Tax implications of donating to flood victims-Akosombo dam spillage

4 December 2023

The recent spillage of the Akosombo dam and the subsequent flooding caused a lot of damage and suffering. Many people lost their homes and livelihoods. This prompted many individuals, companies, groups and associations to come to their aid in various ways. This shows how humanity cares for its own. The humanitarian actions and gestures are costs that are borne by these benevolent donors, which can amount to millions of GHS for some of them.

Generally, these are treated as donations. However, do the tax laws regard all these as donations that can be deducted from their taxable income? In other words, are they taxable or not in the hands of the donor? Imagine, donating items worth millions of GHS at your own expense and having to pay taxes on the contributions made. The purpose of this article is to explain the best way to make such humanitarian donations to ensure that they are treated as tax deductible expenses or non-taxable expenses.

Section 100 of the Income Tax Act, 2015, Act 896 (as amended) is the section that deals with contributions and donations to a worthwhile cause, which means that not all donations are considered as tax deductible donations. According to that section, tax deductible donations are donations that are made for a worthwhile cause approved by the Government. In practice, if a donation is not clearly specified in the tax laws, the donors have to write to the Commissioner-General (CG) of the Ghana Revenue Authority to inform him of the donation and request approval to treat the donation as tax deductible before the year of assessment in which the donation is made. This will ensure that the donation can be deducted when calculating and filing the tax return of the person. The worthwhile causes that are pre-approved by the government are as follows:

a. a charitable organization duly approved by the Commissioner-General;

b. development of any rural area or urban area;

c. sports development or sports promotion;

d. a scheme of scholarship for an academic, technical, professional or other course of study; and

e. any other worthwhile cause approved by the Commissioner-General.

Our focus in this article will be on only three out of the five worthwhile causes.

A charitable organization duly approved by the Commissioner-General.

The Commissioner-General has the discretionary power to approve an organization as a charitable organization and has a set of criteria for the approval. These include:

a. the entity is set up to operate as:

- a charitable institution that is of a public nature

- a body of persons formed for the purposes of promoting social activities or sporting activities

- a religious institution that is of a public nature or

- a registered sporting club

b. the entity has a written constitution that prohibits it from:

- being politically active or using its platform to engage in party politics

- being used for private benefits

Therefore, donations to the flood victims through a charitable organization duly approved by the Commissioner-General should automatically qualify as tax deductible donations.

Development of any rural area or urban area

For those who are not able to donate through an approved charitable organization to these flood victims, another option is to use the donation to develop the rural or urban area. For example, the initiative by Citi Fm to resettle these victims by building permanent structures to be used as residential, market, health facilities etc. should easily qualify as development of the area. Therefore, such donations should also be treated as tax deductible donations.

Any other worthwhile cause approved by the Commissioner-General

Contributions and donations that do not fall under the two categories above may belong to this category. Here, the donor must write to the Commissioner-General to seek his confirmation that the purpose of the donation is a worthwhile cause and can be treated as tax deductible. However, this is risky, because the Commissioner-General may not approve the donation as a worthwhile cause, in which case the donor will have to pay taxes on it. The application and approval must occur before the end of the year of assessment that the donation relates to. In our opinion, it is safer to route the donations through an approved charitable organization or to demonstrate that they are for the development of a rural or urban area. The application to the Commissioner-General for approval as a worthwhile cause should be a last resort.

Quantification of the contribution or donation

Donations or contributions in cash are quite straightforward. The complications arise when the donations are in kind, such as building materials, food items, medical supplies, clothing etc. Generally, these may be valued using market values. It is therefore important to have the evidence of the valuation of these items readily available when they are requested by the tax auditors during tax audits.

Our recommendation

To avoid the complexity of having to route the donations/contributions to ensure that they are all deductible for tax purposes, we recommend that the government through the Ghana Revenue Authority issues a directive that donations/contributions to the victims of the dam spillage should automatically qualify as deductible expenses.

This was authored by SineCera. SineCera is firm of chartered accountants that provide tax, business advisory, accountancy and corporate secretarial services in Ghana. Reach us on info@sineceragh.com, +233 509380617. Thank you.