In a time of crisis such as the Covid-19 pandemic, people’s willingness to donate increases significantly. However, the beneficiaries of these donations, such as funds and nonprofit organisations (NGOs), are often less than transparent about the tax implications for donors.
Equally, most people seem ignorant of the rules that govern donations, especially with the fast-changing financial policies the government is implementing in response to Covid-19 support, whether in the case of private donations or payroll giving. Nor that these can be used as a way to claim tax deductions or reduce your payable tax, based on supporting approved “section 18A” causes or the Solidarity Fund.
Giving is a critical part of society; it’s what makes society more just and pleasant. However, it is worrying when charity funds pop up, especially during a time of crisis, and simply appeal to people to donate with the promise of a tax benefit. We need to be clear which tax deductions are allowed and how this works, especially in times such as these when people feel it is important to give towards a cause. It is an emotive issue, but it cannot be based on a knee-jerk reaction. Donations should form part of individuals’ financial planning. A tax calculator can help determine what tax rebates you can expect from donations.
It is highly misleading to set up a fund and declare that all donations are tax-deductible without laying out the parameters and regulations that govern donations, as per section 18A of the Income Tax Act. In SA, companies that wish to donate funds need to know that legislation only allows for an amount of R10,000 a year to be used to gain a tax rebate. Above that amount, the donation will get taxed at 20% of the donation, though section 18A-approved organisations, with public benefit organisation (PBO) status, are exempt from this limit.
This is a separate tax and is managed as such. For example, in the case of a R12,000 donation to an employee (from the R10,000 limit), you will be required to pay 20% on the R2,000. If the donation is to a PBO, the amounts donated are exempt from the limit, but the claim amount is capped at 10% of taxable income per year. If amounts of more than 10% are given, the “tax saving” will be carried forward to the next financial year.
imilarly, individuals can give up to R100,000 a year tax-free, after which they also have to pay tax of 20% for nondeductible donations above R100,000. Donations to SA Revenue Service-approved section 18A PBOs are excluded from the limit, and other limits apply on “tax saving” planning for donations, such as the 10% that can be claimed per year. Donations to the Solidarity Fund have a limit of 20% and the donation cap for employees, given through the payroll, may go up from 5% to about 33%, which is a substantial tax saving for the donor.
It is therefore important to dispel the initial confusion that is created by funds and section 18A-approved organisations that are marketed as tax deductibles, when people are not savvy enough to know the limits. In fairness, people should be given a chance to decide how much they can donate and manage their tax more effectively.
Perhaps some of the confusion around donations and tax rebates arises from the underlying regulation around taxation, which in many cases is not really followed. The legislation has been around for as long as NGOs have been collecting donations, yet only a few manage their section 18A certificates diligently, while others only do it when asked. This means society is missing out on significant tax savings.
Becoming more savvy about the tax implications of donating money and donating amounts that allow donors — both individual and corporate — to take advantage of tax rebates is not only good for the taxpayer, but also for the beneficiaries. If donations are based on sound financial planning, it allows people to build relationships with causes and support them in the long term. While individuals get a tax benefit, the beneficiaries can plan their work better based on expected donations.
There is also a need for greater transparency from the side of NGOs and charity funds. In many cases money is given but there is no-one to account for it or what exactly it is used for. In many cases, despite protocols for donations being in place numbers are often misrepresented and money is seldom accounted for at the level required.
Companies, regulators, charities and individuals need to work together to get greater clarity in this area. The regulations are not as clear as they could be, yet we expect people to continue donating. During a time of crisis, charities and funds become our go-to places to get help. We should start taking the business of donating far more seriously.
• Luke is CEO of The Social Collective.
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