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Before your company makes a Christmas donation, make sure you understand the Vat implications so SARS doesn't penalise you

by , 19 December 2014
In 2005 SARS changed the definition of a donation. This means it also changed its Vat implications. In terms of the law, you'll pay Vat either at 14% on a donation or not at all. To determine whether you should apply Vat or not, you need to make sure you understand what a donation is under the Vat Act.

According to the Act, a donation is a payment your company makes to a non-profit organisation (not for gain). This payment can be money or something else, such as time or goods.

The important thing is there's no benefit for your company when you make this payment. Whether you donate to a non-profit organisation or not.

So how do you work out what the Vat implications of a donation are?

To do this, you first have to know which organisations count as non-profit...

 
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These are the types of organisations SARS considers as non-profit 

 
Here's what an association not for gain essentially is:
 
Any religious institution;
Any society, association or organisations that carries on, not for profit, including clubs, societies, charities, professional bodies and welfare organisations; or
An educational institution of a public character.
 
If you make a donation to one of these types of organisation and you don't get anything in return then this donation is Vat exempt. This means the organisation you're donating to won't pay output tax and you can't claim input tax. 
 
But if you get something in turn, such as advertising, then you must get a tax invoice from the organisation. It must apply the 14/114 tax fraction to work out how much tax it must pay over to SARS. 
 
You can find out more about the 14/114 tax fraction in the Practical Vat Loose Leaf Service
 
The good news here is you can claim input tax on this kind of donation. 
 
This means you can get a little bit of your money back. 
 
But what happens if you want to donate to a foreign donor funded project?
 
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The general rule is that if you're registered as a Vat vendor, you must include Vat at the standard rate or zero-rate, in the price of your goods and services. And then if you have a Vat liability, you pay the assessed amount over to SARS in your defined tax period.
 
 
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Here's what happens if you donate to a foreign donor funded project

 
Foreign donor funded projects are international donation funds. These get money from donors all over the world. 
 
They must fall under an international donor agreement for it to affect South African tax.
 
So if you donate to such a project and it has a Vat registration number, the Vat is zero-rated. This means you need to get a tax invoice from the project and you can claim input tax on it. 
 
 
Knowing these Vat implications when you make a donation will help you take advantage of input tax claims when you can. 
 
For more information on the Vat implications of donations, check out the Practical Vat Loose Leaf Service
 

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