South African companies often seek to conduct corporate social investment initiatives for a number of reasons including, but not limited to, enhancing their Broad-based Black Economic Empowerment status. These initiatives are commonly conducted by way of donating assets, funds or services to public benefit organisations. It will be prudent for such companies to structure or implement their donations in a manner that maximises their tax benefits and tax efficiency.
In South Africa, section 18A of the (South African) Income Tax Act (“ITA”) allows a taxpayer to apply deductions (known as section 18A Receipts) against its taxable income in respect of bona fide (good faith) donations made to an approved public benefit organisation (“PBO”). A taxpayer may only make such deductions if the PBO receiving the donation issues a receipt in terms of section 18A(2) of the ITA.
The eligibility of a PBO to issue section 18A Receipts is limited to specific approved organisations that are non-profit companies, trusts or associations of persons that have been incorporated, formed or established in South Africa. To maintain such eligibility, taxpayers must also make donations to fund specific approved Public Benefit Activities (as defined in section 30 of the ITA and listed in Part I of the Ninth Schedule to the ITA) and must be formally approved by the Tax Exemption Unit of the South African Revenue Authority (“SARS”) under section 30 of the ITA. The taxpayer will only qualify for a deduction from its taxable income if the donation is actually paid or transferred to the PBO. The deduction may, however, not exceed 10% of the taxable income a taxpayer during any year of assessment.
It is important to note that a South African branch of foreign exempt organisation does not qualify for approval under section 18A of the ITA. Such a branch will not be permitted to issue receipts, notwithstanding the fact that it may carry on approved Public Benefit Activities.
There are two categories of PBOs that qualify for section 18A approval. The first is a PBO which actively carries on any Public Benefit Activity. The second is a PBO that does not itself carry on such Public Benefit Activities but instead provides funds or assets to another approved PBO. This second type of PBO is also known as a conduit PBO.
There are additional specific requirements imposed on a conduit PBO that must be complied with in order to qualify for approval by SARS. One example is that it must distribute at least 75% of its funds received within twelve months of the end of the financial year in which the donation was received.
In the case of a conduit PBO, section 18A receipts may only be issued to the extent that the funds or assets are to be provided to other approved PBOs, institutions, boards or bodies which use the funds donated to carry out Public Benefit Activities.
When considering the issuing of donations through a trust, whether the trust constitutes a conduit PBO or not, one should always observe the trust deed as the trust deed may limit or restrict the activities of the trust geographically or otherwise.
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