ACT: Income Tax Act 58 OF 1962, Section 18A(2B) AND (2C)
This is part 2 of 2 in this series of articles. Please read part 1 before reading this second article.
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.
EXAMPLE – Obtaining of an audit certificate by an institution, board or body
An entity established as a juristic person by national legislation to conduct research, development and technology transfer to promote agriculture has been approved by the Commissioner as an institution, board or body under section 10(1)(cA)(i).
In addition to conducting research activities contemplated in PBA 8(a) in Part I, the entity provides scholarships, bursaries, awards and loans to deserving students for study or research in agriculture contemplated in PBA 3(o) in Part II. The Commissioner has also granted the entity approval to issue section 18A receipts under section 18A(1)(a)(ii) for donations received or accrued that will be used solely in providing the scholarships, bursaries, awards and loans.
The Auditor-General is required to audit the entity’s accounts under the national legislation establishing and governing the entity.
Outcome:
The entity must obtain an audit certificate confirming that all donations received or accrued during the year of assessment for which the entity issued section 18A receipts were used solely in carrying on PBA 3(o) in Part II in South Africa. It will be acceptable for purposes of section 18A(2B) if the entity obtains the audit certificate from the Auditor-General. The entity must retain the audit certificate as part of its records. The audit certificate must annually be submitted to the Commissioner.
Submission of an audit certificate
A person who willfully and without cause fails or neglects to submit a return or document to SARS, which would include an audit certificate, which is required to be submitted as noted below, is guilty of an offence and on conviction is subject to a fine or imprisonment for a period not exceeding two years. In addition, section 18A(5) and (5B) stipulate various consequences if the Commissioner has reasonable grounds for believing a section 18A receipt was issued in contravention of section 18A(2A) or that a donation for which a section 18A receipt was issued was used for a purpose other than that permitted in that section. Failure to submit an audit certificate may be one of the facts giving the Commissioner reasonable grounds for invoking section 18A(5) and (5B). Most of the consequences in section 18A(5A) and (5B) are, however, triggered only if corrective steps as required by the Commissioner are not taken within the time period provided.
Approved organisations
An approved organisation is not required to submit the audit certificate together with its annual income tax return.
The Commissioner will notify an approved organisation if any supporting documentation, including the audit certificate, is required to be submitted to substantiate any aspect of the income tax return or to determine compliance with section 18A.
The Commissioner may during an audit or investigation, for example, request the following:
• A description of the work performed that formed the basis for the confirmation provided, for example, the extent of the person’s examination of the books of account and of the documents from which the books of account were written up.
• Whether the entries in those books and documents disclose the true nature of the transactions in so far as may be ascertained by that examination, and how the linkage between the funds for which a section 18A receipt was issued and the application of those funds to carry on PBAs in Part II was tested.
• Details of the local or international standards and regulations, if applicable, under which the examination was conducted.
• Confirmation that the person issuing the audit certificate obtained sufficient and appropriate evidence in support of the confirmation provided.
Departments
The accounting officer or accounting authority required to issue the audit certificate for any department issuing section 18A receipts must submit the audit certificate annually to the Commissioner.
Retention of an audit certificate
The audit certificate, whether in physical or electronic form, is generally required to be kept and retained for five years from the date of submission of the income tax return for the year of assessment to which it relates. There, however, are circumstances in which it may be required to be retained for a longer period.
For example, if:
• an income tax return for a particular year of assessment is not submitted as required, the audit certificate must be retained indefinitely until the obligation to submit a return has been complied with and, once the return has been submitted, for five years from the date of submission; or
• a person has been notified of or is aware of an audit or investigation by SARS regarding donations received or accrued, the issue of section 18A receipts or the usage of those donations, the audit certificate must be retained until the audit or investigation is concluded or the applicable five-year period has elapsed, whichever is the later.
A person who wilfully and without cause fails or neglects to retain records as required is guilty of an offence and on conviction is subject to a fine or imprisonment for a period not exceeding two years.
Conclusion
Strict control measures must be applied to donations received by or accrued to approved organisations, agencies, programmes, funds, High Commissioners, offices, entities, organisations and departments for which section 18A receipts are issued, since such donations may qualify for a tax deduction from the taxable income of taxpayers and as such represent a cost to the fiscus. 62 Approved organisations, agencies, programmes, funds, High Commissioners, offices, entities, organisations and departments are therefore required to maintain proper control over the application and spending of such donations.