Why do we give money to registered charities?
I had two dear friends who were just good people. One day they came to me and introduced me to their new cause; an orphanage taking care of young children.
Now financial advisors are cynical people, the most cynical are those doing estate planning such as executors of estates and trustees on trusts. I put myself in their number.
My first question to this person was are you a registered non –profit company?
The answer was no. My second question to clarify this were you a Section 21 company?
At this point the person nodded so I asked the final question: “do you issue a section 18A tax certificate”. The blank look told me no. I immediately became my cynical self. Rightly so, as it transpired this person was indeed looking after the children displayed. However they were not orphans, and her scam meant she was making over R80 000 per month in donations from very caring people, which ended up being spent on items that were clearly not for those or any other children. She had also never registered a section 21 company.
Why is it important to know if the charity is registered?
The South African revenue service (SARS) gives companies incorporated for a public benefits purpose, special treatment. Not for profit organisations play a significant role in society as they take a shared responsibility with Government for the social and development needs of the country. These companies may be churches, orphanages, animal care organisations and so forth. SARS recognises keen and loving people can do a better job at doing “good work” than the state, and so encourage people to donate to these organisations. The organisations are held to a standard. For example; income and property are not allowed to be distributed to the NPC’s incorporators, members, directors or officers – excluding any reasonable compensation for services rendered by them.
The registration of a non-profit company (NPC) is a formal process whereby an application is submitted to the Companies and Intellectual Property Commission (CIPC). The process includes the reservation of the company name, the payment of a fee, and submission of certain documents, including a Memorandum of Incorporation (MOI). SARS will not give a non-profit status to that company unless it ensures that the assets and income must be used to advance the NPC’s stated objectives. A minimum of three persons must be the incorporators, and sign the MOI. The company formation is subject to a special set of fundamental rules for NPCs, to ensure the company does what it should do. All non-profits are required to register as a Public Benefit Organisation (PBO) with Sars to receive a tax exemption, and this tax exemption must be approved by the Sars Tax Exemption Unit (TEU).
Non-profit companies meeting these requirements receive preferential tax treatment. Preferential tax treatment is designed to assist non-profit organisations by augmenting their financial resources. The South African Government to encourage generosity by the public, has provided a tax deduction for certain donations made by taxpayers by allowing section 18A approval. This allowed deduction from taxable income is capped at 10% of taxable income and only permitted if the donation is supported by the necessary section 18A receipt issued by the organisation or, in certain circumstances, by an employees’ tax certificate reflecting the donations made by the employee. Donations lower the taxable income and so reduce tax payable.
Making your charitable giving a part of your overall financial plan is advisable for many reasons. The first is it reduces your personal taxes and the second gives you peace of mind that your hard earned money is doing what you want it to do. Sars has published an up-to-date list of all Section 18A approved PBOs on their website at www.sars.gov.za.
Donations made to a charity that is not registered as a PBO can result in you having to pay donations tax and may put you into a situation where you are supporting a person who ends up living a better lifestyle than you on your money.