SARS rules on BEE donations-related tax consequences

Section 55 of the Income Tax Act of 1962 defines a ‘donation’ as any gratuitous disposal of property, including any gratuitous waiver or renunciation of a right. As such, many NGOs as part of their fundraising strategy have offer section 18(a) tax exemption certificate and BEE points for cash contributions they receive from the private sector. In light of a recent SARS ruling, it would appear that charities have been dealt a blow. It has emerged that companies will no longer score meaningful BEE points by giving to the poor and receive a section 18(a) certificate.

In October 2016, SARS issued a binding private ruling (BPR 253) regarding the donations-related tax consequences of a proposed transaction which would introduce a BEE shareholder into a group of companies in order to:

benefit all of the entities within the group in respect of their BEE scorecard ratings; and
increase the profitability of a South African resident company.

The other parties to the proposed transaction were:

the seller (Y) – a South African resident trust that holds all of X’s shares;
the company (A) – a South African resident non-profit company; and
the acquirer (B) – a South African resident company whose shares are wholly owned by the South African resident non-profit company.

SARS had to decide whether the disposal of Y’s shares in X at a discounted price and the subsequent acquisition of the shares by Y in B at a nominal subscription price – in order to introduce the acquiring company into Y’s existing group structure for BEE purposes – would constitute a ‘donation‘ under the Income Tax Act.

NPI Commentary

It is interesting to note that South African case law does deal with this particular issue and until now SARS had not given a clear opinion with regards to BEE donations. In a 2005 Supreme Court case (Welch’s Estate v the C: SARS), it was held that that the law makers did not eliminate from the statutory definition of a donation the common-law requirement that the disposition be motivated by pure liberality or disinterested benevolence and not by self-interest or the expectation of a “quid pro quo” of some kind. As the disposal of X’s equity shares to B aims to improve the group’s BEE scorecard ratings, among other things, the donation is not motivated by pure liberality or disinterested benevolence and is not done for self-interest or with the expectation of a quid pro quo. It is likely for this reason that SARS ruled that the transactions would not constitute donations as defined in the act. NGO’s are therefore advised not to claim that they can offer a section 18(a) exemption certificate and BEE points at the same time. It is either one or the other!!!!