Welcome to June!- the past couple of months have brought more regulatory changes to the sector, including the final versions of:
- the NPO Act Regulations (the draft version was dealt with in our previous Brief) and
- the new Companies Act Regulations (which we will deal with in our next Brief).
For this Brief, though, the focus is on 18A and the new “third party return”– which is in the pipeline -but needs to be prepared for. This Brief will explain the general principles, and then the next issue will go into the finer details of preparations required.
We also deal with the difference between ‘doer’ and ‘donor’ 18A status and why the details of this distinction are so important.
We end with reflections arising from a recent online webinar hosted by Trialogue and the lively debate with two CSI Foundation Leaders- also a link to that webinar included.
We hope that you find all of this information useful and, as usual, please feel free to send this on to anyone who you think might benefit from it. If you have been sent this by someone else and would like to receive future newsletters, click this link to subscribe If you would rather not be sent these, then unsubscribe at the end of the newsletter.
Keep the questions coming and send us suggestions for future topics – visit our website, hit the ‘contact’ tab, and enter your question into the ‘Contact Form’ space provided.
Hands to the plough and eyes on the horizon, as ever!
Nicole, Bandile, Janice, Chelsea, Lisa, Dorothy and Alison
NEW FROM SARS- “THIRD PARTY RETURNS” BY 18A ORGANISATIONS
In our previous Brief https://ngolawsa.co.za/first-quarter-2023-ngolaw-in-brief/ we explained the new details which have to be captured on the expanded version of the 18A receipt to be issued to SA taxpaying donors who request them.
In the next step towards closing down 18A fraud, SARS has introduced a new tax filing requirement for organisations issuing 18A receipts (and for trusts which ‘vest’ an amount in a named beneficiary)- the filing of “third party returns”.
What is a “third party return”?
These are information returns (so reports filed with SARS in a specific format) and they are currently required to be filed by banks, medical schemes, and other entities as part of their tax compliance obligations.
For example, banks and other financial institutions in South Africa are required to submit third party returns to SARS (the IT3(b) and IT3(c) returns) which give information about interest earned, dividends paid, and other investment income earned by their customers. Similarly, medical schemes are required to submit third party returns such as the IT3(m) return, which provides information about contributions received from and benefits paid to their members.
These third party returns are used by SARS to verify the information provided by the bank customers and medical aid members when these taxpayers file their individual tax returns. The information reported in these returns helps SARS in its efforts to detect and prevent tax evasion, and to ensure that taxpayers are accurately reporting their income and deductions.
So, a “third party return” is a sort of tax return which is not about your own tax affairs, but about the tax affairs of others (your customers, members and now donors) and helps SARS to connect the dots and check that people are not making false claims in their tax returns.
SARS issued a draft Notice in April 2023, adding to the list of the organisations needing to file what are called third party returns.
The new additions to the list of organisations which must, when the final Notice is issued, submit these returns is:
- Organisations which have 18A (donor deductibility) status and which have issued 18A receipts within the relevant period; and
- Trusts which are established or managed in South Africa and which ‘vested’ any amount in a beneficiary during the relevant period.
The process of rolling these requirements out is in the testing phase and the first date by which submissions will be due is only end February 2024 (in respect of the period 31 Aug 2023 to end Feb 2024). SARS is, however, calling for early adopters to assist in testing their systems (and the organisation systems) and for voluntary submissions to be made. If the organisation you work with is likely to have innate complexities which will make this process difficult, or lack of technical expertise and support, we suggest that you do volunteer and make these returns before they are officially due, as the SARS systems will be refined and updated based upon the practical examples they process in their systems.
Before getting into the details, it is good to know that the main aim of SARS in all of this is not to make the lives of NGOs more difficult, but to make giving and getting 18A deductions easier for donors, while clamping down on fraud. The end-game is that, when donors come to file their tax returns, the fields for 18A donations made will be pre-populated for them, based upon the information submitted by the recipient 18A organisations. Also, the likelihood of a need for an audit or for supporting documents to be filed by donors will be greatly reduced, as the system will independently verify the tax deductions claimed.
Another important point to note is that SARS has not so far proposed any penalties for non-compliance with the requirement to file– they anticipate that there will be tweaks and accommodations to be made, and want to encourage participation so that they can make the necessary adaptations. Early adopters who make errors or who battle with the requirements need not fear that there will be SARS penalties for mistakes or technical issues.
Will our tax-exempt organisation have to submit an 18A third-party return?
Not all tax-exempt organisations and not even all tax exempt organisations which have 18A status will have to submit these new returns- SARS is only interested in the information of SA taxpayers (so, individuals and corporates) who have made a donation to an 18A organisation, and requested an 18A receipt to be issued to them.
18A organisations whose funding all comes from overseas donors, or whose funding is all ‘earned’ income (such as school fees) or whose income is from the state need not worry about this extra filing requirement, as it is not applicable unless an 18A receipt is issued.
As the issuing of 18A receipts introduces this (and other) extra regulatory and administrative requirements, the first response is to look at your practice or policy around 18A receipts. There are many organisations who issue them as a matter of course, for all donated income, and who do not stop to examine whether an 18A receipt is appropriate or required for that specific donation.
If the organisation you serve receives donations from a mixed field of donors (local, foreign, foundations, corporates, individuals etc) then it is important to classify donors (and donations) by whether an 18A receipt is requested and issued or not, and then keep a separate record of all donations for which the 18A receipt is issued, so that you will have the information to hand to make these third party returns, when they become compulsory.
Quick quiz- when do we issue an 18A receipt?
|Income||18A receipt to be issued?|
|Funding received from a US-based donor organisation||No- donor not an SA taxpayer|
|Funding received from a South African donor foundation||No- donor is tax-exempt itself and does not need an 18A receipt|
|Someone (any type of organisation, company or body) paid us for services||No- not a donation (this was a trick question)|
|Funding received from an individual living and working in Canada||No- donor not an SA taxpayer|
|Donation received from a South African business||Yes- if they ask for an 18A receipt|
|Donation received from a South African individual||Yes- if they ask for an 18A receipt|
|Government grant funding||No- donor is not a taxpayer|
|Free service/time given by an SA individual||No- also a trick question, no 18A receipts allowed|
We are a trust which issues 18A receipts- do we have to do twice the number of third-party returns?
There are two different types of third party returns which could be required from trusts:
- one about the donations made to it (the IT3(d)) and
- one about the donations it has made (the IT3(t)).
So there is no doubling up on filing duties, just that trusts are required to track both incoming and outgoing donations and may be required to file both sorts of third-party returns.
For a trust, the question about whether third party returns will be required for funds donated to it is answered in the same way as for any other organisation, and the table we have given here applies. If the trust you serve is solely funded from offshore that third party return will not be applicable to you.
Regarding the IT3(t) third party return, this is only required regarding:
“Any amount vested in a beneficiary including income (nett of expenditure), capital gains and capital amounts distributed.”
SARS has in mind here a situation where there is a named beneficiary which has been ‘vested’ with funds under the terms set out in the trust deed (or will). The main group targeted are business trusts and family trusts with named beneficiaries which receive distributions out of the funds of the trust.
In terms of trusts set up for charitable or other non-profit purposes, this return will only be required if the trust is making donations (not spending funds in carrying out a project or paying for services) and there is a specific beneficiary which has a vested right to receive support or funding from that trust, and a payment has been made to that beneficiary.
DONOR ORGANISATIONS AND THE 18(1)(b) RULE
It is a fairly well-known rule that an organisation which has 18A status may only, in respect of funds for which 18A receipts have been issued, on-donate to another organisation which also has PBO and 18A status. However, there is a little more detail in this rule, and it is very important detail- There are two types of 18A status:
- 18A(1)(b) status- approved by SARS as a donor and disburser of funds and goods;
- 18A(1)(a) status- an organisation which sets up and carries on its own initiatives or projects and is recognised by SARS as having (active project/’doer’) status.
An organisation which has donor (18A(1)(b)) status, may only on-donate funds for which 18A receipts have been issued, to an organisation with 18A(1)(a) “doer” status. This is contained in the provisions of section 18A in the Income Tax Act, the relevant bits of which read:
18A(1) …there shall be allowed to be deducted in the determination of the taxable income of any taxpayer so much of the sum of any bona fide donations by the taxpayer in cash or of property made in kind which was actually paid or transferred during the year of assessment to—
(i) public benefit organisation contemplated in paragraph (a)(i) of the definition of “public benefit organization” in section 30(1) approved by the Commissioner under section 30; or (ii) institution, board or body contemplated in section 10(1)(cA)(i),
(aa) carries on in the Republic any public benefit activity contemplated in Part II of the Ninth Schedule, or any other activity determined from time to time by the Minister by notice in the Gazette for the purposes of this section;
(bb) complies with the requirements contemplated in subsection (1C), if applicable, and any additional requirements prescribed by the Minister in terms of subsection (1A); and (cc) has been approved by the Commissioner for the purposes of this section;
(b) any public benefit organisation contemplated in paragraph (a)(i) of the definition of “public benefit organization” in section 30(1) approved by the Commissioner under section 30, which provides funds or assets to any public benefit organisation, institution, board or body contemplated in paragraph (a), or any department contemplated in paragraph (c) and which has been approved by the Commissioner for the purposes of this section;…
The providing of funds, assets etc is not listed in Part II of the PBAs, but only in Part I. But an organisation which carries on the donor functions set out in 10 of Part I of the PBA lists, attains 18A status through section 18A(1)(b).
To ascertain which sort of 18A status a potential recipient of funds has, the first place to look is the SARS online list of 18A organisations, which specifies the kind here: https://www.sars.gov.za/businesses-and-employers/tax-exempt-institutions/approved-section18a-pbos/ . One word of warning- an organisation may have both sorts granted to it, and the SARS online record only has place to capture one, so it would be best to check with the organisation and ask them to send you their exempting letter issued by SARS. This letter will clearly set out what sort of 18A status they have. Or whether they have both. If they have applied for funding, are clearly carrying out projects but have been granted 18A (1)(b) status, then either an error has been made in the application, or they have shifted focus since the status was granted. In either case, they will need to approach SARS to amend their status.
Until that status is amended, they will not be able to receive funds from 18A(1)(b) organisations UNLESS the funds are not derived from donations for which 18A receipts have been issued. This is another rather important detail- the 18A rules only apply to funds for which 18A receipts have been issued. A local donor organisation which has 18A(1)(b) status, but which receives all of its funding from overseas sources, for example, does not have to issue an 18A receipt for those funds, and so has far greater freedom in the use of its funds. So if you have funds coming in from donors who do not want or need an 18A receipt, or from investments, these could be used to fund any PBO (even one with 18A(1)(b) status).
And you would not be contravening your PBO status in so doing as this is the list of relevant PBAS in the 9th Schedule:
(10) The provision of—
(a) funds, assets, services or other resources by way of donation; (b) assets or other resources by way of sale for a consideration not exceeding the direct cost to the organisation providing the assets or resources;
(c) funds by way of loan at no charge; or
(d) assets by way of lease for an annual consideration not exceeding the direct cost to the organisation providing the asset divided by the total useful life of the asset,
(i) public benefit organisation which has been approved in terms of section 30;
(ii) institution, board or body contemplated in section 10(1)(cA)(i), which conducts one or more public benefit activities in this part (other than this paragraph); (iii) association of persons carrying on one or more public benefit activity contemplated in this part (other than this paragraph), in the Republic; or …
(i), unlike the other two, does not limit funding to PBOs approved other than in this paragraph. And (iii) provides the opportunity to fund organisations which have no registered status.
It is important to check your founding document as well. Sometimes these will prohibit funding to any organisation which does not have 18A status. Even though this is not a legal requirement. But the founding document will have to be obeyed (or amended).
CORPORATE FOUNDATIONS: TALKING POINTS
I had the pleasure recently of taking part in a panel discussion on the Trialogue platform on Corporate Foundations: Finding the Best Fit and my fellow panellists (Tshego Bokaba, Group CSI Manager, Momentum Metropolitan) and Arthur Mukhuvha (MTN SA Foundation GM) sparked a lively debate on the dynamics of an ‘internal’ CSI programme compared to one for which a separate legal entity has been established. As usual, the legal questions asked were the least interesting and the easiest to answer. But those dealing with how these programmes actually work and are administered or governed gave rise to some interesting insights, and those which stood out to me are:
- A corporate which is a complicated group/branch structure will often choose to have a dedicated legal entity to house the CSI work for the entire group, so that funds are pooled and work is focused for maximum impact. In the absence of a centralised CSI function or a special ‘Foundation’ for the group, the giving approach can be fragmented and reactionary. A dedicated charitable entity will choose fewer projects, be able to demonstrate impact better, be able to offer more continuous/consistent support to projects and may also choose projects which are better aligned with the work of the group as a whole.
- We spoke about the relative agility and speed of response of various organisations and the consensus was that the type of legal entity chosen to house the work had no impact on this but that relevant factors were:
- the culture of the corporate which created the Foundation. Those businesses which are admin-heavy, highly regulated and generally more ponderous will more than likely produce a Foundation which is less agile or responsive than a Foundation coming out of a digital or creative industry;
- the balance on the board of the Foundation may have an impact on the ability of the Foundation to respond quickly to need: if the majority of the board members are from the ‘mother’ corporate and if the corporate is quite centralised in nature, then decisions may be made faster;
- the extent to which authority to decide and to spend is delegated to Foundation management is also crucial. If funds are pre-allocated in the budget to emergency response work or if the CEO has a certain budget in their discretion to allocate, this will improve response time.
- The question of ‘alignment’ of the objects of a corporate-birthed Foundation is a ticklish one. Corporate donors (like the vast majority of donors) are permitted to give with conditions provided that those conditions are not something which will result in a benefit to the donor. The legal nature of a donation, is that the donor receives no ‘quid pro quo’ (no ROI!) aside from the warm glow inside and the positive publicity from the fact of having made the donation.
Yet, for Corporate Foundations there is usually some sort of ‘double bounce’ aimed at where, although there is no fiscal or direct benefit to those who donate, a linkage between the work of the Foundation and its Founder makes sense, and allows the Founder/donor to bask a bit more in the glow.Some real examples:
- a publishing company which funds literacy work;
- an insurance brokerage which teaches financial literacy in indigent schools;
- a food company which aims to eradicate stunting in children; and
- a tourism company which funds conservation.
In all these cases large sums of money are being impactfully directed at specific public benefit activities which the donors are not only engaged with but also understand better than most. This alignment, as long as there is no actual back flow to the donor of income/fiscal benefit from the donation, is legally acceptable.
- One of the very good questions asked in the session ‘chat’ was around tax deductions under section 11(a) of the Income Tax Act (‘expenditure incurred in production of income’) vs section 18A donation deductions. Of course, a single outward flow of funds can only be deducted for tax purposes once, and a tax deduction is a tax deduction, whether under 11(a) or 18A. The specific question raised was around B-BBEE expenditures and whether these should be claimed under 11(a) or 18A. There is quite a bit of controversy around this issue, with some lawyers and accountants taking a fierce stance against the perceived ‘double dipping’ of B-BBEE points and an 18A deduction.
My own view on this question is more nuanced:
- If funds are actually donated and there is no actual quid pro quo for the donor, then the requirements of 18A are satisfied and the 18A deduction should be allowed. Depending on the part of the B-BBEE scorecard and the impact on the score, this expenditure may very well bring no tangible benefit to the donor;
- If the B-BBEE spend can validly be classified as ‘expenditure incurred in production of income’ then the tax deduction should certainly be claimed under 11(a) and not 18A. And the B-BBEE points will also be awarded. Oddly, there is no-one complaining about B-BBEE and tax ‘double dipping’ in this circumstance!
- 11(a) should be the first choice, really, if its requirements can be satisfied as, unlike the deduction of 18A (which is capped at 10% of taxable income) there is no ceiling on 11(a) deductions. Except for the need to show a profit to shareholders, of course.
- And if the requirements of 11(a) cannot be satisfied, ie if it is not expenditure incurred in production of income then (looping right back) there is no benefit, it is a donation and the 18A deduction should be claimed.
For those who would like to view the recording of the webinar which gave rise to these thoughts, please see it on Corporate Foundations webinar – ngoLAW – Nicole Copley (ngolawsa.co.za).
MENTAL HEALTH SUPPORT FOR NGOs
Coming to you from our good friend SADAG and Tshikululu, a resource that deserves to be shared:-