Balancing the books with Donations and Taxes

Many companies endeavor to contribute to building a better future for South Africans especially in today’s difficult economic situation.  Whether from an altruistic perspective or to comply too their Broad-based Black Economic Empowerment (B-BBEE) requirements, donating to charities through corporate social investments undertakings will assist communities by filling the gaps that government grants & aids don’t reach.

The Donation

Accordingly, let’s firstly clarify that a donation does not have to refer to only money but it also includes a physical asset or something that is deemed to have value.  Most importantly though, there must be no expectation on the part of the donor (the giver) to receive something in return for this donation.  The South African Revenue Service (SARS) needs to be informed of donations whether you are the giver or the receiver.

The Receiver

As a receiver (Donee), the good news is if your company has received a donation, then its 100% tax-free (you won’t be taxed on it) however in order to keep your books clean and truthful you need to record a donation asset as a debit to “Fixed Asset” and a credit to “Contribution Revenue”.

The Giver 

As a giver (Donor), it is important to be mindful that the applicable Donation tax threshold is R100 000 collectively per tax year, subsequently 20% tax will kick in on the amount over this and up to R30 million.  If the donation exceeds R30 million then the amount above this figure will be taxed at 25%.  It is also important for both the giver and receiver to note, that if the donation exceeds the tax-free limit of R100 000 but the Donor does not pay the associated Donation Tax once the Income Tax assessment has been submitted in that specific year then both the receiver and giver will be equally responsible to settle the tax owing.  Your financial records should state these outgoing expenses under tax-deductible contributions and list the corresponding organization as a registered vendor for the company.

Donation Tax Exemption

Companies are entitled to tax relief for donations but only if made to carefully selected qualifying and registered public-benefit organization (PBO’s) and non-profit organization (NPO’s) organizations.  However, without a section 18(a) certificate from these organizations, the donation will not be accepted as tax-deductible.  It is important that the organization you are dealing with has the appropriate registration documents from SARS.  Remember donations are exempt from tax, as long as the donation does not exceed 10% of the donor’s taxable income in that specific year of assessment.