The tax benefits of giving to charity
Donating to a charitable cause close to your heart is always special however it’s a good idea to take note of different kinds of non-profit entities recognized in South Africa, and the tax consequences of donating to them.
Non-profit organizations (NPOs) in South Africa are governed by the Non-Profit Organizations Act (NPO Act). According to the Act, an NPO is defined as either a trust, company or other association of people established to serve a public purpose – essentially, those in need.
The South African Revenue Service (SARS) encourages NPOs to register as public benefit organizations (PBOs) in terms of Section 30 of the Income Tax Act (ITA), and where required, to apply for the relevant tax exemptions afforded in terms of Section 18A of the ITA.
Donations made to registered PBOs that comply with Section 18A of the ITA can be claimed as tax deductions up to certain limits. “Registered PBOs are exempt from income tax – certain receipts and accruals from trading or activities carried out by a PBO may, however, be taxable. Donations and bequests made to registered PBOs are also not subject to donations tax and/or estate duty. Similarly, assets donated or bequeathed to registered PBOs aren’t subject to capital gains tax.
The PBO has to undertake and support particular public benefit activities, including stipulated welfare and humanitarian; healthcare; land and housing; education and development; religion, belief and philosophy; cultural; conservation, environment and animal welfare; research; and sport activities, in order to qualify for approval as a PBO
Types of PBO available in South Africa:
- Non-profit companies – governed by the Companies Act. A non-profit company enjoys all the benefits of juristic personality, which may include the protection of directors from personal liability. Since there is a total prevention on the declaration of dividends in a not-for-profit company, shareholders won’t receive any form of dividends. A disadvantage of setting up this form of PBO, however, is that it’s administratively intensive, which may attract higher costs.
- Non-profit trusts – governed by the Trust Property Control Act. The most significant advantage of a non-profit trust is its flexible structure – it can be used for a variety of purposes. It can only apply for tax benefits if it complies with the relevant requirements of the ITA. Another benefit of a non-profit trust is that its formation requirements and ongoing obligations are less onerous than those of a non-profit company, and it may be less costly to run. A disadvantage is that a non-profit trust doesn’t have a separate legal personality. Trustees may therefore be protected from personal liability only to a limited extent.
Income tax relief
Any individual or company making a bona fide donation to a registered PBO can qualify for a tax deduction – provided the PBO is able to issue a Section 18A certificate to the donor. “A bona fide donation is a voluntary, gratuitous gift given out of generosity, without reciprocal obligations or personal benefit for the donor. The donor may also not impose conditions that could enable them to derive some direct or indirect benefit from the donation.
The deductible portion of the donation is capped at 10% of the taxable income of the donor. With donor companies, an excess donation may be rolled over as a deductible donation in the subsequent year of tax assessment.