Companies, as organisations designed for profit maximisation, do not necessarily have the mandate or capacity to actively engage in ESG initiatives in an effective manner. A valuable tool available to corporates to address their selected ESG priorities, is the ability to fund organisations that undertake specific or general activities for the public good.

South Africa’s tax system includes a special dispensation for organisations which do not have a profit motive and instead are solely or mainly aimed at providing public goods. Public benefit organisations (PBOs) approved by the South African Revenue Service (SARS) are exempt from income tax in recognition of the fact that the income of such entities is being applied to fund public goods, in a manner akin to the government’s use of tax revenues.

An important feature of the PBO regime when considering ESG, is that it enables companies to provide donor funding for their selected ESG priorities and receive a tax deduction for such expenditure. This is the case where the PBO to which the company donates has been approved by SARS in terms of section 18A of the Income Tax Act 58 of 1962 (Income Tax Act), and issues the donor with a valid section 18A receipt for the donation.

On 18 November, SARS proposed that additional information be included on section 18A receipts for them to constitute valid receipts entitling the relevant donors to a deduction. Members of the public have until 5 December 2022 to provide SARS with comments on the proposed augmentation of the section 18A receipt requirements.

South Africa’s deductible donation regime

It is noteworthy that not only SARS approved PBOs are capable of issuing section 18A receipts. Other institutions that may do so include amongst others the Government of the Republic of South Africa, a SARS approved institution, board or body, and certain specified United Nations entities. However, PBOs are the most prevalent issuers of section 18A receipts and present the most utility for the pursuit of ESG targets by companies.

To be approved as a PBO under section 30 of the Income Tax Act, the applicant must satisfy, inter alia, the following requirements:

• the entity must be a non-profit organisation, trust or non-profit company, or a branch of a similar entity established in another jurisdiction where it benefits from an income tax exemption;
• the sole or main object of the entity is the carrying on of one or more public benefit activity (PBA), as listed under the Ninth Schedule to the Income Tax Act;
• all PBAs are carried on in a non-profit manner and with altruistic or philanthropic intent;
• no activity of the entity is intended to promote the economic self-interest of any fiduciary or employee of the entity directly or indirectly, otherwise than by way of reasonable remuneration payable to that fiduciary or employee; and
• each PBA is carried on by that entity for the benefit of, or is widely accessible by, the general public.

An organisation that meets the above requirements and makes an application to SARS for approval as a PBO, may be granted tax exempt status regarding its income. However, this does not enable the PBO to receive donations that are deductible by the donor. To be able to do so, the PBO must additionally be approved for the purposes of section 18A.

Section 18A enables PBOs and other selected entities to issue receipts to donors entitling such donors to a deduction of the amount of their donation. The core requirement for approval under section 18A is that the PBO carries on PBAs noted in Part II of the Ninth Schedule to the Income Tax Act or otherwise approved by the Minister of Finance by notice.

The broad categories of the PBAs listed in Part II of the Ninth Schedule are:

• welfare and humanitarian;
• healthcare;
• education and development;
• conservation, environment and animal welfare; and
• land and housing.

Where a donor has made a donation to an organisation entitled to issue a section 18A receipt, that donor is entitled to a deduction of the amount donated upon submission of a valid section 18A receipt issued by the organisation.

Proposed amendments to section 18a receipts requirements

The requirements for a valid section 18A receipt are contained in section 18A(2) and are as follows:

• the reference number of the PBO or other approved entity issued by SARS for the purposes of section 18A;
• the date of the receipt of the donation;
• the name of the PBO or other approved entity which received the donation, together with an address to which enquiries may be directed in connection to such donation;
• the name and address of the donor;
• the amount of the donation or the nature of the donation (if not made in cash);
• a certification to the effect that the receipt is issued for the purposes of section 18A, and that the donation has been or will be used exclusively for the object of the PBO or approved entity for the carrying on of the relevant PBA; and
• such further information as the Commissioner of SARS may prescribe by public notice.

In its draft notice of 18 November 2022, SARS indicated that the following information would be added to the requirements for a valid section 18A receipt:

• donor nature of person (natural person, company, trust, etc.);
• donor identification type and country of issue (in case of a natural person);
• identification or registration number of the donor;
• tax reference number of the donor (if available);
• contact number of the donor;
• email address of the donor;
• a unique receipt number; and
• trading name of the donor (if different from the registered name).

Comment

The ability for companies to select or even create an independent organisation with a specified mandate targeting that company’s ESG priorities is a useful mechanism that allows corporates to directly link the utilisation of funds or assets donated by them, with positive public outcomes. The availability of a tax deduction for this expenditure (which may not have otherwise constituted deductible expenditure) is a strong incentive to utilise this avenue to attain a company’s ESG goals.

The amendments proposed to the information to be contained in section 18A receipts may be aimed at augmenting the administration of the section 18A regime, as greater information regarding the donor noted on a section 18A receipt would increase the ease with which SARS administers the regime.

Greater transparency in this instance can also be in the donor’s interest, as it provides corporates with a verifiable means to highlight their ESG spend. As, the proposed changes would provide a third-party document, which  the donating company could choose to use to fly its ESG flag high.