Donations are typically made for altruistic and philanthropic purposes (gratuitous) by non-natural persons such as companies, close corporations, and trusts. Such contributions are taxable at 20%, with an exemption limit of R10 000 per year. For natural persons, a 20% donation tax is payable if the donation exceeds R100 000 per year.
Public companies and public benefit organizations are exempt from donation tax. In terms of the Income Tax Act, entities that donate to section 18A public benefit and charity organizations are taxed differently and such donations are tax-deductible by the donor as an operational expense.
A contribution made by a Contributor to a B-BBEE beneficiary entity in order to enhance the Contributor’s B-BBEE credentials is not gratuitous as it involves a quid pro quo and is reciprocal (in exchange for B-BBEE credentials). As contributions for B-BBEE purposes are not gratuitous “donations”, such contributions are generally reflected by entities as development grants, sponsorships, enterprise development costs, enterprise facilitation costs, etc.
Irrespective of the classification or description of a contribution for B-BBEE purposes as a “donation”, grant, sponsorship, etc. such contributions are not gratuitous. For this reason, they are not taxable as a donation and are deductible as an expense.
In the event that the contribution is included in the Income and Expenditure Statement as a deductible expense in terms of section 11, read with section 23 of the Income Tax Act, such an expense (contribution) should be excluded for B-BBEE procurement purposes from the Total Measured Procurement Spend (TMPS) of the Contributor as a measured entity (paragraph 5.10 of Statement 400 of the B-BBEE Codes).
The Income Tax Act headings for these two section are as follows:
Section 11 General deductions allowed in the determination of taxable income
Section 23 Deductions not allowed in determination of taxable income
Below is Paragraph 5.10 of Statement 400 of the Amended Code of Good Practice for B-BBEE empowerment-related expenditure.
“All goods and services procured in carrying out B-BBEE. The Total Measured Procurement Spend does not include the actual contribution portion recognised under sections 2.2 and 2.3 of this Statement or Code series 500 but does include any expenditure incurred in facilitating those contributions;”.
For this exclusion from TMPS to be allowed, the contribution amount as expense should be reflected separately in the Income and Expenditure Statement – normally as follows: Enterprise development grant – Statement 400 of the B-BBEE Codes.
Irrespective of the nature of the expense and the tax benefit derived by the Contributing Entity, the Recipient as enterprise development beneficiary should account for such an amount as “other income” and not “operational income”. This would have a material effect on the extent and nature of expenses allowed as deductions by the Recipient in terms of section 11 of the Income Tax Act.
A Recipient entity who accounts for a supplier and enterprise development contribution as operational income could derive a tax benefit, but it may, conversely, place such a Recipient entity into a different B-BBEE enterprise category in terms of annual turnover. This may further impact the procurement points of the donor as a B-BBEE measured entity because the Recipient might no longer qualify as an Exempted Micro Enterprise (EME) or Qualifying Small Enterprise (QSE) supplier, and if detected, the contribution will not be recognised as a qualifying supplier and enterprise development contribution by the B-BBEE measured entity.
Socio-Economic Development contributions
The Contributor Entity (donor)
B-BBEE donations for socio-economic development (SED) purposes can be made to any qualifying non-profit organisation. These charity organisations can be in the legal form of non-profit companies (NPCs), trusts, or associations of natural persons (members). Not all charities are registered or required to be registered as Public Benefit Organisations (PBOs) in terms of section 30 of the Income Tax Act.
From a B-BBEE point of view, SED contributions can be made to non-profit organisations which are not registered (as PBOs) in terms of the Income Tax Act and are not permitted to issue section 18A receipts. Contributions to such non-PBOs will still fully qualify for SED points.
In general, the threshold for donors in respect of donations to PBOs and section 18A entities is calculated as a percentage of the donor’s taxable income (presently 10%) before the donation is made, with substantially more tax benefits to a donor entity as such the donation is fully tax-deductible as an operational expense. Apart from SED contributions to section 18A entities, “donations” to other qualifying non-profit organisations to obtain or enhance B-BBEE credentials are not gratuitous and therefore not taxable as a donation, but are tax deductible as an operational expense by the donor enterprise as alluded to above.
The Recipient Entity (beneficiary)
All charity non-profit organisations, irrespective of whether they are registered to issue section 18A receipts, must apply all their assets and income, however, derived, to advance their stated objectives as set out in their incorporating or governing documents (MoI, trust deed, or constitution). Any donations received and expenses incurred by such non-profit organisations are accounted for in accordance with these non-profit, altruistic and philanthropic principles and the donation as income does not impact the Recipient entity’s B-BBEE category per annual turnover or the donor entity’s B-BBEE compliance.