The South African Revenue Service (SARS) has recently been on a drive to modernise and simplify tax processes. This evolving best practice of third-party data requirements has been extended to include Public Benefit Organisation’s (PBO’s), enabling SARS to develop an efficient process in granting Section 18A (S18A) deductions to taxpayers and help prevent claims abuse.
S18A Background
S18A of the Income Tax Act is an important provision in South African tax law that encourages donations to qualifying PBOs as it provides the donor with an income tax deduction for qualifying donations not exceeding 10% of the donor’s taxable income for the tax year of assessment.
In order to however qualify for the deduction the donation must be:
- to a SARS registered S18A PBO, and utilised specifically for the undertaking of Public Benefit Activities (PBAs) outlined in Part II of the 9th Schedule of the Income Tax Act, within South Africa; or
- to a conduit PBO providing funds or assets to a S18A PBO as above;
- in cash or in-kind (however not in the form of services rendered);
- paid or transferred during the year of assessment;
- gratuitous and made with no reciprocal obligation/no personal benefit for the donor.
Qualifying PBOs should only issue S18A receipts if the above criteria are satisfied. This would then allow the donor to claim a deduction against their taxable income for the respective year.
S18A Abuse
Given that a S18A certificate represents a deduction (and therefore a reduced tax liability in the hands of the donor), SARS has faced numerous challenges due to various forms of abuse, including:
- S18A receipts incorrectly issued by non-qualifying PBO’s
- S18A receipts incorrectly issued for services rendered, or non-qualifying PBAs
- The overstatement of donation values for income tax deduction purposes
- Fictious S18A certificates submitted by taxpayers
This potential abuse is thus expected to be curtailed via the recently implemented IT3(d) third-party submission of S18A data to SARS directly by PBO’s. The result of which will be the pre-population of donation information on the income tax returns of taxpayers, contributing directly in curbing some of the abuses noted above.
S18A Additional Requirements
One of the steps recently implemented by SARS in this area was the introduction of additional information required on all S18A receipts effective 1 March 2023, as per the Government Gazette No. 48104, dated 24 February 2023.
In addition to the previously required information that PBO’s were to maintain and provide to SARS, the additional information now required in terms of section 18A(2)(a)(vii) of the Income Tax Act is as follows:
- Donor nature of person (natural person, company, trust, etc);
- Donor identification type and country of issue (in case of a natural person);
- Identification or registration number of the donor;
- Income tax reference number of the donor (if available);
- Contact number of the donor;
- Electronic mail address of the donor;
- A unique receipt number; and
- Trading name of the donor (if different from the registered name).
IT3(d) Submissions
These additional fields are a critical element required for the recently introduced IT3(d) submissions, making it mandatory for S18A approved PBO’s to electronically submit this information to SARS as third-party data providers. SARS thus requires PBO’s to submit applicable 18A data on donations received (i.e. information recorded on 18A receipts) via specified channels and formats.
This will ensure donation amounts are pre-populated on donor income tax returns to facilitate the tax deduction of donations and prevent 18A claims abuse.
The third-party data channels implemented by SARS will enable PBO’s to submit applicable S18A data to SARS through the Direct Data Flow channel with the following submission channels available, dependant on the number of records to be submitted:
- eFiling – 50 or fewer records submitted via an IT3-01 and IT3-02
- Hypertext Transfer Protocol Service (HTTPS) bulk data filing – 51 to 50 000 records or files up to 10MB
- Connect Direct (C:D) bulk data filing – more than 50 000 records or files larger than 10MB
PBO’s are required to submit 18A data with all the prescribed information for 18A receipts issued from 1 March 2023 to 29 February 2024 by 31 May 2024. In future PBO’s are expected to make such submissions bi-annually on 31 October and 31 May 2024.
Practical Challenges
Even though stakeholder consultation has been underway with the NPO sector since early 2022 and SARS had, during the 2020/2021 filing season implemented the automated IT3(d) submissions process successfully with the Solidarity Relief Fund, it does seem that the majority of NPOs are unaware of these requirements and are facing a number of practical challenges with the submission process, including:
- 18A data integrity and donor information
- Data file format and conversions
- IT3 tax type activation
- Enrolment of the various user roles (i.e. Business Administrator, Technical Administrator, Technical User)
- Third-party data provider registration
- Technical support and practical guidance
A number of NPO’s are also yet to update their S18A receipts for the additional requirements which became effective 1 March 2023. In fact, many have not prepared for this process, with donor information proving to be a challenge. Those responsible for managing NPOs, including Board members, are encouraged to familiarise themselves with the new processes and to actively initiate plans for the submission.
Currently, the S18A receipting process is mostly manual in nature and it is not uncommon to find NPOs still using pre-printed receipt books. NPOs need to prioritise data readiness and dedicate resources to extract data from the current receipting systems.
With privacy and the protection of personal information constantly in the limelight, there are also concerns amongst stakeholders that donors may be reluctant to divulge certain of the compulsory information required for a valid S18A receipt, which could then potentially discourage donations. Donor engagement and education would thus be critical to ensure the donor community is fully aware of and understand the need for such information and the benefits it brings.
IT3(d) Support
Turning Point has recently hosted webinars on “Decoding IT3(d) Submissions”, and since our successful pilot testing with SARS in 2023, we have been leading the practical IT3(d) implementation and troubleshooting efforts within the SARS production environment. As a SARS approved Submitting Entity we’re well positioned to assist your PBO and manage the entire IT3(d) process, including:
- Third-Party Data Provider registrations
- Activation of IT3 tax type on eFiling
- Data conversion of historical S18A data to electronic format
- 18A Excel/CSV SARS compatible file conversions
- Filing of IT3 returns
- Activation of HTTPS secure file upload link
- Technical SARS & IT support
- Soon to be launched fully automated web-based 18A receipting platform
Video Overview
Watch our detailed video overview on IT3(d) compliance for PBOs:
Infographic
For a quick and easy reference, download our infographic on IT3(d) compliance:
Complying with IT3(d) reporting is now a critical aspect of maintaining your PBO’s financial health and operational integrity. Turning Point Chartered Accountants is here to support your organisation through this new requirement. Don’t let compliance challenges divert you from your mission. Contact us today to ensure your submissions are timely, accurate, and hassle-free.
For more information or to get a quote, email us at REZA@TPCSA.CO.ZA or visit our website at WWW.TPCSA.CO.ZA. You can also call us at 031 207 8674 or 083 282 8786.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)