A portion of a monthly payment to a PBO is a donation: is it deductible under section 18A?
24 June 2015
Posted by: Author: SAIT Technical
Author: SAIT Technical
Q: We have a
client which is a registered PBO in terms of section 30 of the ITA and has
approval to issue 18A certificates. The PBO is considering setting up a loyalty
program whereby members can sign up and make monthly payments to the PBO. The
loyalty program entitles the member to a range of promotional offers. In the
terms and conditions for membership of the loyalty program it is recorded that
the monthly payment is equally split into a donation component and a benefit
component, but the member only ever makes one payment per month to the PBO.
Would the donation component of the monthly loyalty program payment qualify for
section 18A approval?
A: We agree with
you – the parties may find it difficult to meet the onus of proof if it is
disputed that there was a bona fide donation.
Section 18A(1) of the Income Tax Act requires that it must
be "any bona fide donation” paid by the taxpayer to an approved public benefit
organisation and where that donation will be utilised "solely in carrying on
activities contemplated in Part II of the Ninth Schedule”.
The definition in section 55(1) of the Income Tax Act is not
relevant to section 18A and the word ‘donation’ (in section 18A) must take it
ordinary meaning. According to Judge
Marais (in the Welsh case) "The test to be applied at common law to determine
whether the disposition of an asset amounts to a donation properly so called
(as opposed to a remuneratory donation) is so well settled that it hardly needs
repetition. The test is of course that the disposition must have been motivated
by ‘pure liberality’ or ‘disinterested benevolence’. As it was put in De Jager v Grunder, ‘Was die
dryfveer iets anders as suiwer vrygewigheid en welwillendheid jeens die eiser,
was dit geen skenking nie.’ Furthermore,
there is a presumption against donations in our law.”
We don’t know what the "loyalty program” entails. The SARS view, in paragraph 23.11 of the
guide that you refer to that "there must be no quid pro quo, no reciprocal
obligations and no personal benefit for the donor…” is based on the section 55
definition, but we agree with them that " if the donee gives any consideration
at all it is not a donation…” So if the loyalty program provides some benefit
to the person participating in it there will not be a bona fide donation. The words ‘ bona fide’ emphasises in our view
Disclaimer: Nothing in this query and answer should be construed as
constituting tax advice or a tax opinion. An expert should be consulted for
advice based on the facts and circumstances of each transaction/case. Even
though great care has been taken to ensure the accuracy of the answer, SAIT do
not accept any responsibility for consequences of decisions taken based on this
query and answer. It remains your own responsibility to consult the relevant
primary resources when taking a decision.