What new rules on tax exemption mean for charitable organisations
In case a charitable organisation is involved in business activities, such income is only exempt from income tax if is applied solely to charitable purposes.
Charity and charitable activities play an essential role in society. That is way the government has provided certain incentives to encourage private sector participation in charitable activities. The law allows organisations that provide donations to deduct against their income such donations subject to certain conditions.
The Treasury recently gazetted the Income Tax (Donations and Charitable Organisations Exemption) Rules, 2024, revoking the Income Tax (Charitable Donations) Regulations, 2007.
The objective of the new rules is to prescribe the procedure for determining the allowability of donations and prescribe the procedures for applying for, processing, granting and retaining an exemption from income tax.
The rules provide a more elaborate and tighter framework to govern donations and charitable organisations. Generally, any institution, body of persons or irrevocable trust of a public character that is established solely for the relief of poverty, distress of the public or for the advancement of religion or education is exempt from income tax subject to meeting certain conditions.
In a new move, the rules provide a restriction on the retention and accumulation of surplus funds by an exempt charitable organisation.
Going forward, an exempt charitable organisation will only be allowed to accumulate surplus funds, from donations and grants, not exceeding the average of 15 percent of its funds in a period of three succeeding years.
This is meant to ensure that donations received by these organisations are utilised for the intended purpose in a timely manner. It is therefore important that exempt charitable organisations proactively manage their donations.
The governing document of these organisations is also required to explicitly state its primary charitable purpose is the relief of poverty, distress of the public, advancement of religion, or advancement of education.
Additionally, it must state the specific charitable activities it intends to carry out to achieve its charitable purpose such as projects to be undertaken and the targeted beneficiaries including the criteria for selecting the beneficiaries.
The rules have introduced restrictions on the allowability of donations. Specifically, for a donor to enjoy a deduction on donations, the donation must not result in a taxable loss and donations to an unrelated exempt charitable organisation should not exceed 50 percent of the total donations made by the donor in the financial year.
Under the previous rules, donations were required to be given in cash to qualify as a deductible expense by the donor for income tax purposes. In a positive move, a donation can now comprise of a benefit conferred on a person in kind, cash, promissory note, mobile money or money transfer in any form.
In case a charitable organisation is involved in business activities, such income is only exempt from income tax if is applied solely to charitable purposes.
Additionally, the business should be carried on in the course of the actual execution of the charitable purposes of the charitable organisation.
The work in connection with such business should also be carried on by those who benefit from the charitable organization’s charitable purposes.
Notably, a charitable organization should make an application for exemption from income tax. If issued with an exemption certificate it is valid for a period of five years.
By and large, the rules have introduced some progressive aspects but also introduced some stringent requirements for donors and charitable organizations.
The writer is an Associate Director at Ernst & Young LLP (EY). The views expressed herein are not necessarily those of EY.
