There appears to be considerable confusion about tax and donations which probably arises from the fact that if you make a donation there are two questions you need to ask am I liable for donations tax on this donation and can I deduct the amount of the donation against my other taxable income for income tax purposes?
These are two quite distinct questions because the rules governing donations tax are completely different from those governing the income tax deduction.
Donations tax is payable at a rate of 25 percent of the amount of any donation you make, which does not qualify for an exemption, that is, donations that are specifically donations tax free.
A donation, in this context, includes not only giving something, be it money or assets, without expecting anything in return but also the giving of something for an inadequate return (for example, selling something at below its market value).
The exemptions are numerous, and I will list only some of the more common ones:
* You, as a natural person, are entitled to make donations to any recipients of your choice up to a total of R25 000 a year, without having to pay donations tax. (If you pay towards the maintenance of a person, and the Commissioner of the South African Revenue Services considers the amount you contribute to be reasonable, then this will also not be subject to donations tax);
* You can donate to your spouse;
* You can donate out of assets not located in South Africa provided that they were acquired by you out of non South African funds. Specifically, the assets must have been acquired before you became a resident of South Africa for the first time, or by inheritance from a non-resident, or out of the proceeds from the disposal of either of these, or out of funds derived from a trade you carry on outside South Africa, or if the donation is of immovable property and you acquired it more than 10 years prior to the donation;
* You can donate to science, art, charitable, educational or religious institutions; and
* There are also a series of other bodies to which you can donate without incurring donations tax.
However, just because you may donate to these various parties without paying donations tax does not mean that you may deduct them for income tax purposes.
The only type of donations that you may deduct against your taxable income are donations to specified educational institutions. The donation must be for the use of the institution at its discretion. You may not specify that it must be used for a specific student, for example.
The educational institutions which qualify will give you a certificate, which will say that you are allowed to claim the donation for income tax purposes under section 18a of the Income Tax Act.
The amount you may deduct is limited to the greater of R500 or two percent of your taxable income before you make a deduction for medical expenses.
So, if you make a donation of R5 000 to a qualifying education institution, assuming you don't have any medical expenses, and your taxable income is R120 000 before taking into account the donation, you may only deduct R2 400 of the donation. In this instance many people would not make a donation above this amount. If the donation was to a charity you would not be able to deduct any of the amount.
The debate then arises as to whether the Income Tax Act should provide more encouragement to individuals and businesses to make donations to needy causes...but that is a debate for the politicians.
I have dealt with the position regarding donations if you are a natural person.
The limits for both donations tax and income tax differ slightly if the donor is a company or close corporation, but the deductions are still limited, and the resulting debate the same.