Section 18A – is it fully understood?
Depending on their activities, public benefit organisations (“PBO’s”), as well as certain institutions and Government departments, can apply to SARS for approval in terms of Section 18A of the Income Tax Act. If this approval is granted, their donors can obtain a limited tax deduction (generally speaking of up to 10% of their taxable income in a tax year) in respect of the total donations made to such approved organisations.
If an organisation has not formally received this approval from SARS, they cannot issue Section 18A receipts to donors, and their donors cannot claim any tax deduction. Also, some organisations only receive Section 18A approval in respect of certain of their activities or programmes; in such cases, they can only issue Section 18A receipts for donations towards these specific activities or programmes and the donations must be used only on those activities/programmes.
Despite this, we have become aware that SARS is picking up a number of cases in which:
- organisations are issuing Section 18A receipts to their donors when they are not approved to do so; and/or
- donors are claiming Section 18A deductions when they are not legally entitled to do so.
This may point to a lack of understanding of the legislation, which is quite complex, but could also indicate abuse of this benefit by organisations or donors. In our experience, the issue is very often a lack of awareness and so we cannot stress enough the importance of strictly following the requirements of this legislation.
What are the potential consequences of failing to understand and/or comply with Section 18A?
- The organisation may lose its PBO status (ie. its income tax exemption) as it could be seen to be participating in a tax avoidance scheme/transaction.
- Future support and donations to the organisation may be adversely affected, not only because the various exemptions will no longer be available but also as a result of reputational damage.
- SARS may treat any donation to the organisation as taxable income and any Section 18A receipts issued by the organisation may be invalidated – in such a case, donors would not be able to claim their tax deduction. Denial of the deduction by SARS can be costly for the donors concerned, who may then be subject to penalties and interest if this caused them to underestimate their taxable income in the relevant tax year; as a result, affected donors could insist on the return of their donation due to the misrepresentation.
- Any intentional failure to comply with the relevant legislation may constitute an offence punishable by a fine or imprisonment for up to two years.
- SARS may also begin to look for ways to limit tax benefits for PBO’s in the light of these illegal or fraudulent practices, to the detriment of the sector and the country as a whole.
The basic facts about Section 18A:
- No non-profit organisation is automatically exempt from income or other taxes.
- All separate legal entities, once established, are required to register as a taxpayer and must complete an annual income tax return.
- Non-profit organisations carrying out public benefit activities may apply to the Tax Exemption Unit (TEU) of SARS for approval for (partial) income tax exemption (approval as a PBO) and, if their activities qualify, also for Section 18A approval.
- Not all organisations approved as PBO’s enjoy Section 18A approval. The public benefit activities for which Section 18A approval is granted are limited and specifically do not include religious activities and certain cultural, research and sports-related activities.
- SARS issues a formal letter in response to any application for PBO and/or Section 18A approval which will clearly indicate the approvals the organisation has been granted (if any). If a PBO has not been granted Section 18A approval, it may not issue Section 18A receipts and may therefore not offer the limited tax deduction to their donors.
We urge you to ensure that your organisation’s tax affairs are fully in order, not only to maintain compliance but also to ensure that the tax benefits that are currently available for donors and PBO’s are retained, or even improved, so that resources available for making a difference can be maximised. Can we suggest that you refer to the SARS letter sent to your organisation to double-check the details of the approvals and exemptions that your organisation has been granted, as well as any conditions or restrictions on these.
To ask any questions about income tax exemption and Section 18A approval and receipts, please contact us.
With best wishes
Anna, Cathy and Paul