New from SARS: “third party returns” by 18a organisations
In the next step towards closing down 18A fraud, SARS has introduced a new tax filing requirement for organisations issuing 18A receipts (and for trusts which ‘vest’ an amount in a named beneficiary)- the filing of “third party returns”.
What is a “third party return”?
These are information returns (so reports filed with SARS in a specific format) and they are currently required to be filed by banks, medical schemes, and other entities as part of their tax compliance obligations.
For example, banks and other financial institutions in South Africa are required to submit third party returns to SARS (the IT3(b) and IT3(c) returns) which give information about interest earned, dividends paid, and other investment income earned by their customers. Similarly, medical schemes are required to submit third party returns such as the IT3(m) return, which provides information about contributions received from and benefits paid to their members.
These third party returns are used by SARS to verify the information provided by the bank customers and medical aid members when these taxpayers file their individual tax returns. The information reported in these returns helps SARS in its efforts to detect and prevent tax evasion, and to ensure that taxpayers are accurately reporting their income and deductions.
So, a “third party return” is a sort of tax return which is not about your own tax affairs, but about the tax affairs of others (your customers, members and now donors) and helps SARS to connect the dots and check that people are not making false claims in their tax returns.
SARS issued a draft Notice in April 2023, adding to the list of the organisations needing to file what are called third party returns. The new additions to the list of organisations which must, when the final Notice is issued, submit these returns is:
- Organisations which have 18A (donor deductibility) status and which have issued 18A receipts within the relevant period; and
- Trusts which are established or managed in South Africa and which ‘vested’ any amount in a beneficiary during the relevant period.
The process of rolling these requirements out is in the testing phase and the first date by which submissions will be due is only end February 2024 (in respect of the period 31 Aug 2023 to end Feb 2024). SARS is, however, calling for early adopters to assist in testing their systems (and the organisation systems) and for voluntary submissions to be made. If the organisation you work with is likely to have innate complexities which will make this process difficult, or lack of technical expertise and support, we suggest that you do volunteer and make these returns before they are officially due, as the SARS systems will be refined and updated based upon the practical examples they process in their systems.
Before getting into the details, it is good to know that the main aim of SARS in all of this is not to make the lives of NGOs more difficult, but to make giving and getting 18A deductions easier for donors, while clamping down on fraud. The end-game is that, when donors come to file their tax returns, the fields for 18A donations made will be pre-populated for them, based upon the information submitted by the recipient 18A organisations. Also, the likelihood of a need for an audit or for supporting documents to be filed by donors will be greatly reduced, as the system will independently verify the tax deductions claimed.
Another important point to note is that SARS has not so far proposed any penalties for non-compliance with the requirement to file- they anticipate that there will be tweaks and accommodations to be made, and want to encourage participation so that they can make the necessary adaptations. Early adopters who make errors or who battle with the requirements need not fear that there will be SARS penalties for mistakes or technical issues.
Will our tax-exempt organisation have to submit an 18A third-party return?
Not all tax-exempt organisations and not even all tax exempt organisations which have 18A status will have to submit these new returns- SARS is only interested in the information of SA taxpayers (so, individuals and corporates) who have made a donation to an 18A organisation, and requested an 18A receipt to be issued to them.
18A organisations whose funding all comes from overseas donors, or whose funding is all ‘earned’ income (such as school fees) or whose income is from the state need not worry about this extra filing requirement, as it is not applicable unless an 18A receipt is issued.
As the issuing of 18A receipts introduces this (and other) extra regulatory and administrative requirements, the first response is to look at your practice or policy around 18A receipts. There are many organisations who issue them as a matter of course, for all donated income, and who do not stop to examine whether an 18A receipt is appropriate or required for that specific donation.
If the organisation you serve receives donations from a mixed field of donors (local, foreign, foundations, corporates, individuals etc) then it is important to classify donors (and donations) by whether an 18A receipt is requested and issued or not, and then keep a separate record of all donations for which the 18A receipt is issued, so that you will have the information to hand to make these third party returns, when they become compulsory.
We are a trust which issues 18A receipts- do we have to do twice the number of third-party returns?
There are two different types of third party returns which could be required from trusts:
- one about the donations made to it (the IT3(d)) and
- one about the donations it has made (the IT3(t)).
So there is no doubling up on filing duties, just that trusts are required to track both incoming and outgoing donations and may be required to file both sorts of third-party returns.
For a trust, the question about whether third party returns will be required for funds donated to it is answered in the same way as for any other organisation, and the table we have given here applies. If the trust you serve is solely funded from offshore that third party return will not be applicable to you.
Regarding the IT3(t) third party return, this is only required regarding:
Any amount vested in a beneficiary including income (nett of expenditure), capital gains and capital amounts distributed.”
SARS has in mind here a situation where there is a named beneficiary which has been ‘vested’ with funds under the terms set out in the trust deed (or will). The main group targeted are business trusts and family trusts with named beneficiaries which receive distributions out of the funds of the trust.
In terms of trusts set up for charitable or other non-profit purposes, this return will only be required if the trust is making donations (not spending funds in carrying out a project or paying for services) and there is a specific beneficiary which has a vested right to receive support or funding from that trust, and a payment has been made to that beneficiary.