To claim the full 15 points allocated to enterprise development contributions, contributions (as adjusted by reference to a 'benefit matrix') must, as from an inception date, amount to 3% of the Net Profits After Tax ('NPAT').

In the case of socio-economic development contributions, the target is 1% of NPAT. 

In both cases, contributions are measured on a 'running average' basis as from the inception date.  That date will usually be 9 February 2007, being the date of promulgation of the B-BBEE Codes of Good Practice.

The effective cost of making enterprise development ('ED') and socio-economic development ('SED') contributions to an enterprise is in many cases exacerbated because contributors fail to recognise that the cost of such contributions may be deducted from the income earned by the enterprise for tax purposes.

If you fail to claim a tax deduction, you forego a 'tax subsidy' towards the end of the contributions.

Where the contributions take the form of grants, the expense is often compounded because the contributors mistakenly take the view that grants with few or no strings attached are subject to donations tax at 20% of the grant, payable by the donor.

The costs attendant upon SED and ED contributions are deductible and even outright grants should not be subject to donations tax.

The deductibility of costs in the nature of ED and SED contributions is sufficiently affirmed by the Warner Lambert SA case, decided by the Supreme Court of Appeal in 2003:

Warner Lambert SA was a South African subsidiary of a US parent company.  Warner Lambert SA, and its parent, subscribed to the principles of the Sullivan Code, propounded by the Reverend Arthur Sullivan, and adopted by the US Congress under the Comprehensive Anti-Apartheid Act in 1986.  The Code set out to oblige South African subsidiaries of the US companies to make contributions towards redressing the wrongs of apartheid, including the adverse socio-economic consequences of apartheid.

At issue in the Warner Lambert SA case was, amongst other things, the deductibility of contributions made by Warner Lambert SA towards community projects and emerging black enterprises during 2000 to 2003.

In concluding that the costs in question were deductible, The Supreme Court of Appeal took into account that if Warner Lambert SA were not to comply with the Sullivan Code, it would face closure by its parent, or a sale of its shares by the parent. Against this background, the Supreme Court of Appeal held that the expenses in question were 'bona fide incurred for the performance of the appellant's income producing operation and formed part of the cost of performing it.'

Therefore, ED and SED contributions made pursuant to the BB-BEE Codes stand on the same footing.  It is, in many cases, simply and starkly so that the preservation of the enterprise turns upon the attainment of a respectable B-BBEE status.  In other cases, where it is not a stark matter of preserving the enterprise, the attainment of an enhanced B-BBEE status is calculated to improve the enterprise's trading position.

Turning to the question of donations tax, it is a common misconception that donations tax will be attracted merely because no quid pro quo is exacted from the recipient of a grant.  The absence of a quid pro quo from the recipient is not enough - before a grant will constitute a donation, it must be established that it was motivated by 'sheer literality' or 'disinterested benevolence'.  If the grantor receives 'realistic consideration' from any other quarter, the absence of a quid pro quo from the recipient of the grant will not be fatal.

The above principles were laid down by the Supreme Court of Appeal in 2004 in the case of Estate Welch.  Their application to SED and ED contributors should be plain.  Such contributors do not make their contributions out of disinterested benevolence; they contribute to score B-BBEE points.  The BB-BEE regime offers them a 'realistic reward' by way of scorecard points.

So:  Claim your deductions, and do not tender donations tax to SARS.  You are entitled to the deductions, and SARS is not entitled to donations tax.

Ends

 

Issued by: Claire Densham Communications On behalf of Mazars Moores Rowland

Contact Mazars: Wouter Scholtz or Noleen Hepburn (marketing): 021-405-4000

Contact Kerkhoff Densham: 021-914-9353; 082-906-3201 (Claire Densham)