“I like to pay taxes. With them, I buy civilization.”
― Oliver Wendell Holmes Jr.
I was recently asked to explain, in less than a page, how charitable donations have an effect on taxation. Here is my attempt. Please note that what is contained below is a very general summary and should not be followed on the basis that it may constitute legal advice.
The general principle is that, in order to calculate your taxable income, you add up your gross income and deduct all allowable expenses. Some allowable expenses are specifically dealt with in the Income Tax Act but, generally speaking, these are all expenses legitimately incurred in the production of your income. However, in order to incentivise charitable giving, the legislature has allowed you to deduct from your gross income, any donations made to registered charitable institutions. These donations are therefore treated as a business expense, even though they are not incurred in the production of your income. Qualifying donations also attract Broad Based Black Economic Empowerment points, but that is not the subject matter of this post.
If you are an individual, as opposed to a company, you can deduct the prescribed rebate from this amount before you get your taxable income.
Once you have calculated your taxable income, you then apply a prescribed percentage depending, either, on whether you are an individual, a trust or a company/close corporation and if you are an individual, on what tax bracket you fall into.
So let’s assume that you are a company with a gross income of R1 million per year, with expenses of R500 000 per year.
Your taxable income would be R500 000 to which you would apply a prescribed rate of 28%. You would therefore pay R140 000 in tax.
If, however, you made qualifying charitable donations of R10 000, your taxable income would be R490 000 and you would pay R137 200 in tax.
Therefore, you can effectively set off your charitable donations against your income in order to reduce your tax liability.