The Tax Treatment Of Public Benefit Organisations
06 May 2012
Posted by: Author: Heather Pretorius
The Tax Treatment Of Public Benefit Organisations
"Non-profit organisations play a significant role in society as they undertake a shared responsibility for the social and development needs of the country thereby relieving the financial burden, which otherwise falls on the State.Tax benefits are designed to assist non-profit organisations by augmenting their financial resources and providing them with an enabling environment in which to achieve their objectives.”
In 1997, the Non-Profit Organisations Act was assented to by Parliament, the object being to create an environment in which non-profit organisations (NPO) can flourish and to create a regulatory and administrative framework within which these organisations can operate.Section 30 of the Income Tax Act defines a public benefit organisation (PBO) as a company trust or association of persons that has been incorporated, formed or established in the Republic of which the sole or principal object is the carrying on of one or more public benefit activities (PBA).
PBO is a category of NPO.All PBAs must be carried on in a nonprofit manner and with an altruistic or philanthropic intent.In addition, no PBA may be intended to, either directly or indirectly, promote the economic selfinterest of any fiduciary or employee of the organisation, otherwise than by way of reasonable remuneration payable to that fiduciary or employee.
The fiduciary officer of the PBO must ensure that its objects, as set out in its constitution, are carried out at all times and that its funds are applied for purposes which are covered by those objects.In this respect, reference will also have to be had to the constitution of the PBO.
A PBA is any activity which is listed in Part I of the Ninth Schedule to the Act and any other activity determined by the Minister of Finance, by notice in the Gazette, which activity is of a benevolent nature, having regard to the needs,interests and well being of the general public.
The tax treatment of PBOs - some highlights
The Income Tax Act, and other related legislation, contains various provisions pertaining to the tax treatment of PBOs and the requirements that need to be met in the context of the tax exempt status of these entities.In order for an entity to qualify for the exemptions on various taxes and duties, the entity must be approved as a PBO in terms of Section 30 of the Act.Here follows just a few highlights regarding the tax treatment of PBOs:
•Section 10(1)(cN): The receipts and accruals of PBOs are exempt from income tax provided they meet the requirements of the section.The section further makes provision for the partial taxation of receipts and accruals by the PBO, at the normal tax rates of the form of entity in which the PBO is conducted to the extent that those receipts and accruals stem from trading or business activities which exceed the limits prescribed in the section, without compromising the exemption which is enjoyed by the PBO in respect of its public benefit activities.
•Section 18A: Creates a tax deduction in favour of a taxpayer who makes a bona fide donation to a PBO, in the circumstances set out in the section and does not exceed 10% of the taxable income, excluding any retirement fund lump sum benefit and retirement fund lump sum withdrawal benefit of the taxpayer as calculated before allowing any deduction under section 18A or section 18.This section must be read together with Part II of the Ninth Schedule which sets out the PBAs which qualify for the Section 18A tax deduction of donations made to PBOs.The PBO will have to provide a receipt to the taxpayer in order for the latter to claim a deduction.
•Part I of the Ninth Schedule: Lists all activities which are approved as PBAs and which will qualify an entity for approval in terms of Section 30 as a PBO. A PBO can be engaged in Part I and Part II PBAs but only donations in respect of the Part II PBAs will qualify for the Section 18A tax deduction in the hands of the donor if the requirements of the section are met.
•Capital Gains Tax: Paragraph 63A of the Eighth Schedule deals with the gains tax implications when a PBO disposes of a capital asset. In view of the partial taxation of the income of a PBO as set out above (see discussion of section 10(1)(cN) ) PBOs do not enjoy a complete exemption from CGT, as they did in the past 11.Any capital gain or loss made by a PBO on the disposal of an asset will be taken into account for purposes of CGT if substantially the whole of the use of the asset by the PBO was not directed towards the carrying on of a PBA.
•Dividends tax: Any dividends received by a PBO pursuant to its shareholding in a company, would, in terms of the new dividends tax regime which became effective on 1 April 2012, be exempt from dividends tax. Section 64F(c) of the Income Tax Act, as amended, reads as follows: "Any dividend is exempt from the dividends tax to the extent that it does not consist of a dividend in specie if the beneficial owner is -....(c) a public benefit organisation approved by the Commissioner in terms of section 30(3).”
If a PBO were, for example, to hold shares in a private company, the provisions of section 12(2)(o) of the Non-profit Organisations Act will have to be borne in mind: "Unless the laws in terms of which a non-profit organisation is established or incorporated make provision for the matters in this subsection, the constitution of a non-profit organisation that intends to register must ... provide that, when the organisation is being wound up or dissolved, any asset remaining after all of its liabilities have been met, must be transferred to another non-profit organisation having similar objectives.”This is an important factor when utilising PBOs in structuring arrangements, such as BEE and other initiatives as the future effect may be that the shares, being an asset of the PBO, will pass to another PBO in the circumstances envisaged above.
PBOs have a valuable contribution to make to society and they fill a very important lacuna in the ability of the State to address all the social and development needs of the country.This can be gleaned from the extensive list of activities which are recognised as PBAs. In order to optimise this contribution, it is important that PBOs are structured correctly and that they maintain their tax exempt status by at all times being compliant with the Act, and other related legislation.
Source: By Heather Pretorius (TaxTALK )