Giving to others helps society and can leave you, the giver, feeling good. But there is the added benefit that you can claim for a deduction against your tax - provided you make your donation to an organisation that meets the taxman's very specific requirements.
The festive season is over, and the orgy of gift giving and collective overspending is done for another year. This overindulgence is typically followed by New Year resolutions - prompted by remorse - that are too strenuous for their well-intentioned makers to live up to.
May I suggest an alternative to this crazy cycle of boom and bust? Donations to certain organisations that work for the public good are tax-deductible. If you are looking for tax relief, this is a win-win situation. And if you are looking for a New Year's resolution that can easily be kept, you can resolve to support a charity or organisation working in a field that touches you - whether it is teaching adults to read or supporting HIV-positive orphans.
But it is important to know that you can claim back from the taxman only if you donate to an organisation that is registered with the South African Revenue Service (SARS) and that is entitled to issue a certificate for a tax deduction against your donation. Not all charities, institutions and non-government organisations qualify. You could also donate to national, provincial or local government.
Section 18A of the Income Tax Act deals with the deduction of donations made to public benefit organisations (PBOs), so these deductions are sometimes called section 18A deductions.
1. How much you can claim
For the 2007/8 tax year, donations of up to 10 percent of your taxable net income (excluding any retirement fund lump sum benefit, and before deducting your allowable medical expenses) to an approved PBO can be claimed as a deduction for tax purposes. In his budget of March 2007, Finance Minister Trevor Manuel doubled the allowable deduction from five percent, which applied to the 2006/7 tax year.
The donation can be in cash or in kind. For example, a farmer can give vegetables to a school feeding project.
SARS has different ways of valuing an in-kind donation, depending on whether:
- The asset forms part of your trading stock (as in the case of the farmer's vegetables);
- You donate a business asset used in your trade (such as computers); or
- Your donation is purchased, manufactured, erected, assembled, installed or constructed specifically for the purpose of being donated. (For example, you could help to build or repair a crèche in a poor area.)
Deborah Tickle, a tax partner at KPMG, says that if you have not used the asset in your trade, or did not buy or build it specifically for the purposes of the donation, you cannot deduct any amount in respect of that donation from your taxable income.
So, for example, if you give your children's old toys to an orphanage, you will not be able to claim a deduction in respect of those toys.
2. Companies can also claim
Tickle says that although the rules relating to donations by companies used to be somewhat different to those for individuals, the same rules now apply to companies and individuals.
"Thus, a company may also deduct donations it has made to approved institutions in an amount of up to 10 percent of its taxable income. Since a company can't have section 18 medical expenses or receive lump sum benefits in respect of retirement, the deduction is calculated in relation to its taxable income before the donation," she says.
"Since a company is generally formed to trade, the relevance of the valuation provisions become significant if it chooses to donate some of its trading stock - for example, if a supermarket donates food from its shelves to an approved poverty-relief PBO, or a textile factory donates blankets to an approved disaster relief fund or healthcare organisation."
She says that, as is the case for an individual, it is not possible for a company to create a loss with donations, because the formula is based on a percentage of taxable income.
And if a company or you, as an individual, donate amounts that qualify for deduction but exceed 10 percent of your relevant taxable income, you unfortunately cannot carry the amount forward to the next year.
3. Get a proper receipt
Tickle says: "It is important to be aware that not all donations to worthy causes qualify as donations that are deductible for tax purposes. The type of organisations that SARS is able to approve as being tax-free entities are limited by legislation, and the ones that qualify to be able to provide a tax certificate to their donors to allow them to deduct the donations are even more limited.
"In addition, even if the type of organisation does qualify to give a tax-deduction certificate, it must continuously satisfy various requirements in order to retain that status," Tickle says.
To make sure that you can claim a deduction, you must get a receipt from the PBO or institution you are donating to. Keep your receipt for five years, which is the time SARS requires taxpayers to keep the documentation related to their tax returns.
The receipt must have the following details:
- The SARS reference number of the PBO or the institution;
- The date of the receipt of the donation;
- The name and address of the PBO or institution;
- Your name and address;
- The amount of the donation or the nature of the donation if it was not made in cash; and
- Certification to the effect that the receipt is issued for the purposes of section 18A of the Income Tax Act, 1962, and that the donation has been or will be used exclusively to carry out the objectives of the PBO, institution, board or body concerned. In the case of a donation to the national government, a provincial administration or a municipality, that tier of government must certify that the donation will be used for a public benefit activity as described in point number six of this article.
"Many organisations give receipts to acknowledge donations, but if you don't get a receipt that states it is issued in accordance with section 18A, the donation will not qualify for a tax deduction," Tickle says.
Kathy Dixon, Grant Thornton's tax manager in the Eastern Cape, points out that before April 1, 2006, a PBO could lose its tax-exempt status and the donor could lose the tax-deductibility of his or her donation if the approved PBO failed to satisfy its objectives.
Since April 1, 2006, SARS Commissioner Pravin Gordhan has had the right to treat donations as taxable income in the hands of the PBO if he believes the organisation has contravened the Income Tax Act.
If the PBO does not take steps to rectify the situation in a certain time, any receipts issued by that PBO after that date will not qualify your donation as tax-deductible in your hands, Dixon writes in e-taxline, Grant Thornton's online publication.
She says it is important to ask the PBO, before you make a donation, whether the donation will be tax-deductible.
4. Entities that qualify to issue certificates
According to the Income Tax Act, the entities that qualify to issue a certificate for a tax deduction against your donation are limited to:
- Certain PBOs and other specified institutions that carry out specified "public benefit activities" as defined by SARS in the law or PBOs that donate specifically to these organisations. PBOs must offer their services in a restricted range of fields (see point six).
- Any of the three tiers of government (national government, a provincial administration or a local government such as a unicity or municipality), provided that they will use the money for the same restricted activities that the approved PBOs would use it for.
5. How a PBO is defined
PBOs are defined in section 30 of the Income Tax Act by the following criteria:
- Their ownership structure.
The organisation must be:
- A section 21 company; or
- A trust; or
- An association of persons.
- The objectives of the organisation.
According to the Act, the sole objective of the organisation must be to carry out public benefit activities for altruistic reasons and without making a profit. A stipulation that at least 85 percent of the funding must come from donations or grants applied until November 2006 but is no longer in force.
- Where the organisation operates.
The bulk of an entity's activities must be for the benefit of South Africans. The Act puts the figure at 85 percent of its activities, as measured either by the cost of carrying out the activities or by the time spent on them.
- Fields of activity.
The organisation's activities must benefit, or be widely accessible to, the general public or, specifically, to the poor and needy.
A public benefit activity must involve work in one of the following fields: welfare; land and housing; education and development; health care; culture; conservation and animal welfare; religion, belief and philosophy; consumer rights; and sport.
However, while these activities are those that the Income Tax Act regards as for the public benefit, not all PBOs that work in these fields qualify to issue a tax-deduction certificate.
6. The field in which the PBO works is important
If the organisation you want to donate to meets all the other qualifying criteria, it also has to offer services in a select range of fields. The activities that qualify a PBO to issue a tax-deduction certificate are listed in part 2 of the ninth schedule of section 30 of the Income Tax Act.
The PBO must do work in any of the following broad areas:
- Welfare.
This includes, for example, organisations that care or counsel the aged or marginalised children (such as orphans and abused children), and organisations that provide poverty relief or legal services for the poor and needy.
- Health care.
This includes, for example, hospices and organisations that care for and counsel HIV-positive people and their families.
- Land and housing.
Entities that build, develop and upgrade housing for low-income households would qualify under this provision, as would PBOs that build crèches and clinics for the poor.
- Education and development.
Among others, schools and institutions of higher learning qualify. (However, school and tertiary education fees are not tax-deductible.) Organisations that offer adult basic education and training also qualify.
- Conservation, environment and animal welfare.
Activities in this field include organisations involved in the establishment and management of transfrontier parks, and in the care of domestic animals, including those PBOs that work in poor areas offering animal education and sterilisation services.
If you donate to one of the arms of government, the donation is tax-deductible only if the donation is channelled towards the activities outlined above.
7. Organisations that do not qualify
Religious institutions such as churches, ashrams, mosques, synagogues and temples do not qualify to give a tax-deduction certificate, although they do qualify to be exempt from paying tax themselves. However, organisations set up by religious and philosophical organisations may qualify if they conduct activities specified by SARS in the five areas listed above and if they meet the other criteria set out in the Act.
PBOs operating in other fields that do not qualify for tax exemption include those that:
- Conserve, rehabilitate or protect the natural environment; or
- Provide residential care for the aged, even if they are poor and needy pensioners.
Also excluded are:
- Sport and recreation bodies; and
- Cultural institutions, such as museums, libraries and art galleries.
The situation is quite different in Germany. Thomas Boehnke, of Boehnke and Associates, a Johannesburg-based financial advisory firm, says a "church tax" can be directly deducted, together with income tax, from any salary paid. The German receiver of revenue acts as a collecting agent for the religious institutions. "The rate of that church tax is eight or nine percent (depending on the province) of the income tax calculated. Such a payment is, however, 100 percent deductible without any limitation."
Boehnke says 85 percent of the income of the Catholic and Lutheran churches and Jewish synagogues is derived from this tax. In 2006, contributions to churches totalled E8 billion, or about R77 billion at current exchange rates.
In Germany donations of up to 20 percent of the total income of an individual taxpayer are fully tax deductible if made to a recognised PBO. "Any amount in excess of that limit is not lost as a special deduction but is carried forward to the next tax year," he says.
8. Tax-neutral donations
If your favourite charity does not qualify as an "approved" section 18A organisation and is therefore not able to issue a certificate for a tax deduction against your donation, you can still give to that organisation without attracting donations tax.
No donations tax is payable when donations are made to PBOs. These would include churches, mosques, synagogues and ashrams that meet all the conditions of being a PBO, as well as organisations that work to advance consumer rights, cultural development and sports.
The tax is also not incurred when donations are made to:
- Another person for his or her maintenance (as long as the payment is "reasonable");
- A spouse (unless you are separated from your spouse in terms of a judicial order or notarial deed of separation);
- National, provincial or local government;
- Any body or board exempt from tax and established by law to further scientific, technical or industrial research;
- Political parties registered under the Electoral Act 73 of 1998; and
- Bodies corporate and shareblock schemes.
9. Donations tax
Donations tax has been in force for almost 60 years and was introduced to prevent South Africans from reducing their liability for estate duty and income tax.
Assuming you are a South African resident and you do not donate under the above conditions, you, as a "natural person", are taxed at a rate of 20 percent on donations exceeding R100 000 a year for the tax year ending February 2008, and companies and trusts are taxed at 20 percent on donations of more than R10 000 a year.
The South African Financial Planning Handbook 2007 says a "donation" is defined by the Income Tax Act as "any gratuitous disposal of property, including any gratuitous waiver or remuneration of a right".
The handbook defines "property" as any right in, or to, property, wherever it is situated. This property can be moveable or immovable, corporeal or incorporeal (rights and intellectual property, for example).
If you dispose of property for considerably less than it is worth, the taxman will regard the difference between fair market value and the amount you sold it for as an amount that will incur donations tax. So, if an asset with a fair market value of R500 000 is sold by you to Mrs X for R100 000, you will be regarded as having made a donation of R400 000 and will be taxed accordingly.
10. Giving is good for you
You do not have to be an Oprah Winfrey addict to know that donating to a good cause makes you feel good.
This intuitive knowledge is now backed up by research from economics professor William Harbaugh of the University of Oregon in the United States and his colleagues Ulrich Mayr and Dan Burghart.
The researchers found that giving to good causes activates regions of the brain associated with pleasure. The brain's neural responses to donating are very similar to those elicited by activities such as eating good food and seeing pictures of loved ones.
In their article "Neural responses to taxation and voluntary giving reveal motives for charitable donations", published in Science in 2007, they say: "Even mandatory, tax-like transfers to a charity elicit neural activity in areas linked to reward processing. ... neural activity further increases when people make transfers voluntarily."
In other words, donations that you are compelled to make leave you feeling good; ones that you make of your own free will feel even better.
But Dr Helgo Schomer, the director of the Behavioural Health Consultancy and a senior academic in the department of psychology at the University of Cape Town, adds another dimension: "We are social beings; we are not insular. It is fantastic to give from the point of view that we are contributing to the social fabric.
"Giving does the soul good. It is a way in which we realise how fortunate we are to be part of a community, and to be one of the earners - one of the lucky ones. It is a way of saying thank you for being so fortunate."
He goes on to say that as a psychologist he spends time in therapy with his clients concentrating on what is present, instead of what is lacking. "Giving is a clear orientation towards what is, instead of what isn't, and that builds character."
Schomer says some of the wealthiest people in the world are dealing with stress and isolation and unhappiness.
"By giving, I can demonstrate some of my success. And what nicer feeling in life than feeling successful?" he says.
As with all tax laws, there are ifs and buts. This brief article cannot cover those extensively. Before donating, it would be prudent to check the credentials of the organisation you wish to contribute to and discuss your circumstances with your tax consultant or financial adviser if large amounts of money are involved.
But even if there is no tax benefit to be gained at all, the act of giving always enriches you.
This article was first published in Personal Finance magazine, 1st Quarter 2008. See what's in our latest issue