ACT: Income Tax Act 58 OF 1962, Section 18A(2B) AND (2C)
This article summarises key elements of SARS Guidance Note 112 on the interpretation and application of section 18A(2B) and (2C) in relation to the audit certificate that must be obtained and retained in specified circumstances for section 18A receipts issued by an approved organisation or department.
As the Guidance Note is extensive in detail more than one article will be written.
Background
Section 18A(1) and (2) potentially provide a taxpayer with a deduction for bona fide donations paid or transferred to any approved organisation, agency, programme, fund, High Commissioner, office, entity, organisation or department, if the donation is supported by a section 18A receipt issued by that approved organisation, agency, programme, fund, High Commissioner, office, entity, organisation, or department.
Generally speaking, under section 18A(2A) a PBO, an institution, a board or body or a department may issue section 18A receipts only to the extent that the donation will be used to carry on PBAs in Part II in South Africa or, in the case of a conduit PBO, that 50% of the donations will be distributed within 12 months and that the funds will be used to fund PBOs, institutions, boards or bodies, or departments, which carry on PBAs in Part II in South Africa.
A section 18A receipt issued by an approved organisation, agency, programme, fund, High Commissioner, office, entity, organisation or department is required to include 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 that approved organisation, agency, programme, fund, High Commissioner, office, entity or organisation or, in the case of a department, in carrying on the relevant PBA.
Part I of the Ninth Schedule lists a variety of activities recognised as PBAs for purposes of section 30(1). Part II of the Ninth Schedule lists some, but not all, of the activities listed in Part I for the purposes of section 18A. An organisation may conduct a combination of PBAs in Part I and PBAs in Part II. In this situation, section 18A receipts can be issued only for donations that will be used for purposes of carrying on PBAs in Part II. Concerns arose regarding whether approved organisations and departments in these situations would restrict the issuing of Section 18A receipts to donations that would be used for PBAs in Part II in South Africa.
As a result, the requirement for an approved organisation or department to obtain an audit certificate was introduced as a control measure to ensure that section 18A receipts were issued only for donations received or accrued during the year of assessment8 that would be and ultimately are used for purposes of PBAs in Part II in South Africa. It is not unreasonable to require control over donations for which an approved organisation or department issues a section 18A receipt, since this potentially entitles the donor to claim a tax deduction that has a real cost to the fiscus given that the donee is normally not subject to tax on the donation received.
Section 18A(2B) and (2C) merely refer to an audit certificate. No detailed requirements are prescribed with regard to the information that must be contained on the audit certificate, or from whom the audit certificate should be obtained, with the exception of who must issue it in the case of a department. Thus, uncertainty exists on how to comply with the audit certificate requirement.
What is an audit certificate?
The term “audit certificate” referred to in section 18A(2B) and (2C) is not defined in the Act. Although the term “audit” is defined in the Auditing Profession Act it cannot be linked to the word “audit” in the term “audit certificate” referred to in sections 18A(2B) and (2C), since a definition of a word in the one statute does not automatically or compulsorily apply to the same word in another statute.
The term “audit certificate” will be considered below within the context and purpose of sections 18A(2B) and (2C).
The ordinary meaning of:
• “audit” is “an official inspection of an organisation’s accounts”; and
• “certificate” is “an official document recording a particular fact, event, or level of achievement”.
An audit certificate in the present context of sections 18A(2B) and (2C) is therefore a physical document, for example, a form, declaration or letter. SARS cannot be prescriptive with regard to the appearance or format of the document, which is representative of the audit certificate.
Circumstances under which an audit certificate must be obtained and retained
Approved organisations
An approved organisation carrying on a combination of PBAs in Part I and PBAs in Part II must obtain and retain an audit certificate confirming that all donations received or accrued in the year of assessment for which section 18A receipts were issued were used solely in carrying on PBAs in Part II. Parts I and II are listed in the Ninth Schedule of the Act.
A conduit PBO providing funds to PBOs, institutions, boards or bodies, or departments carrying on PBAs in Part II as well as to PBOs, institutions, boards or bodies, or departments carrying on PBAs in Part I or other organisations that are not approved by the Commissioner for section 18A purposes, must obtain and retain an audit certificate confirming that all donations received or accrued in the year of assessment for which section 18A receipts were issued were used solely to provide funds to PBOs, institutions, boards or bodies, or departments which used those funds solely in carrying on PBAs in Part II.
9 Under section 18A(2A)(b)(i), a conduit PBO may retain a certain percentage of the donations received or accrued for which section 18A receipts were issued instead of distributing them as noted above.
Section 18A(2B) requires the audit certificate to confirm that all donations received or accrued during the year of assessment for which section 18A receipts were issued were used in the manner contemplated in section 18A(2A), which in the case of a conduit PBO includes section 18A(2A)(b)(i) and (ii). The audit certificate would also need to confirm that all donations received were distributed as required under section 18A(2A)(b)(i).
This confirmation means that despite the retention of any donations by the conduit PBO, it still meets the requirements of section 18A(2A)(b)(i).
An approved organisation carrying on only PBAs in Part II and any conduit PBO funding PBOs, institutions, boards or bodies, or departments carrying on only PBAs in Part II, are not required to obtain and retain an audit certificate.
Departments (governmental in this case)
A department must obtain an audit certificate from the accounting officer or accounting authority contemplated in the PFMA or an accounting officer contemplated in the Local Government: Municipal Management Finance Act, as the case may be, for that department, which issued any section 18A receipts.
The audit certificate must confirm that all donations received or accrued in the year of assessment for which section 18A receipts were issued were used solely in carrying on PBAs in Part II in South Africa.
Agency, programme, fund, High Commissioner, office, entity or organisation
The activities of an agency, programme, fund, High Commissioner, office, entity or organisation contemplated in section 18A are restricted to PBAs in Part II carried on in South Africa. Accordingly, such an agency, programme, fund, High Commissioner, office, entity or organisation is excluded from the requirement to obtain an audit certificate under sections 18A(2B) and (2C).
Persons from whom an audit certificate may be obtained and the acceptability of such a certificate
Approved organisations
The Act does not specify from whom an approved organisation may obtain an audit certificate and what constitutes an acceptable audit certificate. These matters can be assessed only during an audit or investigation on a case-by-case basis. Although the legislation does not prescribe that the person issuing the audit certificate must be independent, it is a reasonable requirement and implied considering that the audit certificate was introduced as a measure of control in the circumstances discussed in the Approved Organisations detail above. The person issuing the certificate should be independent of the approved organisation and suitably qualified, and appropriate work must have been performed to enable that person to provide the required confirmation on the use of donations for which section 18A receipts were issued in the audit certificate.
In terms of “appropriate work” having been performed, section 18A(2B) and (2C) require the audit certificate to confirm that all donations received and accrued in respect of which section 18A receipts were issued were used as contemplated in section 18A(2A). Confirmation regarding the use of all donations for which section 18A receipts were issued is required. Ultimately, whether appropriate work has been conducted can only be assessed during an audit or investigation on a case-by-case basis.
Whether a person is suitably qualified may involve a consideration of the person’s qualifications and experience, taking into account, for example, the person’s accounting, audit and tax knowledge and experience. The person issuing the audit certificate, however, is not limited to a “registered auditor” as defined in the Auditing Profession Act.
Content of an audit certificate
The Act prescribes that the audit certificate must, assuming the work performed and the underlying facts permit this to be done, confirm that all donations for which section 18A receipts were issued were used solely for PBAs in Part II in South Africa.
An audit certificate for a conduit PBO must confirm that donations for which section 18A receipts were issued were used solely to provide funds to any PBOs, institutions, boards or bodies, or departments that used those funds solely in carrying on PBAs in Part II and that all donations received for which section 18A receipts were issued were distributed as required under section 18A(2A)(b)(i).
In addition to the above-prescribed confirmation, and although not prescribed in the Act, the audit certificate should at a minimum contain the following details:
- The name and address of the approved organisation or department.
- The reference number issued to the approved organisation or department by the Commissioner for purposes of section 18A.
- The taxpayer reference number of the approved organisation.
- The year of assessment to which the audit certificate applies.
- Full name, signature and designation of the person responsible for issuing the audit certificate.
- Details of the section 18A receipts issued by the approved organisation or department, for example, the number of section 18A receipts issued and the total rand value of the donations for which section 18A receipts were issued.
- The date on which the audit certificate is issued.
This concludes part 1 of 2 in this series of articles.