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Johannesburg - Don't make the mistake of thinking that your company's do-good expenses are automically tax deductible.
Many South African companies contribute to the upliftment of society through corporate social responsibility expenditure (CSR). But as entities which want to make as much profit as possible for shareholders, they may also have a business benefit in mind with their CSR spend.
You would expect the government to grant a full income tax deduction on this - but it all depends on the purpose for which the CSR expenditure was made.
For example, the South African Revenue Service (Sars) is likely to give its nod of approval to the provision of bursaries to recipients from underprivileged backgrounds with the specific purpose of meeting your firm's black economic empowerment (BEE) scorecard.
This, says Ilse Gaum, manager for tax at Ernst & Young, is probably because this type of spend meets the requirements of the Income Tax Act, as it's "incurred for the purposes of the taxpayer's trade, in the production of future income and is not of a capital nature".
"Companies should clearly document that the CSR expenditure is incurred for the specific purpose of improving or maintaining their BEE rating," she says. "They should also ensure that the type of expenditure qualifies as allowable CSR expenditure in terms of the company's specific BEE sector charter."
But what if the money is spent for purely philanthropic purposes?
Says Gaum: "In this instance, the expenditure would be classified as a donation and would not be tax deductible under the normal rules relating to operational expenditure as mentioned above. This may also be relevant to a liability for donations tax of 20%.
"A donation may, however, qualify for a tax deduction in terms of the act if it was made to a specified public benefit organisation, which in turn issues so-called section 18A receipts."
This deduction is limited to 10% of the company's taxable income (before any deduction of donations), and does not apply to companies in tax loss positions.
What if CSR expenditure is linked to a publicity campaign? For example, if a company hands out soccer T-shirts bearing its logo to underprivileged schools, would it be able to deduct the cost as advertising expenditure?
Says Gaum: "If the company can prove that the purpose of the T-shirt give-away was to advertise the company through the logo and to increase sales, the expenditure should be tax deductible as being incurred in the production of the company's income, for purposes of its trade and not of a capital nature."
However, CSR costs with the dual purpose of advertising a company's products (or complying with BEE requirements) and social upliftment would fall under the tax portion relating to advertising and the tax portion relating to the donation, says Gaum.
These days most companies incur CSR expenditure and often automatically treat all of it as tax deductible, without proper consideration of merit.
It makes sense to be aware of the rules so that you can minimise your company's tax risk and maximise the tax deductibility of what you spend on social upliftment.
- Fin24.com
Many South African companies contribute to the upliftment of society through corporate social responsibility expenditure (CSR). But as entities which want to make as much profit as possible for shareholders, they may also have a business benefit in mind with their CSR spend.
You would expect the government to grant a full income tax deduction on this - but it all depends on the purpose for which the CSR expenditure was made.
For example, the South African Revenue Service (Sars) is likely to give its nod of approval to the provision of bursaries to recipients from underprivileged backgrounds with the specific purpose of meeting your firm's black economic empowerment (BEE) scorecard.
This, says Ilse Gaum, manager for tax at Ernst & Young, is probably because this type of spend meets the requirements of the Income Tax Act, as it's "incurred for the purposes of the taxpayer's trade, in the production of future income and is not of a capital nature".
"Companies should clearly document that the CSR expenditure is incurred for the specific purpose of improving or maintaining their BEE rating," she says. "They should also ensure that the type of expenditure qualifies as allowable CSR expenditure in terms of the company's specific BEE sector charter."
But what if the money is spent for purely philanthropic purposes?
Says Gaum: "In this instance, the expenditure would be classified as a donation and would not be tax deductible under the normal rules relating to operational expenditure as mentioned above. This may also be relevant to a liability for donations tax of 20%.
"A donation may, however, qualify for a tax deduction in terms of the act if it was made to a specified public benefit organisation, which in turn issues so-called section 18A receipts."
This deduction is limited to 10% of the company's taxable income (before any deduction of donations), and does not apply to companies in tax loss positions.
What if CSR expenditure is linked to a publicity campaign? For example, if a company hands out soccer T-shirts bearing its logo to underprivileged schools, would it be able to deduct the cost as advertising expenditure?
Says Gaum: "If the company can prove that the purpose of the T-shirt give-away was to advertise the company through the logo and to increase sales, the expenditure should be tax deductible as being incurred in the production of the company's income, for purposes of its trade and not of a capital nature."
However, CSR costs with the dual purpose of advertising a company's products (or complying with BEE requirements) and social upliftment would fall under the tax portion relating to advertising and the tax portion relating to the donation, says Gaum.
These days most companies incur CSR expenditure and often automatically treat all of it as tax deductible, without proper consideration of merit.
It makes sense to be aware of the rules so that you can minimise your company's tax risk and maximise the tax deductibility of what you spend on social upliftment.
- Fin24.com
