not be entitled to claim tax deduction in relation to those donations. If the donations made are material and they exceed the donor’s annual exemption limit, the donor may be held liable for donations tax by SARS at the rate of 20% of the value of the donation.