Comments have been made recently regarding the current global economic recession and its possible effects on non-profit organisations (NPOs). Economists urge organisations to look to corporate funding to bridge the economic slump that may lie ahead, while those already relying on this funding have been advised to brace themselves for a reduction in funds over the next two years. This suggests that more effort should be made to attract corporate and individual funding, especially as the South African Revenue Service (SARS) actively encourages funding to the NPO sector by allowing donations to the sector to be tax deductible, subject to certain restrictions.

Section 18A of the Income Tax Act No 58 of 1962 (the Act) allows donors to deduct donations made to registered Section 18A organisations from their taxable income (limiting such deductions to 10% of the taxable income of both corporate entities and individuals – whose taxable income is determined before the deduction of medical expenses and donations). In order for donors to be able to utilise the deduction, valid section 18A certificates must be issued.

Through the process of application for income tax exemption, the income of public benefit organisations (PBOs) is tax exempt (subject to certain conditions). However, not all PBO’s qualify for section 18A status. Organisations conducting activities relating to religion, belief or philosophy, cultural activities, research and consumer rights, sport and the general provision of funds, assets or other resources, would not qualify to register as section 18A organisations as they do not conduct the activities as contemplated in Part II of the Ninth Schedule, which details the activities that qualify for section 18A status. Thus, donations to organisations that carry out these activities will not be deductible for tax purposes.

Practically, an organisation that carries out activities that qualify for section 18A status would apply to the Tax Exemption Unit (TEU) of the SARS by completing the form EI1 provided on the SARS website (the same form used to apply to be registered as a PBO). The form contains a specific section dealing with PBOs that qualify and wish to register as section 18A organisations and PBOs simultaneously. Once the PBO has obtained section 18A status, it must issue certificates to donors that comply with stringent requirements determined by the law and that contain specific details, namely:

• the exempt entity tax reference number of the PBO, as issued by the TEU;
• the date of the receipt of the donation;
• the name of the PBO, together with an address to which enquiries may be directed;
• the name and address of the donor;
• the amount of the donation, or the nature of the donation (if not made in cash); and
• certification to the effect that the receipt is issued for the purposes of section 18A, and that the donation has been, or will be, used exclusively for the object of the PBO.

A section 18A receipt must be retained by the donor for five years, which is the period of time that SARS requires taxpayers to keep the documentation related to their tax returns.

Last year, section 18A was amended to provide that an employer operating payroll giving programmes (a way to encourage employees to make donations to PBO’s) may obtain a section 18A certificate on behalf of its employees from recipient organisations and reflect the donation made on the IRP 5 certificates of relevant employees.

The amendment was enacted in order to ease the logistical problems previously experienced by employers, where it was required that a certificate was issued to each individual employee, in order to enable the employee to claim the deduction. Previously, the employee was also subject to the deduction of employees’ tax on the donation and would only receive the tax benefit of the donation after the end of the tax year. To prevent over-deductions, however, the deductible amount is limited to 5% of remuneration of the employee.

In summary, although NPO’s may experience the effects of the global economic recession, there are tax benefits in place which should be used, as far as possible, to entice local individual and corporate donors to partner with their organisation during this critical period.

Fiona O’Brien is a tax consultant at KPMG (Services) Pty Ltd. This article is published with permission of CMDS – Accounting for Management and Development in the Non-Profit Sector. For more information go to: www.cmds.org.za