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An important judgement for public benefit organisations

22 February 2014   (0 Comments)
Posted by: Author: Ben Strauss
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Author: Ben Strauss (Cliff Dekker Hofmeyer)

Fiscal policy, as manifested in the Income Tax Act, No 58 of 1962 (Act), is that philanthropy should be encouraged. The Act achieves this objective by providing that, subject to certain criteria being met and subject to limitations, charitable organisations enjoy a very favourable tax regime and taxpayers who make donations to such organisations may deduct the donations for income tax purposes.

To qualify for the favourable dispensation, an organisation must be approved as a public benefit organisation (PBO) by the South African Revenue Service (SARS). The requirements for obtaining approval are set out in s30 of the Act. Put simply, to be a PBO, an organisation must carry on activities in a non-profit manner, its constitution must contain certain prescribed provisions and it must carry on one of the activities in the closed list of activities set out in Part I of the Ninth Schedule to the Act.

Once SARS has approved an organisation as a PBO, it is not liable for:

  • income tax on its income (subject to limitations);
  • capital gains tax;
  • transfer duty when it acquires immovable property;
  • dividends tax; or
  • the skills development levy.

Once an organisation is approved as a PBO it usually wishes to go one step further to ensure that,to encourage donations to it,taxpayers who make donations to the organisation are able to deduct the value of donations for their income tax purposes. Most non-profit organisations no doubt rely on the philanthropy of outsiders to fund their activities.

Donations to PBOs are tax deductible if the requirements set out in s18A of the Act as read with Part II of the Ninth Schedule to the Act, are met.

The above principles were the subject of a judgment in the Western Cape Tax Court (unreported judgment delivered on 22 January 2014,case number 13254). In that case an inter vivos trust had applied for approval in terms of s30 and 18A of the Act. SARS decided not to grant the approval. The organisation objected to the decision and,when the objection was disallowed, the organisation appealed to the Tax Court.

The Court held that, on the facts of the case, the trust did meet the requirements of s30 of the Act and that it should have been approved as a PBO.

However, the court found that the trust could not enjoy' s18A status', that is, persons who made donations to the trust were not entitled to deduct the donations for tax purposes.The reason why the court found in favour of SARS on that issue is that the trust did not intend to carry on all its activities in South Africa.

With respect, in my view, the finding of the court in relation to s18A of the Act was incorrect.

The Court referred to the deletion in 2008 of the requirement in s30 that at least 85 percent of the activities, measured as either the cost related to the activities or the time expended in respect thereof, are carried out for the benefit of persons in South Africa.The Court also referred to the Explanatory Memorandum relating to the amendment which stated that:

"Currently, in order for a PBO to qualify as such, it must conduct at least 85 per cent of its public benefit activities for the benefit of persons in the Republic. Given the fact that many PBOs conduct a substantial amount of activities outside South Africa and the fact that foreign PBOs fall outside the South African tax net per se, it is proposed that this restriction be removed."

The Court, having cited those provisions, however, made no inference with respect to the provisions. In my view, the only inference that can be made is that the National Treasury wished to remove the restriction on the conduct of activities outside South Africa. If, as the court suggested, it is a requirement for approval under s18A of the Act that all activities of the organisation be carried on in South Africa, the purpose of the removal of the restriction would be undone.

The Court went on to state that the authority to issue tax deductible receipts in terms of s18A of the Act has the effect of reducing the tax base in South Africa. While the statement is arguably correct, it should be noted that s30 of the Act also has the effect of reducing the tax base in South Africa as organisations which qualify for the approval, are exempt from taxes, as set out above. In fact, the provisions of s30 of the Act may have a greater effect on the erosion of the tax base in South.The point, however, is that, despite the erosion of the tax base, the policy of the Government is that philanthropy in the right sectors should be encouraged. No doubt, one reason for that policy is that those organisations ease the Government's burden to provide the help and care rendered by the organisations.

The Court continued to state that "it therefore makes sense that only activities carried on within the Republic should be allowed to reduce the South African tax base. "But, as noted above, s30 of the Act, which also reduces the South African tax base,was amended precisely to enable organisations to carry on activities largely, or even mostly outside South Africa – despite the possible increase in the erosion of the tax base.

The Court, effectively, held that an organisation must carry on its activities exclusively in South Africa to qualify under s18A of the Act. With respect, the words of the relevant provision are that the organisation qualifies if it' carries on in the Republic' the relevant public benefit activity.The words are not unclear or ambiguous. As such, they should be given their ordinary meaning which, I submit,does not include the meaning that it should be carried on  exclusively or even mainly in the Republic.If the Legislature had wished to qualify the meaning, it would have inserted words to that effect.

It should also be noted that paragraph 4(d) of Part II of the Ninth Schedule includes as an activity that qualifies for s18A of the Act "the establishment and management of a transfrontier area, involving two 
or more countries…" (emphasis added). In that case, the activity in fact contemplates that it will be carried
on in South Africa and outside South Africa. If the relevant phrase in s18A of the Act should be read as"carries on exclusively in the Republic",no one would be able to qualify under paragraph 4(d).

If the phrase were to bear the meaning ascribed to it by the court it would mean that SARS would have to withdraw the approval of many organisations which do not carry on their activities exclusively in South Africa. For instance, one local organisation which provides disaster relief all over the world,on its website invites donors to apply for receipts in terms of s18A of the Act and, ostensibly, has been approved under that provision.

Finally, s18A of the Act was recently amended (in terms of the Taxation Laws Amendment Act, No 31 of 2013) to enable donors who do not use their deductions in terms s18A of the Act in full during a tax year,to 'rollover' the unused deductions in subsequent tax years.

In my view, this is another indication of the fact that National Treasury wishes to expand, and not restrict the application of s18A of the Act.

If the judgement of the court were allowed to stand, it would have a profound effect on the non-profit sector in South Africa. I understand that the trust is appealing against the judgement. 

This article first appeared


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