Many companies in South Africa are generous givers, even during these trying COVID-19 times. During the annual festive holiday season giving to staff, clients and suppliers, as well as to charitable organisations, is a widespread practice that aims to convey appreciation and build relationships.
Whether you are thinking of annual bonuses for employees; Christmas parties for suppliers; or corporate gifts for your top clients, there are tax implications that should be considered – from tax deductions to VAT implications! For this reason, it is important to consult a professional before you implement any festive season giving this year.
“Think of giving not as a duty but as a privilege.” (John D. Rockefeller Jr.)
Christmas is a time for giving, and in our local business environment, as well as in many other markets around the world, it may even be unofficially expected of companies to give generously to their employees, to their clients and suppliers, and to the communities in which they operate. Many companies give generously in these ways, but may not be aware of the tax implications of their generosity.
In this article, we briefly look at some of the tax implications of various forms of giving, to emphasise that before any corporate giving decisions are made, companies should seek professional advice about the tax implications.
Giving to employees
- Company Christmas party: For many employees the annual office Christmas party or lunch is a highlight: a great meal, free drinks and the opportunity to mingle socially with colleagues. Although the costs of such an event would have to be carefully considered, this would be a tax-deductible expense, regarded as a non-taxable occasional meal.
- Gifts: Whether you are considering gift vouchers, physical presents or intangible gifts, there is no minimum value below which employer-provided gifts are tax free. If it can be regarded as an asset, it will be seen by SARS as a taxable benefit in the hands of the employee.
Some examples include gift vouchers, prizes or awards; physical items such as a mobile device; and intangible gifts such as flights or accommodation. This applies whether the gift is given to an employee or an employee’s family member, such as a spouse or child. The cost to the employer of any such gift must be reflected as a taxable fringe benefit on the employee’s payslip, and PAYE must be calculated and deducted.
There are some exceptions. For example, in the case of a long service award (15 years or more), the first R5 000 of the cost of such a gift is not taxable, but any amount in excess thereof is taxable as described above. Other possible exceptions include where the employer incurs no cost in conferring the gifts, or where the gifts are utilised by the employees for business purposes. However, even these simplified scenarios are subject to complex considerations and should first be discussed with a professional.
- Bonuses: When considering giving annual bonusses or “13th cheques”, remember that a bonus is taxed at the same rate as other remuneration. This means that the amount of the bonus will be added to an employee’s annual salary to determine the rate of tax payable for the year. However, the bonus amount might push some employees into a higher tax bracket, significantly eroding the amount of the bonus the employee receives after tax. Be sure to get professional advice on structuring bonuses to be tax efficient.
Giving to clients/suppliers
- Christmas functions: Where clients or suppliers are entertained at a Christmas function, expenses such as meals, venue hire and live entertainment can be claimed as a tax deduction. However, this is only allowed where the taxpayer can prove that expenses were incurred in pursuit of business. It will be necessary to keep a comprehensive schedule of the entertainment expenses along with the date, the venue, the company and people entertained, and the purposes of that entertainment (for example prospecting for a new client) to prove to SARS that the expenses were genuinely business-related.
In the past, this deduction was prone to abuse. Consequently, a claim for entertainment expenses is likely to be flagged for investigation by SARS, and taxpayers should not risk this unless they have verified their tax position with a specialist and are certain they are able to prove the expenses claimed are again, genuinely business-related.
In addition, input VAT cannot be claimed on entertainment expenses, including but certainly not limited to business lunches and dinners; annual functions; and expenses incurred for entertaining clients at restaurants, bars and night clubs.
- Gifts: Many companies show their appreciation and build relationships with clients and suppliers with corporate gifts that can range from bottles of wine to keyrings. These expenses could be tax deductible as marketing expenses or as cost of sales expenses, but the onus will rest on the taxpayer to prove that these expenses were incurred in the production of income.
Giving to charities
- Donations: Before making a donation, consider that there may be donations tax implications. A company will not incur donations tax for the first R10,000 per annum in donations. However, any amounts over this limit are taxed at a flat rate of 20% on the value of the donation up to R30 million, and at a rate of 25% on donations over and above R30 million. Furthermore, any donations made to a registered PBO (Public Benefit Organisation) are not subject to donations tax, even for amounts over the limits set out above. The PBO must have been approved by SARS – have a professional check.
The deduction may, however, not exceed 10% of the donor’s taxable income during any year of assessment. Should the company (donor) have given more than 10% of taxable income in one year, the excess over 10% can be carried over to the next year.
Staff can also get tax relief on their PAYE through “payroll giving” whereby the employer donates on their behalf up to 5% of remuneration to qualifying section 18A PBOs. The donation relief will be reflected on the employee’s IRP5 at the end of the year.
Ask for professional advice to structure your company’s donations in the most appropriate and tax-efficient manner. You may also require assistance to declare and pay donations tax, as it does not form part of the business’ normal tax returns. Following a donation, you will need to submit a donor declaration (IT144 form) and pay any donations tax owing by the end of the month following the month during which the donation was made.