How to claim a donation as a section 18A income tax deduction
In the coming months, taxpayers will be gathering the information needed to file their 2014 income tax returns. There are not many tax deductions still available; however, still on offer to individuals, whether in employment or carrying on their own business, is the deduction for donations to registered public benefit organisations (“PBOs”) and other qualifying institutions.
The amount of the deduction is capped at 10% of taxable income, which could present quite a sizeable tax saving.
So, what are the requirements?
First of all, there must be a bona fide donation. A donation is essentially the same as a gift or ‘freewill offering’, meaning that there can be no quid pro quo: nothing can be expected to be given in return. For example, if a cash payment is made to a school with the expectation that the school will, in turn, provide a place or indeed education for the donor’s child, that is not a donation and the payment will not qualify for a tax deduction. A gift or donation with no conditions attached to it, is what the South African Revenue Service (“SARS”) is looking for.
Secondly, the donation may be either in cash or ‘in kind’. An individual could pay a cash gift to a qualifying public benefit organisation (PBO) or institution, in which case the amount of the deduction will be the amount of cash actually donated. Also included within the scope of the deduction are donations of assets, which could include for example, a donation of food, clothing, furniture… or perhaps a whole house. Where an asset is donated, the amount that can be deducted is usually the lower of the cost or market value of the asset on the date of the donation, with specific valuation rules applying to assets that previously formed part of the donor’s trading stock and other assets that qualified for tax write-offs.
Thirdly, the donation must have been made to a qualifying institution or PBO, which must in turn carry on activities that are listed in Part II of the Ninth Schedule. The list of qualifying activities is provided at the end of this article, but it is important to note that not all donations to PBOs are covered. The deduction is available only for donations made to qualifying institutions and PBOs that actually carry on one or more of the specified activities.
Fourth, the donee must have provided the donor with a s 18A certificate, which is essentially a receipt that reflects the following information:
The PBO registration number of the donee;
The date the donee received the donation;
The name and address of the donee;
The name and address of the donor;
The amount of the donation or the type of donation if it is not a cash donation;
A certification that the receipt is issued for the purposes of s 18A of the Income Tax Act and that the donation will be used exclusively for the objectives or required activities of the donee.
Having met the requirements, and with the necessary s 18A certificate in hand, the taxpayer must then claim the deduction on his or her tax return. The original certificate must be kept in a safe place and made available to SARS if requested.
If you made any donations in the 2013 tax year, you should request the charity to provide you with the s 18A certificate and provide it to your tax advisor with your tax documents. Going forward, plan to direct your giving towards qualifying PBOs and institutions that can issue you with the s 18A certificate to maximize your tax savings. In the 2013 Tax Budget speech, the Minister indicated that amendments to the Income Tax Act will be made to allow taxpayers to carry forward donations that exceed the ‘10% of taxable income’ limit, which will be most welcome… even more reason to focus on claiming this deduction in your next tax return!
If in doubt about how to proceed, consult your tax consultant.