I have been approached to prepare the annual financial statements for a community organisation registered as a not for profit company but not registered as PBO with the SARS. The company derived 95% of its income from donations and only a small amount fro
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
The tax consequences of a donation are not specifically dealt with in the Income Tax Act. As there is a receipt one must apply the principles of the definition of gross income to determine if it will have tax consequences. Our courts have laid down the law in this regard. According to Judge Smalberger (in CIR v Pick ‘n Pay Employee Share Purchase Trust) “... any receipts accruing to the Trust were not intended or worked for, but purely fortuitous in the sense of being an incidental by product. They were therefore non-revenue. That makes them accruals of a capital nature falling outside the definition of "gross income" in the Income Tax Act, and therefore not subject to tax.” Judge Southwood in CSARS v Wyner agreed with this and stated the principle as follows: “This means that receipts or accruals will bear the imprint of revenue if they are not fortuitous, but were designedly sought for and worked for...”
We accept that this is not a voluntary payment in respect of services rendered as that would be gross income irrespective of its capital nature. But, based on the information provided, we submit that the non-profit company will not, in this instance be able to prove that it was fortuitous. It will therefore be gross income – that is why section 10(1)(cN) provides an exemption, but that requires approval by SARS. As this was not obtained, the amounts received will potentially be subject to tax.