The Cape Tax Court interprets the statutory criteria for approval by SARS as a tax-exempt PBO
05 September 2014
Posted by: Author: PwC South Africa
Author: PwC South Africa
The decision of the Cape
Town Tax Court in ITC 1872 (2014) 76 SATC 225 brings long-awaited clarity to
the interpretation of the statutory criteria that a public benefit organisation
(PBO) needs to satisfy in order to qualify for tax exemption in terms of s
10(1)(cN) of the Income Tax Act 58 of 1962, read with the provisions of the
Ninth Schedule to the Act.
tax exemption and – if further stipulated criteria are satisfied – the right to
issue donors with tax-deductible receipts in terms of s 18A is critical to the
financial viability of many such organisations.
SARS had declined
to approve an application by
an inter vivos trust for
In this case, an inter vivos trust,
registered in the office of the Master of the High Court in Cape Town, had
applied to SARS in terms of section 30(3) of the Income Tax Act for approval as
a public benefit organisation, and the application had been refused.
issue before the court was whether the trust in fact satisfied the requirements
of section 30(3) and was entitled to be granted such approval. A central
question in this inquiry
was whether the sole or principal objective of the trust was the carrying on of
public benefit activities as listed in the Ninth Schedule.
trust deed stated that the objectives of the trust were –
poverty relief to poverty stricken communities, community development and
anti-poverty initiatives, training for actively [sic] poor persons to enable
them to obtain employment or improve their employment, the advancement,
promotion or preservation of arts, culture and custom, engaging in the
conservation, rehabilitation or protection of the natural environment, the
promotion, monitoring or reporting of development assistance aimed at
benefiting the poor and needy.
its application to SARS, the trust indicated that it would be carrying out the following public benefit activities listed
in the Ninth Schedule, namely, welfare and humanitarian activities entailing
the provision of poverty relief; community development for poor and needy
persons and anti-poverty initiatives; the advancement, promotion
or preservation of the arts, culture or customs; and the conservation,
rehabilitation or protection of the natural environment, including flora, fauna
or the biosphere.
is clear from the judgment (see para ) that SARS viewed the trust’s claim
to be a genuine public benefit organisation with suspicion, and had concluded
that it did not satisfy the statutory criteria for tax-exempt PBO status.
particular, SARS was of the view that the expression poverty relief in
the context of para 1(f) of Part 1 of the Ninth Schedule, which is not
defined in the Act, had to be given a narrow interpretation that did not
encompass what the trust was doing.
SARS was of the view that the trust’s actual
activities were the establishment of tourist routes and the creation of a website to market those routes.
SARS believed that the persons using those tourist routes did not require
poverty relief. The real benefits of the trust’s activities, according to SARS,
accrued to ‘a small and inclusive list of route participants’ (which seems to
mean the established businesses along the tourist routes) and the trust’s
proposed activities were therefore not for the benefit of the poor and needy, nor were
they widely accessible to the general public, as required by the definition of public benefit organisation in section 30(1)of the Income Tax Act.
SARS contended further (see para  of the
judgment) that, in order to qualify for approval as a PBO, the trust’s
activities, as far as humanitarian
activities were concerned, had to be
directed at ‘assisting persons who were in dire straits to survive’.
As regards the public benefit activity referred to
in para 6(a) of Part 1 of the Ninth Schedule (‘the advancement,
promotion or preservation of the arts, culture or customs’), SARS contended
(see para ) that the trust had to show that it
would perform overt acts to advance, promote or preserve arts, culture or
SARS argued that the use of an internet website to
attract potential tourists did not satisfy the requirement that the activities
in question must be designed to benefit the poor and needy and did not satisfy the criterion of being
widely accessible to the general public.
As regards the public benefit envisaged in para 7(a)
of Part 1 of the Ninth Schedule (‘engaging in the conservation, rehabilitation
or protection of the natural environment, including flora, fauna or the
biosphere’), SARS contended that, to satisfy this criterion, the trust was
required to ‘have the necessary infrastructure and skilled personnel to perform
the functions for the protection of the environment’ and that the mere listing
of selected species on a website did not constitute ‘engagement’ by the trust
in the conservation, rehabilitation or protection of the environment.
response, the trust contended (see para ) that it –
uses tourism as
a platform to create and to sustain jobs in rural communities whilst at the
same time promoting local culture and conservation of the natural environment.
This it does by encouraging tourists to take off the beaten track self-drive
travel routes to enable communities on those routes to benefit from tourism. To
achieve this objective, so the Trust contends, it adopts a collaborative
approach with the local communities by way of workshops to identify attributes
of the area or community concerned that could attract travellers and tourists
to the area. These attractions may include local flora, fauna, scenic
attractions, services, arts, culture or local customs. Thus, the Trust contends
that it proposes to establish markets and monitor the routes arising therefrom
in terms of workshop processes. It proposes to create forums to sustain the
process and to stay in touch with those forums to answer questions and provide
mentorship and share best practice. The opening and marketing of tourism routes
to marginalised and rural areas encourages tourists to visit and spend money on
ventures operated by poor people in those areas and thus contributes to poverty
relief. These areas, so the Trust contends, have both large and small
businesses. Thus, so the Trust contends, its activities are aimed at bringing
in tourists for the purposes of supporting poor people on those tourist routes.
The Trust concludes by contending that it is purely incidental that established
business would benefit from the Trust’s proposed public benefit activities.
The trust argued that the welfare and humanitarian
activities referred to in Part 1 of the Ninth Schedule were not, as
SARS contended, restricted to assisting persons in dire straits to survive, and
pointed out that the Schedule did not require overt engagement in the
conservation of the natural environment, nor that the organisation have an
infrastructure or skilled personnel. The trust argued that many recognised
public benefit activities are engaged in by unskilled persons with little or no
The Tax Court
required oral evidence to be led
Tax Court ruled (see para ) that this matter could not be decided on the
basis of the contents of the trust instrument and its annexures and that oral
evidence needed to be led in regard to the activities currently undertaken by a
section 21 company (referred to in the judgment as ‘ABC’) that (see paras  –
) was the founder of the trust and played ‘an active and significant role in
the administration and management of the trust’.
company had, in its own right and prior to the formation of the trust, applied
for and been granted approval as a public benefit organisation, only to have
that approval withdrawn by SARS two years later on the grounds that the
requirements of section 30(1) of the Act had not been satisfied.
on legal advice, ABC then formed the trust so that it could apply to SARS for
approval as a tax-exempt PBO and for the right to issue tax-deductible receipts
to donors in terms of section 18A.
evidence was led in the Tax Court to the effect that it was not the objective
of ABC or the trust (should the trust take over the activities of ABC) to
advance the interests of the established business community.
SARS argued (see para ) that the trust’s
application for approval as PBO involved merely ‘regurgitating the Ninth
Schedule’ and that the application was silent as to what the trust was actually
authorised to do and how it would go about performing the proposed public
Tax Court accepted (see para ) that applications to SARS for approval as a
public benefit organisation should be strictly scrutinised. But, said the
court, this did not mean that a narrow rather than a wider view should be taken
as to what constitutes a qualifying public benefit activity.
ambit of section 30 of the Income Tax Act, said the court, was ‘to encourage
activities that will benefit the general public’ and –
this in mind, the net should be thrown fairly wide to encourage and promote the
carrying on of all and any bona fide public benefit activity provided
always the organisation seeking approval complies with the requirements as set
out in s 30 of the Income Tax Act and provided further the proposed public
benefit activity falls within the framework set out in the 9th Schedule
to the Income Tax Act.
court found that the trust had not intended to deceive SARS in the documents it
had provided in support of its application for approval as a PBO.
the court ruled that the trust did not qualify to issue donors with
tax-deductible receipts unless it could satisfy SARS that its activities were exclusively
carried on in the Republic.
the result, the court ruled that SARS’s decision not to approve the trust’s
application for approval as a public benefit activity in terms of section 30(3)
of the Income Tax Act be overruled and set aside, but the court dismissed the
trust’s appeal in regard to the issuing of tax-deductible receipts in terms of
SARS had viewed with cynicism the formation of the trust after ABC, the section
21 company, had been refused approval as a public benefit organisation. SARS
believed that the application by the trust for approval as a public benefit
organisation was deceptive and that the trust was just a front for ABC.
particular, SARS took an adverse view (see para ) of the fact that,
although the trust and ABC were two separate legal entities, they did not
significance of the judgment (and it should be borne in mind that decisions of
the Tax Court have no binding force outside of the particular case) is that the
court ruled that section 30 is intended to encourage activities that will
benefit the general public; hence, that encouragement should be given to the
carrying on of bona fide public benefit activities, provided that an
organisation seeking SARS’s approval as a public benefit organisation must
carry on activities that fall within the framework of the Ninth Schedule to the
Income Tax Act.
The court was of the view that poverty relief, as envisaged in the Ninth Schedule, could be achieved in many ways,
including (see para ) creating tourist routes that could benefit
communities located alongside such routes – in other words, that poverty
relief can be achieved indirectly. In this regard, the court took the view
that the use of an internet website by an applicant for PBO status should not
be viewed negatively.
is clear from the judgment that SARS has hitherto been applying extremely
narrow criteria in determining whether to approve applications for PBO status.
Of particular note is SARS’s view, as revealed in its arguments to the Tax
Court in this case, that welfare and humanitarian activities, in the
context of the Ninth Schedule, means ‘activities that [assist] persons in dire
straits to survive’.
All in all, this judgment will provide encouragement
to non-profit organisations to apply for approved PBO status (and perhaps
encourage organisations that have, in the past, been refused PBO status by SARS
to reapply) and will be an invaluable guide to professional advisers in
drafting the constitution of the organisation and advising on how it should
conduct its activities in order to satisfy the statutory criteria.
This article first appeared on pwc.co.za