Understanding the VAT Treatment of Donations received by Associations Not for Gain
Understanding the VAT Treatment of Donations received by Associations Not for Gain
By Nonhle Thabethe, Junior Consultant
The term ‘association not for gain’ is defined in section 1 of the VAT Act. In essence, the definition includes religious and educational institutions of a public character as well as other societies, associations and organisations that are carried out otherwise than for purposes of gain to any proprietor, member or shareholder.
Associations not for gain are largely dependent on fund raising initiatives and donations received from donors.
The cash flow of most associations not for gain is not infinite and has to be managed very carefully. Any unforeseen or unplanned expenditure like a tax liability (including penalties and interest) could have a detrimental impact on the existence of the association not for gain.
It is therefore crucial that the association not for gain understands the VAT implications of funding and donations received.
In this article the VAT implications of donations received by an association not for gain are considered. A ‘donation’ is defined under section 1(1) of the VAT Act as a voluntary payment, whether in cash or kind, made to any ‘association not for gain’ for its operational purposes. These payments do not provide any ‘identifiable direct valuable benefit’ to the donor or anyone connected to them, and they exclude payments from public authorities or municipalities. Donations play a vital role in social responsibility initiatives. To comply with the provisions of the VAT Act, it is essential to classify donations correctly.
What qualifies as a donation?
For a payment in cash or otherwise to be considered a ‘donation’, it must be completely gratuitous. This means it should be given out of genuine kindness, with no expectation of anything in return other than perhaps a simple acknowledgement (thank-you) or a small token of appreciation.
What does not qualify as a donation?
If a payment in cash or otherwise is made with the expectation of receiving something in return or if the recipient gives the donor a valuable benefit, it may thus be treated as a taxable supply for VAT purposes. Such a transaction, whether in cash or in kind, counts as ‘consideration’ as defined, and is subject to VAT.
In simple terms, ‘consideration’ refers to anything received in exchange for the supply of goods or services. ‘Consideration’ is deemed to include VAT, meaning that any payment for a taxable supply is deemed to contain a VAT component. Donations made to an association not for gain are expressly excluded from the definition of ‘consideration’ for VAT purposes provided the donations are a ‘donation’ as defined. A payment that is not a ‘donation’ as defined will be treated as ‘consideration’ if it can be linked to a supply and VAT will need to be charged at the standard rate thereon, unless the supply is zero-rated (including if it is a ‘grant’ as defined) or exempt. It is also important to note that the VAT treatment is best determined by having regard to the substance i.e. the true nature of the payment, rather than the label used to describe it in document such as a deed of donation.
In the case of payment that is partly gratuitous and partly for goods or services, it should be considered whether the payment should be apportioned between the amount attributable to the goods and services and the amount offered as a donation. The Constitutional Court, in Capitec Bank Limited v Commissioner for the South African Revenue Service [2024] ZACC 1 has held that “the fact that the Act makes no explicit provision for apportionment in this situation is not dispositive against apportionment” and that “the scheme of the Act, in circumstances such as the present, itself suggests an apportionment”. This finding by the court applied in a very different context, but there may be a rational basis to apply it in this context.
The facts, circumstances and the wording of the funding agreement may result in apportionment being appropriate and the basis for the apportionment will depend on what is fair and reasonable in the circumstances.
If the payment is a ‘donation’ as defined, it will not have any VAT implications because donations are not subject to VAT. This means the association not for gain does not need to account for VAT nor issue a tax invoice to the donor.
If a payment is not considered a ‘donation’ but is ‘consideration’ for the supply of goods or services, the association not for gain must account for output tax according to section 7(1)(a) of the VAT Act unless an exception (zero-rating) or an exemption applies. In terms of section 64 of the VAT Act, the amount received from the donor will be deemed to be a VAT-inclusive amount. This would mean that the association not for gain would not ultimately retain the full payment received to fulfil its charitable activities but will instead only retain the donation less the tax fraction (the portion of the amount that constitutes VAT). As an illustrative example, a payment of R100 will be reduced by R13 (R100 less the tax fraction of 
and the R13 will have to be paid to SARS by the association not for gain as output tax.
Where VAT is attributable to the payment, the association not for gain also needs to provide a valid tax invoice as specified in sections 20(4) and 20(5) of the VAT Act. Additionally, the person making the payment may be entitled to deduct input tax if the supply is used or consumed for purposes of making taxable supplies. Failing to correctly determine the true nature of the payment can result in SARS raising assessments and imposing interest and penalties.
What constitutes an identifiable direct valuable benefit?
Whether there is an ‘identifiable direct valuable benefit’ to the donor varies from situation to situation. For instance, if the recipient must provide advertising or promotional services in exchange for the payment, this would usually create an identifiable direct valuable benefit for the donor. However, an agreement stipulating exposure (i.e. publicity) could still be properly interpreted as a donation if the payment was subject to conditions that require it be used for the objectives of the association not for gain. The success or otherwise of the advertising would be irrelevant; the mere requirement that those services must be rendered by the association not for gain would mean that the payment would not be gratuitous and cannot be classified as a ‘donation’.
The receipt of tangible benefits, such as merchandise or gifts from the association not for gain or services rendered by the association, such as invitations to exclusive events, regardless of the monetary value, may be an identifiable direct valuable benefit and potentially subject the donation to VAT.
Associations not for gain can consult their advisors to structure their agreements with donors in a way that part of the funding received is a consideration for a supply of a good or service and the other part is for the donation (if this is their intention). This approach will help the association not for gain to clearly allocate the funding between the consideration for the goods or services and the donation, ensuring that VAT is applied correctly to the appropriate portion of the funding.
As discussed above, on the base of Capitec it may be possible to argue that the funding received by an association not for gain can be apportioned to distinguish between the consideration for goods or services and the donation, even if no explicit wording is included.
Of course, taxpayers and ultimately courts could arrive at different conclusions based on the wording of the law as properly interpreted, and SARS is not the authority that exclusively decides on a reasonable interpretation.
By clearly understanding what constitutes a benefit, associations not for gain can ensure the appropriate VAT treatment of donations and compliance with the VAT Act. Here are some examples to help clarify what qualifies as a donation.
Example 1
Bright Futures Initiative, an association not for gain and a VAT vendor, hosts a sponsored walk and run event in which participants raise funds to support its mission of providing warm blankets to persons in need. All contributions are made voluntarily, with no expectation of receiving anything in return.
Bright Futures is not obligated to account for output tax on the contributions received, as the donors do not anticipate any benefits in exchange. In other words, the contributions made by the donors are entirely voluntary and gratuitous.
Example 2
Bright Futures Initiative organizes a ‘giving day’ event where individuals provide funding of any amount within a 24-hour period. This funding is made unconditionally by the funders. Bright Futures publicly recognizes funders who contribute over R5 000 on its website.
Although it may be argued that a benefit is created for the funders, the funding itself is unconditional and not connected to any specific, tangible benefits received by the funders. Therefore, it is submitted that these payments should be seen as donations as defined and Bright Futures is not required to account for output tax on them.
Example 3
Unity Bank (a VAT vendor) provides financial contributions worth R500 000 to Bright Futures Initiative to help fund its efforts in supplying blankets to persons in need. In return, Unity Bank requests that Bright Futures promote their services by displaying branded materials with a market value R50 000 on Bright Futures’ website.
Unity Bank may be seen as receiving advertising and promotional services from Bright Futures. However, the full amount of R500 000 does not relate to the advertisement, only R50 000 of the R500 000 amount relates to the advertisement. Therefore, the amount of R500 000 can be apportioned to reflect the consideration of R50 000 which relates to a supply of a service being advertising, and VAT will need to be charged on this portion. Then the rest of the amount being R450 000 will be donation as there is no identifiable direct valuable benefit associated with it. In these circumstances, Bright Futures Initiative must issue a tax invoice of R50 000 to the bank for the services provided being advertising and account for output tax.
Conclusion
Understanding the VAT implications of donations is vital for both donors and associations not for gain. After all, the taxpayer bears the burden of proving which amounts are taxable and which are not. All funding and contributions received must be properly interpreted to determine if they constitute ‘donations’ as defined. By prioritizing these aspects, associations not for gain can navigate VAT complexities effectively while staying focused on their mission and maintaining community trust.
Should you require any assistance regarding the VAT treatment of donations, do not hesitate to contact BDO Tax Services.