Donors seeking a tax deduction need to carefully consider the implications where an approved Public Benefit Organisation ("PBO") performs its activities outside South Africa. This article explores the deduction pitfalls faced by donors making donations to approved PBO's who conduct their activities outside our borders.
The PBO rules in section 30 of the Income Tax Act, 1962 ("the Act") were relaxed during 2008 by deleting the requirement that 85% of that organisation's activities must be carried out for the benefit of persons in South Africa. Many foreign tax exempt charitable organisations use South Africa's infrastructure and stable economic climate as a launch pad for conducting their activities in the rest of Africa and our Government has responded to this by providing, in certain instances, tax exempt status to these organisations.
The question that arises is whether donations to approved PBO's, conducting their activities outside South Africa, will be deductible under section 18A to the Act.
Conducting a public benefit activity
Section 30 to the Act prescribes the requirements for an organisation to be approved as a PBO which, inter alia, include the carrying on of one or more public benefit activities, as described in Part I of the Ninth Schedule ("Part I") in a non-profit manner and with a philanthropic intent. Further requirements are that the PBO may not promote the economic self interest of any employee or person in a fiduciary position and the activity must be for the benefit of, or widely accessible to the general public at large.
There is no indication, either in the Act or the Tax Exemption Guide for Public Benefit Organisations in South Africa ("the PBO Guide") that the term 'general public' only refers to that of South Africa. There is further no clear indication that the ultimate beneficiary of that public benefit activity listed in Part I should be a South African citizen, community etc. Despite being silent on this point is safe to assume that South Africans do not necessarily have to be the beneficiaries of the PBA under Part I, otherwise the deletion of the '85%' rule would have served no purpose.
Deductibility of donations
The question now turns to the deductibility of donations to an approved PBO conducting public benefit activities outside South Africa.
Section 18A(1) to the Act provides for a deduction of donations in the form of cash or certain types of assets made, inter alia, to PBO's approved under section 30(1), provided that the donor is in possession of a valid receipt and it does not exceed 10% of taxable income.
Furthermore, section 18A(1)(a) states that the approved PBO's activities must be listed under Part II of the Ninth Schedule ("Part II") and that the public benefit activity must be carried on "in the Republic". Many taxpayers make the mistake of assuming that conducting the activities listed under Part I is sufficient to secure a deduction. The reference to conducting a public benefit activity "in the Republic" is repeated under section 18A(1)(bA)(i) which provides for a deduction of donations made to certain "specialized agencies" defined in the Convention on the Privileges and Immunities of the Specialized Agencies, 1947 set out in Schedule 4 to the Diplomatic Immunities and Privileges Act, 2001. Our experience has shown that SARS interprets "in the Republic" as the application of donated cash and assets in, and ultimately benefiting South African communities, persons etc which is a theme followed in the PBO Guide.
The fact that a foreign organisation or agency has an administrative or strategic base in South Africa from which it conducts cross-border activities, would not qualify as carrying on public benefit activities "in the Republic". There is support for SARS' view if one considers the potential erosion of the South African tax base. One the one hand tax exempt status is provided to a PBO conducting activities outside South Africa and on the other hand a potential donation deduction is given to a donor where that donation is not for South Africa's benefit.
The compliance conundrum
The PBO registration process also includes an application for approval to issue certificates for the purpose of section 18A. An applicant is specifically required to declare the extent to which public benefit activities will be conducted outside the Republic. The relevance of this declaration is of far more importance to a donor than it is for a PBO, for the reasons I explain below.
Section 18A places an onerous compliance burden on a donor and for that matter an organisation accepting the donation, to ensure that the deduction requirements are met. The most onerous and impractical requirement is contained in section 18A(2)(vi), taking into consideration the recent amendments to the PBO rules.
Section 18A(2)(vi) requires the organisation accepting the donation to certify that the receipt is issued for purposes of section 18A and that the donation has or will be used exclusively for the object of the organisation in carrying out the relevant public benefit activities. The certification is in the form of an annual audit certificate which confirms that all donations received in respect of which certificates have been issued, were utilised in carrying out the stated public benefit activities in Part II. There is no obligation on a PBO to certify where it conducts its activities, apart from the declaration in the original application.
If the public benefit activities were conducted outside South Africa, no deduction is available under section 18A despite the fact that the PBO issued a certificate. Since there is no obligation on the PBO to declare where the donation will be applied it is often impossible to know whether the donation will qualify for a deduction.
Ruaan van Eeden