Audit certificates: What you need to know?

The South African Revenue Service (“SARS”) issued Interpretation Note 112 on 21 June 2019 to provide guidance on the interpretation and application of the audit certificate requirement as set out in section 18A of the Income Tax Act.[1]

For background purposes – section 18A provides a taxpayer with an income tax deduction for bona fide donations paid to certain approved organisations such as qualifying public benefit organisations (“PBOs”) and other approved agencies, programmes, funds, the High Commissioner, offices, entities or departments.

The requirements needed to qualify as a PBO are set out in section 30 of the Income Tax Act. Part I of the Ninth Schedule to the Income Tax Act lists a variety of activities that are considered to be public benefit activities (“PBAs”) for purposes of section 30. Only certain of these PBAs will result in the approved organisation qualifying for section 18A status. These activities are listed in Part II of the Ninth Schedule.

In terms of section 18A(2A), these approved organisations may only issue section 18A receipts to the extent that the donation received or accrued during the year of assessment will be used to carry on PBAs as set out in Part II of the Ninth Schedule.[2] For conduit PBOs (i.e. PBOs set up to provide funding or assets to other PBOs), 50% of the donations must be distributed within 12 months and the funds must be used by the second PBO to carry on Part II PBAs.[3]

Approved organisations are allowed to conduct a combination of Part I and Part II activities. In order to ensure that section 18A receipts are issued only in respect of donations that would be, and ultimately are, used for purposes of Part II PBAs, approved organisations are required to obtain and retain an audit certificate.[4] This is seen as a reasonable requirement given the fact that the person making the donation could claim a tax deduction if issued with a section 18A receipt and the approved organisation receiving the donation is exempt from income tax.

To date, section 18A did not include detailed requirements with regards to the audit certificate. Examples include the information that must be contained in the audit certificate and from whom the audit certificate should be obtained in certain instances. As a result, uncertainty exists on how to comply with the audit certificate requirements. Interpretation Note 112 was therefore issued to provide guidance in this regard.

Approved organisations should therefore carefully consider Interpretation Note 112 to ensure that the audit certificate meets all the relevant content requirements, is obtained from the correct body or authority and is timeously submitted to SARS.

[1] No. 58 of 1962

[2] Section 18A(2A)(a)

[3] Section 18A(2A)(b)

[4] Section 18A(2B)

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)