When it comes to donations, expectations usually differ from reality. The famous business magnate and philanthropist, Andrew Carnegie, once famously said
It is more difficult to give money away intelligently than to earn it in the first place.
Come on right? Let me guess what you thinking – it’s only the already rich that get to say that? Unfortunately, that is not the case – if you aren’t intelligently donating money, you could be paying a lot more in tax than you expected.
The phrase and use of the word “donation” are most often associated with donations to a charity or a similar non-profit organisation.
In fact, this connotation of donations only constitutes a minority of donations that occur daily.
What are donations?
The Income Tax Act defines a donation as
“any gratuitous disposal of property and any gratuitous waiver of a right”.
This definition includes all gifts, allowances and any items given away for “free” or below their value. It is not a well-known fact that in South Africa we have a donations tax levied at 20% of the value of the donation. Remember donations do not always take the form of money. They can be in-kind – which means the donation of an actual physical asset.
The deemed value of these donations is dependent on the form of the asset.
If it is trading stock, trading assets or other movable assets it will be deemed to be the fair value regardless of what you “sell” it for. Immovable property like your property has a prescribed formula.
Understanding this, how often do you think you are making donations?
Examples of donations
Well, let’s showcase some examples which may change that answer. A gift that a parent buys for their children can be defined as a donation, i.e. if a parent buys their child a car, donations tax would be levied on the amount of the car. That means 20% of the value of a car – could be a tidy sum hey? Well the real kicker is that the tax needs to be paid by the donor.
Yes, the person donating something must pay 20% of the value of the donation to SARs, so I guess donations are certainly not “free”.
Another example is if you provide a loan to a person or juristic entity and down the line decide you do not expect repayment of the money, you have donated the value of your loan. Fortunately, “maintenance” is not included as a donation and for this reason food, clothes and school fees paid for someone else would not fall into the category of gifts/donations.
Wait a second, jewellery exchanged between “lovers” is a donation then! – Yes it is, so best be careful when you think about “putting a ring on it”.
The dream wedding your parents have given you? Also a donation and taxable. The scope of donations is very broad and includes many transactions that everyday South Africans undertake without realising they are falling into the donating ambit of the law.
So I have to pay tax on just about everything now?
Before all hope is extinguished and you panic about the amount of tax you owe, there is an annual exemption of R 100,000 that every natural person in the country receives. This exemption removes the need to pay any tax on donations up to an amount of R100,000. Essentially this covers most donations in ordinary everyday lives. This exemption is only applied to natural people (you and me), whereas a company would only have a R10,000 exemption.
Amounts donated above the exemption would attract tax at an amount of 20% of the donation value. For instance, if you buy your child a car for R140,000 and have made no other donations in the year, then you are liable for tax on R40,000 at 20%. This means SAR’s expect a payment of R8,000.
Further to the individual exemption mentioned above, there are specific donations that are excluded from the tax and would not be included in your R100,000.
The main exclusions are:
- Donations between spouses (Excluding common law spouses). (All the more reason to by your wife that diamond necklace)
- Charities and other public benefit organisations. (Don’t forget your S18A Certificate – read on for more on this)
- Donations in terms of a will of a deceased person. (Condolences)
- To spheres of government and tribal councils. (of course, lawmakers would excuse themselves from paying tax)
As mentioned earlier the value of a donation is always deemed to be at fair value to avoid individuals trying to be smart and donate cars to each other at a nominal amount (e.g. R100). This specifically applies when property and other similar assets are being donated.
SARS and their role with donations
As of 01 March 2014, SARS decided to allow those with a sense of social responsibility who undertake acts of benevolence to get a reduction in their tax bill.
South Africans donating to charities are getting relief – turns out the law does promote people making actual donations. Those people with moral compasses are getting a tax break. This is done by allowing donors to claim back the tax charged on donations made to approved public benefit organisations and certain qualifying institutions, as well as the tax being exempt from donations tax.
So, first off there is no 20% charge to donating. Secondly, you get paid!
In order to claim this tax back, the charity would need to issue a section 18A certificate which can be used to claim tax back in that year. On submission of a valid certificate, you would get your marginal tax rate back on the value you donated. This means you are actually “paid” to donate money. For example, you are taxed at a rate of 45% (the highest tax bracket) and you donate R50,000 to an approved charity. The approved charity would issue you with an S18A certificate (Yay! Well done on your achievement). By submitting this certificate with your tax return at the end of the year it would result in you getting paid back R9,000 from SARs.
In effect your donation only cost you R41,000 but the charity got R50,000. Cool right?
Be aware that there is a limitation – you can only get back up to a maximum of 10% of your taxable income per year. I have defined this term at the bottom of the article for you over-eager learners. Fortunately, the act allows you to roll over the excess into the next year, so it won’t go to waste.
The correct way to donate
Donating as an individual
What we suggest is before you donate any money to someone claiming to be an approved charity, you double check they are SARS approved on the SAR’s website. This is just to make sure you will be getting your money back. At the time of writing there are 21,059 approved PBO’s you could be donating to. Here is the link to SARS approved PBO’s.
Donating as a company
Perhaps you would like to propose to your company how they can reduce the PAYE they need to pay. Or perhaps as a PBO you could use this incentive to fund raise from institutions.
How? Well if your employer agrees to process your donation through its payroll you can deduct the amount of the donation before paying PAYE. You will still get the above tax benefit as well! You should be aware that this incentive is limited to 5% of your salary. Also, to achieve this these further requirements must also be met:
- The beneficiary must be an approved organisation.
- The donation amount must be deducted from your salary and paid directly to the approved organisation on your behalf
- The approved organisation must issue the section 18A certificate to your employer
- Your employer must reflect the full amount of the donation, not only the limited five percent, on your IRP5 certificate
- The IRP5 certificate will suffice as the supporting documentation required to claim the tax deduction on your annual tax return.
All in all, donating can be an expensive or a lucrative endeavour depending on how you do it. Despite donations tax being very difficult to ascertain and monitor by SARS, it is worth being aware of the implications of this piece of law. Perhaps we should change Andrew Carnegie’s quote to:
“It is more difficult to give money away without paying tax than to earn it in the first place”.
Note: Taxable Income for donations purposes is defined for natural persons, as the taxpayer’s taxable income, whether derived from a trade or from a non-trading source, and after allowing all permitted deductions, but before the donation deduction. Taxable income also excludes any retirement lump sum benefit, retirement lump sum withdrawal benefit and severance benefit. However, it includes taxable capital gains.
Have any questions relating to donations? Drop us a question below or subscribe to our newsletter for more information coming soon.