Ensure it's a win-win: the tax benefits of charitable giving

Charitable giving has always been a core consideration for many wealthy South Africans, who often donate to non-profit organisations (NPOs) during their lifetime and/or make specific bequests to them in their wills. 

Before you donate to a cause that’s close to your heart, however, it’s a good idea to take note of the different kinds of NPOs recognised in SA, and the tax implications of donating to them. With this in mind, you may even wish to establish a public benefit organisation (PBO) to do so.

Types of NPOs

NPOs in SA are governed by the Non-Profit Organisations Act (NPO Act). According to the act, an NPO is defined as either a trust, company or other association of people established to serve a public purpose — essentially, those in need.

The SA Revenue Service encourages NPOs to register as PBOs in terms of section 30 of the Income Tax Act (ITA) and, where required, to apply for the relevant tax exemptions afforded in terms of section 18A of the ITA.

Donations made to registered PBOs that comply with section 18A of the ITA can be claimed as tax deductions up to certain limits.

Registered PBOs are exempt from income tax, but certain receipts and accruals from trading or activities carried out by a PBO may be taxable.

Donations and bequests made to registered PBOs are also not subject to donations tax and/or estate duty. Similarly, assets donated or bequeathed to registered PBOs aren’t subject to capital gains tax.

Establishing a PBO

The types of PBOs available in SA include:

Non-profit companies:

• Governed by the Companies Act, a non-profit company enjoys all the benefits of a juristic personality, which may include the protection of directors from personal liability. 
• Shareholders won’t receive any form of dividends.
• A disadvantage of setting up this form of PBO is that it’s administratively intensive, which may attract higher costs.

Non-profit trusts:

• These trusts are governed by the Trust Property Control Act.
• The most significant advantage of a non-profit trust is its flexible structure — it can be used for a variety of purposes. However, it can only apply for tax benefits if it complies with the relevant requirements of the ITA.
• Another benefit of a non-profit trust is that its formation requirements and ongoing obligations are less onerous than those of a non-profit company, and it may be less costly to run.
• A disadvantage is that a non-profit trust doesn’t have a separate legal personality. Trustees may therefore be protected from personal liability only to a limited extent.

To qualify for approval as a PBO, an organisation has to undertake and support particular public benefit activities, including welfare and humanitarian, healthcare, land and housing, education and development, religion, belief and philosophy, cultural, conservation, environment and animal welfare, research and sport activities.

Income tax relief

Any individual — whether during their lifetime or in their last will and testament — or company making a bona fide donation to a registered PBO can qualify for a tax deduction, provided the PBO is able to issue a section 18A certificate to the donor.

A bona fide donation is a voluntary, gratuitous gift given out of generosity, without reciprocal obligations or personal benefit for the donor, who may also not impose conditions that could enable them to derive some direct or indirect benefit from the donation.

The deductible portion of the donation is capped at 10% of the taxable income of the donor. With donor companies, an excess donation may be rolled over as a deductible donation in the subsequent year of tax assessment.

The experts at Sanlam Private Wealth can assist you with creating a non-profit company or a non-profit trust, as well as drafting your will containing bequests to a registered PBO of your choice.

For more information, contact Kajal Chowthee, a fiduciary and tax specialist at Sanlam Privat Wealth on 031 560 366 or email kajalc@privatewealth.sanlam

This article was paid for by Sanlam Private Wealth.