The South African Revenue Service (“SARS”) issued Interpretation Note 112 (“IN112”) 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] This was due to the fact detailed information on this requirement was not included in section 18A, resulting in uncertainties regarding compliance with these provisions.

Section 18A allows for an income tax deduction for donations made to certain approved organisations. These organisations include approved public benefit organisations (“PBOs”), certain specified agencies, programmes, funds, the High Commissioner, offices, entities or organisations[2]  (“approved organisations”) as well as certain government departments.[3]

However, the term “audit certificate” is not defined in section 18A. In terms of the guidance, this constitutes a physical document that provides an opinion on the use of donations for which the relevant entity issued section 18A receipts.

It is recommended that the person from whom an audit certificate is obtained should be independent of the relevant entity and suitably qualified. The IN112 lists examples of such persons for the different types of approved entities. For example, for PBOs, it may be an independent auditor or reviewer[4], while for trusts, it may be a bookkeeper not employed by the trust.

In general, the audit certificate should express an opinion confirming that all the donations for which section 18A certificates were issued were used solely for public benefit activities (“PBAs”) in Part II of the Ninth Schedule to the Income Tax Act.[5] In terms of IN112, additional information that should be included are details of the approved entity, details of the person issuing the audit certificate and details of the work performed. The latter includes, amongst others, a description of the work that formed the basis for the opinion reached and the tests performed. SARS recognises that detailed testing poses practical difficulties but requires an express statement that sufficient and appropriate audit evidence was obtained.

Please note that PBOs are not required to submit the audit certificate with its annual income tax return, though SARS may request it at any point. A government department must, however, submit the audit certificate annually. IN112 furthermore provides guidelines on the retention of audit certificates (generally for a period of 5 years).

The take away is that entities with section 18A status should carefully consider IN112 to ensure that they comply with all the requirements with regards to audit certificates.

[1] No. 58 of 1962

[2] Section 18A(1)(bA)

[3] Section 18A(1)(c)

[4] Appointed under the Companies Act No. 71 of 2008

[5] Section 18A(2B) with reference to section 18A(2A). Please see distribution requirement for PBOs providing funds or assets to other PBOs (referred to as “conduit PBOs”)

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)

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