Donations and funds established to assist with the COVID-19 disaster relief efforts: The special tax dispensation

In the President’s announcement on 23 March 2020 regarding the lockdown, he indicated that private donors have also pledged funding with the aim of providing assistance to the public. The Explanatory Memorandum on the Disaster Management Tax Relief Bill, 2020 (Draft) (Draft EM), states that the pledge funding envisaged by private donors may take the following forms:

• Loan funding by a fund to SMMEs on favourable terms. The terms attached to the loans range from an initial zero interest with interest only being charged in later years to long-term repayment periods.
• Financial assistance provided to SMMEs, but the amount will not be paid directly to the SMMEs but paid in terms of weekly allowances directly to the employees of approved SMMEs in order to ensure that jobs are retained, while the loan obligation remains with the SMMEs.

In order to prevent the tax leakage that may arise due to the various funding structures and mechanisms that will be used by private donors to assist with COVID-19 relief measures, Government proposes a streamlined special tax dispensation for funds established to assist with COVID-19 relief measures. The streamlined special tax treatment for funds will be similar to the current special tax dispensation applicable to public benefit organisations (PBOs) that provide disaster relief as envisaged in sections 10(1)(cN) and 30 read together with Part I and Part II of the Ninth Schedule to the Income Tax Act 58 of 1962 (Act).

Currently receipts and accruals of a PBO, other than from certain business undertakings or trading activities, are exempt from income tax. Donations made to a PBO are exempt from donations tax and donations made to the PBO may be tax deductible in the hands of the donor, where the donation complies with section 18A of the Act. However, the amount of tax that is deductible in respect of the donations in any year of assessment is limited to 10% of the taxable income of that donor. These special tax dispensations for PBOs are not automatic and are subject to a pre-approval process by the South African Revenue Service (SARS).

COVID-19 disaster relief funds deemed to be PBOs

In terms of section 10(1)(cN) of the Act the receipts and accruals of any PBO approved by the Commissioner for the SARS (Commissioner) in terms of section 30(3) are exempt from normal tax. The receipts and accruals are exempt to the extent that they are derived otherwise than from a business undertaking or trading activity, or from any undertaking or activity if the undertaking or activity is integral and directly related to the sole or principal object of that PBO.

A PBO is defined in section 30 of the Act as any organisation which is a non-profit company or trust or an association of persons of which the sole or principal object is carrying on one or more public benefit activities. Such activities must be carried on in a non-profit manner and with an altruistic or philanthropic intent. No such activities should be intended to directly or indirectly promote the economic self-interest of any fiduciary or employee of the organisation other than by way of a reasonable renumeration payable.

The Draft EM states that for a period of four months beginning from 1 April 2020 until 31 July 2020, COVID-19 disaster relief funds will on application and approval by the Commissioner be deemed to be PBOs as contemplated in sections 10(1)(cN) and 30 of the Act, subject to the criteria contained in these sections. This means that the receipts and accruals of COVID-19 disaster relief funds will be exempt from income tax and donations made to or by the COVID-19 disaster relief funds will be exempt from donations tax.

Deduction in respect of donations made to COVID-19 disaster relief funds

In terms of section 18A of the Act, any taxpayer may deduct from its income so much of the sum of any bona fide donation in cash or of property made in kind which was actually paid or transferred during a year of assessment to a PBO which carries on in South Africa any activity contemplated in Part II of the Ninth Schedule to the Act. In terms of Part II of the Ninth Schedule to the Act, one of the listed public benefit activities is the provision of disaster relief. Once a COVID-19 disaster relief fund is on approval deemed to be a PBO in terms of section 30, section 18A will be applicable to the COVID-19 disaster relief fund.

The Draft Tax Relief Bill provides “that there must be allowed to be deducted, in accordance with section 18A in the determination, for the purposes of that Act, of the taxable income, as defined in section 1 of that Act, of any taxpayer, as defined in that section, so much of any bona fide donation by that taxpayer in cash which was actually paid during the year of assessment by that taxpayer to a COVID-19 disaster relief trust”.

This means that for the period of four months, donations made to COVID-19 disaster relief funds will qualify for a tax deduction in the hands of the donor, subject to the section 18A limitation. The limitation being that the donor may deduct in any year of assessment the amount of the donation made limited to 10% of the taxable income of that donor before a section 18A deduction or section 6quat deduction.

What is important to note is that the Draft Tax Relief Bill refers to cash donations and not donations of property in kind. Only once the final legislation is adopted by Parliament will there be certainty as to whether donations other than in cash made will also be provided for under the proposals.

Loans advanced to SMMEs by COVID-19 disaster relief funds

Where loans are made by a COVID-19 disaster relief fund to SMMEs and the amount of the loan is not paid directly to the SMME but is paid in terms of weekly advances to the employees of the SMME, it would be difficult for the SMME to withhold employees’ tax in respect of the allowances paid to its employees.

In terms of the Draft Tax Relief Bill it is proposed that for a period of four months, “any amount received or accrued from a COVID-19 disaster relief trust, must be deducted or excluded from remuneration, as defined in... [the Fourth] Schedule, in calculating the balance of remuneration as referred to in... [paragraph 2(4) of the Fourth Schedule]”.

This means that the allowances paid by the COVID-19 disaster relief fund will not result in employees’ tax withholding obligations by the SMME. The payments made to the employees will be treated as income in the hands of the employees and the payments will be subject to tax in the hands of the employees in accordance with the applicable tax brackets on assessment. The loan obligation will remain with the SMME. The reason for this measure is to ensure that the jobs of the employees of the SMMEs are retained.

Status of COVID-19 disaster relief funds at the end of the four-month period

At the end of the four-month period, the provisions set out in the Draft Tax Relief Bill will cease to apply to COVID-19 disaster relief funds. In terms of the Draft Tax Relief Bill, any COVID-19 disaster relief funds that are not dissolved and the assets thereof not distributed on or before 31 July 2020 will be deemed to be a small business funding entity in terms of section 30C of the Act.

Members of the public still have until 15 April 2020 to make submissions on the tax relief legislation, including the issues dealt with in the article.