How to donate money – and get some back

A cocktail of great leadership from Archbishop Emeritus Desmond Tutu, Warren Buffett, Pravin Gordhan and Jacko Maree has created a mood of: "How can I help solve South Africa's problems today? And if I could secure a tax deduction on a donation, I might donate even more!" So here are some rules to help.

Tax deductible donations can only be made to institutions recognised in terms of Section 18(a) of the Income Tax Act. Not all charities qualify!

There has also been a lot of tax mischief with tax-deductible donations. So check it out before committing your millions – and make sure you keep the Section 18(a) receipt.

Donations with “strings attached” don”t qualify for tax deductions. Similarly, advertising sponsorships mixed with philanthropic motives can also run into trouble. Charity and advertising don”t mix when it comes to tax.

“Salary sacrificing” donations – “don”t pay me, rather pay my specified charity” – can land taxpayers in trouble. When it comes to earnings it is difficult to disturb the principle that the earner pays the tax.

Donations of assets, as opposed to cash, don”t automatically qualify for full tax deductions. The principle of lower cost and market value applies. So an artwork bought in 1960 for R10000, and worth R10-million today, will only qualify for a tax deduction of casino online R10000.

Revocable donations do not qualify for tax deductions. So those who want to control the destiny of their philanthropy could lose their tax deductions.

The value of the tax deduction depends on your taxable income. Taxpayers earning more than R580000 a year effectively get 40% tax relief. Taxpayers earning below the tax threshold, which stands at R59250 for taxpayers younger than 65 years of age, get no tax relief because they don”t pay tax. Corporate donations get 28% tax relief and trusts 40%.

Tax-deductible donations are limited to 10% of taxable income.

If the section 18(a) donation receipt is presented to the taxpayer”s employer, immediate tax relief is available through the employee”s tax/PAYE system. But this is limited to 5% of taxable income from that employer. The remainder must be claimed as a tax deduction on submission of the tax return. And that can easily delay the effect of the deduction by up to a year.

Donations to all tax-exempt institutions are exempt from both capital gains tax and donations tax, even if they do not qualify for income tax.

Bequests from deceased estates are exempt from both capital gains tax and estate duty.

Finally, be careful when trying that old trick of trading tax-deductible donations for school fees. SARS can so easily attack. And the practice can even jeopardise the Sector 18(a) status of the school for bona fide donors.

Originally published in the Sunday Times Tax Talk column.

Showing 1 Comment »

  1. Dear Prof Lester. I picked up on your column this week. Here is an extract from a letter I write Archbishop Tutu in response to his wealth tax proposal. I would welcome your thoughts.Rgds Roger Trythall

    “The aim must be to encourage new enterprises, new innovations and to get small companies out of the confinement of angel financing and dependency of grants. These companies and businesses will create opportunities to reduce the unemployment.
    Specifically one should look to introduce schemes similar to the Quebec Savings and Stock Plan (QSSP). The aim of that plan was to foster the development of businesses in Quebec as it moved through the various referendum phases for independence. Essentially Quebec offered a tax break whereby taxpayers investing into Quebec based companies allowed those investments to be tax deductable. It was successful and today Quebec is a centre of medical and biotech innovation. It’s the headquarters of a world leader in rail train technology.
    Now to apply this to South Africa and I have suggested this to Mr. Manuel when he was Minister of Finance. You incentivize the taxpayer. You allow a tax deductable of R 1,000 or any such number, provided it is invested into a privately managed fund whose aim is to develop new businesses and new enterprises. The subscribing tax payer is entitled to a return on that investment. Any income arising from the investment can be taxed and the capital gains can be taxed in accordance with existing tax laws; so the tax man is winning. The taxpayer is winning, because if the fund is wisely invested it will increase in value. Everyone is winning and sustainable employment is being created. Imagine if such a scheme were to be established by (say) an Investec, which has experience and that say 2 million taxpayers took advantage of it, within one year there would be R 2 billion in the fund available for new enterprises. If this is carried on for several years, you can imagine the size of the fund.
    Perhaps within the concept of the fund, specific areas can be highlighted as priority. If this were to happen, then I can think of a few business foci: agriculture because South Africa is a net importer and should become an exporter; the world needs food. I would consider shipbuilding and oil/gas rig building. South Africa is surrounded by 2 oceans. There is gas and oil offshore and it’s in the neighborhood. Why is Singapore the leading builder world-wide of oil and gas rigs? The universities of South Africa need to turn their research into applications; why does this not happen apace? There must be significant opportunities to develop products and services in the arena of renewable energy. Lastly you and others of influence need to pressure government to denationalize the parastatials. They are monuments to apartheid, designed to feed the elite and are major obstacles in releasing enterprise and creating opportunities and jobs for the youth, who are in desperate need of work and who, I might add, are eager and willing. They are also a burden on the taxpayer.”

    Comment by Rtrythall — 30 October 2011 @ 1:32 pm

RSS feed for comments on this post. TrackBack URL

Leave a comment