Increased compliance burden on the cards for PBOs
26 January 2015
Posted by: Author: David Warneke
Author: David Warneke (BDO)
David Warneke looks at
the increased compliance measures that are set to be placed on PBOs in terms of
the latest version of the Taxation Laws Amendment Bill 2014.
first version of the Draft Taxation Laws Amendment Bill of 2014 that was
released in July, it was proposed that Public Benefit Organisations (PBOs) that
provide assets or funding to other PBOs would have to comply with a prescribed
investment regime. In terms
of current law, such PBOs have to distribute, or incur the obligation to
distribute at least 75 percent of the donations received during the year of
assessment for which section 18A receipts were issued, within 12 months of the
end of the year of assessment (section 18A(2A)(b)). The Commissioner is given
the discretion to vary this requirement having regard to the public interest
and the purpose for which the PBO wishes to accumulate the funds.
present there is no stipulation as to the form in which undistributed funds
have to be held, for example whether in savings accounts, unit trusts, etcetera.
In terms of the first version of the Bill, it was proposed that the 75 percent
distribution requirement would be reduced to a 50 percent distribution
requirement. The undistributed balance in respect of donations for which
section 18A receipts had been issued would have to be:
(or the obligation to distribute would have had to be incurred) within a period
of five years. The five year period was to be calculated from the date of the
coming into operation of the Taxation Laws Amendment Act of 2014 if the PBO was
incorporated prior to 1 January 2015 and from the date on which the
Commissioner issued a reference number to the PBO in the case of PBOs that are
only incorporated after 1 January 2015.
in prescribed investments. These were to include financial instruments issued
by collective investment schemes, long-term insurers, banks, mutual banks, the
government or financial instruments in listed companies. Any amounts received
or accrued in respect of such financial instruments were to be included in the
compulsory distribution requirement in (a) above.
latest version of the Bill, which was released on 16 October, the prescribed
investment regime has been scrapped although the change to a 50 percent
distribution requirement has been retained.
in respect of the undistributed amounts, in other words, amounts arising from
receipted donations, the PBO has to incur the obligation to distribute all
amounts received in respect of ‘investment assets’ held by it (other than
amounts received in respect of disposals of those investment assets to a PBO)
by no later than six months after every five years from 1 March 2015, if the
PBO was formed and issued with a reference number prior to 1 March 2015. If the
PBO was formed on or after 1 March 2015, then the five year period is
calculated with reference to the date on which the Commissioner issued the
to comply with the five year distribution requirement will result in such
amounts being included in the taxable income of the PBO. The
effective date of the above amendments is to be the 1st of March
of problems are likely to arise as a result of the above amendments. Firstly,
the term ‘investment assets’ is not defined. It is uncertain whether, for
example, a current banking account would be regarded as an ‘investment’ asset
in circumstances where no interest is paid on credit balances. According to the
Chambers 21st Century Dictionary, the word ‘invest’ means ‘to put
money into a company or business, for example, by buying shares in it, in order
to make a profit. Where no profit can be made it may be argued that money has
not been ‘invested’.
view savings accounts, shares and properties should be regarded as ‘investment
assets’. If rental income accrues in respect of a property, for example, it
would seem that no running or other expenses may be paid in respect of the
property out of funds for which section 18A donations were originally issued.
draft is likely to be enacted in its current form and although the change from
a 75 percent distribution requirement to 50 percent is welcomed, the need to
track amounts received in respect of the ‘investment assets’ is likely to
create a significant compliance burden. In order to minimise headaches, a clear
separation should exist between assets that represent donations for which
section 18A receipts were issued and other assets, for example representing
exempt trading income of the PBO. It would seem that a reconciliation of the
PBOs assets at 28 February 2015 will have to be undertaken in order to separate
assets that arose from such donations from other assets.
increased compliance burden associated with the above changes is unfortunate
and is likely to detract from funds available for public benefit purposes.
This article first appeared on the January/February edition on Tax Talk.