24 April 2020 by Tax & Exchange Control Alert

Increased relief for taxpayers aiding in the fight against COVID-19

The advent of the COVID-19 pandemic has resulted in an influx of donations being made by taxpayers to associations involved in the fight against the adverse effects of the pandemic. To the extent that these associations are listed in section 18A(1) of the Income Tax Act 58 of 1962 (Act), taxpayers may be allowed to claim a deduction from their income in respect of the amount donated (subject to certain limitations).

The Solidarity Fund plays a significant role in the efforts to combat the pandemic. In order to encourage donations to this Fund, extended tax relief (ETR) measures have been announced by President Cyril Ramaphosa and National Treasury. In particular, it has been announced that the relief provided by means of section 18A of the Act and paragraph 2(4)(f) of the Fourth Schedule to the Act will be temporarily increased.

Relevant sections of the Act

Section 18A of the Act provides that a taxpayer may deduct from its income so much of the sum of any bona fide donation (made in cash or property in kind), which was actually paid or transferred during a year of assessment to an entity listed in section 18A(1). Included in this list are, amongst others, PBOs, United Nations (UN) entities and any department of government of South Africa that has been approved by the Commissioner of SARS for purposes of this section.

The deduction that may be claimed in respect of qualifying donations in terms of section 18A is subject to a limitation of 10% of the taxable income of a taxpayer (excluding any retirement fund lump sum benefit, retirement fund lump sum withdrawal benefit and severance benefit) as calculated before allowing any deduction under this section or section 6quat(1C). To the extent that the donation made exceeds the deduction allowable in that year of assessment, the balance will be carried forward to the next year and allowed as a deduction in that year.

It should be borne in mind that in order to claim this deduction, a certificate in terms of section 18A(2)(a) must be obtained from the entity to which the donation is made and used in support of the deduction so claimed. A certificate issued in this regard must meet the requirements that are prescribed in section 18A(2)(a).

Paragraph 2(4)(f) of the Fourth Schedule to the Act provides similar tax relief in respect of employees who make donations to qualifying section 18A entities and from whom employees’ tax is withheld. This paragraph states that when calculating the amount of employees’ tax to be withheld, an employer must deduct from an employee’s remuneration (amongst others) the amount of any donation made in terms of section 18A by the employer on behalf of the employee. This deduction is limited to 5% of the employee’s remuneration after deducting:

1)    contributions by the employee to any pension or provident fund; and

2)    any contribution to a retirement annuity fund by the employer on behalf of the employee or by the employee.

By applying paragraph 2(4)(f) to the calculation of employees’ tax that is to be withheld, the employee benefits by receiving the benefit of the section 18A deduction at an earlier stage. In this way, the employer also derives a benefit as its employees’ tax liability that it must pay over to SARS is reduced.

Where the donation made on behalf of the employee exceeds 5% of their remuneration as calculated above, the employee will have employees’ tax withheld in respect of the amount of the donation that exceeds the permitted 5% deduction. No further relief will be given to the employee in respect of this portion of the donation until their tax return is submitted at the end of the year of assessment. However, at the end of the year of assessment during which the donation was made on behalf of the employee and employees’ tax was withheld in respect thereof, section 18A may be relied upon by an employee to claim a deduction of that portion of their donation that exceeded 5%. Where this is done, the 10% limitation prescribed in section 18A still applies.

The amendments announced by the President and the Minister of Finance

On 21 April 2020, the President announced that taxpayers who donate to the Solidarity Fund will be entitled to claim up to an additional 10% as a deduction from their taxable income. On 23 April 2020, National Treasury issued a Media Statement outlining and expanding on the further tax measures that are to be implemented to combat the COVID-19 pandemic (Media Statement). In addition, these further measures were highlighted and explained in a draft document that was presented to the Standing Committee on Finance (Draft Document). The extended relief highlighted in these documents in respect of donations that are made is as follows:

  1. The tax deductible limit for donations made in terms of section 18A of the Act will be increased by an additional 10%, with the result that taxpayers may claim a deduction of up to 20% of their taxable income for donations made to the Solidarity Fund. This will apply only in respect of donations made in the 2020/21 year of assessment; and
  2. In the calculation of the employees’ tax to be withheld by an employer, the limit of 5% on the value of donations that may be factored into that calculation will be increased to a certain degree, depending on the circumstances of the employee. The Media Statement has indicated that this increase will be up to a maximum of 33.3% of an employee’s remuneration. However, the Draft Document is silent with respect to the extent to which the deductible limit will increase. Clarity in this regard will have to be provided in the draft legislation. This increase in the amount that may be deducted will only apply for a limited period and only in respect of employees who request their employers to make donations on their behalf to the Solidarity Fund.

Comment

The introduction of this ETR will be welcomed by taxpayers contributing to the fight against the COVID-19 pandemic and is likely to encourage further donations.

Although it is presently uncertain to what extent the amount of a donation that may be factored in by an employer in calculating the employees’ tax to be withheld will be increased, it is likely that it will be a maximum of 33.3% given the recent trend amongst officials, executives and employees in South Africa who are donating 33.3% of their salaries to the efforts to curb the effects of COVID-19.

This employees’ tax relief measure will lessen the cashflow constraints of employee donors considerably as their employer(s) will not be liable for employees’ tax in respect of the portions of employees’ salaries that is reduced by means of the donations made. However, the application of this increased tax relief is dependent on each individual employee’s circumstances and it is not yet apparent what circumstances will be taken into account in this regard.

It should be noted that the announcement expressly stated that the ETR applies only in respect of donations made to the Solidarity Fund and as such, taxpayers will not be entitled to claim the ETR in respect of donations made to other entities listed in section 18A(1) (including those associations that constitute COVID-19 disaster relief trusts as defined in the Draft Disaster Management Tax Relief Bill). Whether the exclusion from the ETR of donations to COVID-19 disaster relief trusts other than the Solidarity Fund will be legislated remains to be seen. However, in the interim, taxpayers wishing to benefit from the ETR should be mindful that at present, it only applies to donations made to the Solidarity Fund.

Taxpayers should also take cognisance of the fact that the ETR is available for limited time periods only. In respect of section 18A, only those donations made to the Solidarity Fund during the 2021 year of assessment will qualify for the increased tax deduction of up to 20% and this deduction will be claimed by taxpayers when their tax returns for the 2021 year of assessment are submitted. The ETR pertaining to paragraph 2(4)(f) of the Fourth Schedule will apply only in respect of specified months during the 2021 year of assessment, however, it is as yet uncertain in respect of which months employers may apply it to their calculations.

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