DONATIONS TO PUBLIC BENEFIT ORGANISATIONS

 

Article by: Fourways Accountant: Annja Lucca

 

Many South African taxpayers may not be aware that they have the opportunity to reduce their taxable income through donations to Public Benefit Organisations (PBOs). However, it is important to understand that there are tax implications when making a donation, which could either increase one's tax burden or provide tax relief.

One such consideration is Donations Tax, which may be applicable if the donation value exceeds R100 000. For instance, giving a car to one's child as a gift may attract Donations Tax.

Nevertheless, this blog post will focus on the tax benefits of donating to PBOs, which are exempt from Donations Tax liabilities.

What is a Public Benefit Organisation?

In terms of Section 30 of the Income Tax Act, a “public benefit organisation” is a non-profit organisation which has registered as such under the Companies Act. These organisations have also applied at SARS for a tax-exempt status.

What type of donation can you make to qualify for the deduction against taxable income?

You can donate either

• Cash or
• Assets (e.g. movable property, trading stock, immovable property)

We’ll focus on cash donations in this blog entry as it is the most common. Donations of other assets can be slightly more complicated, and we won’t discuss these here. Please reach out to us if you wish to know more about non-cash donations.

How does the tax deduction work?

Section 18A of the Income Tax Act provides that taxpayers who donate to a PBO are eligible for a tax deduction equivalent to the value of the donation, subject to a limit of 10% of the taxpayer's taxable income before the deduction is taken into account.

In practice, this means that the s18A deduction cannot exceed 10% of the taxable income calculated after taking into account all income, allowances, other deductions, and exemptions. Therefore, the s18A deduction is the final step in determining taxable income.

As an example, let’s assume the following:

Taxpayer A earns a salary of R800 000, fringe benefits of R50 000 and contributes R80 000 to a provident fund. The taxpayer also has a taxable capital gain of R35 000. Taxpayer A donates R70 000 to a PBO.

	R
Salary	800 000
Fringe benefits	50 000
	__________
	850 000
Taxable capital gain	35 000
	__________
	885 000
s11F retirement fund deduction	(80 000)
	__________
Sub-Total A	805 000
s18A Donation
Donation value: R70 000
Deduction limited to 10% of R805 000
(Sub-Total A = R80 500	(70 000)
	__________
Taxable income	735 000

What happens if donations exceed the limit?

If the donation made exceeds 10% of the taxable income, the excess amount, which is not deductible in the current year, will be carried forward to the next year.

For example, if Taxpayer A had donated R90 000 to a PBO in the above example, this would mean only R80 500 could be deducted in this tax year.

The excess of R8 500 (R90 000 – R80 500) will be treated as if it was a donation made in the next tax year.

What do you need to qualify for a deduction?

Taxpayers qualify for the s18A deduction if they meet the following requirements

• The donation is a bona fide donation, meaning it is made from genuine benevolence
• The donation is to PBO that is registered as such with SARS
• The PBO issues a receipt in terms of s18A which contains
- The PBO’s name, address, and reference number
- Date of the donation
- Name and address of the donor
- The amount of the donation or nature of the donation if is not cash
- Certification that indicates that receipt is issued for purposes of s18A
• If your employer made the donation to the PBO on your behalf, you would need an employees’ tax certificate that shows this.

Donating to a good cause is one of life’s most enriching endeavours. Make it even sweeter by reducing your personal tax burden.

To contact Annja Louca, email annja@anlofin.coms or tel: 011 658-1324