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Increased compliance burden on the cards for PBOs

Monday, 26 January 2015   (0 Comments)
Posted by: Author: David Warneke
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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.

In the 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.

At 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:

  • Distributed (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.
  • Invested 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. 

In the 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.

However, 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 reference number. 

Failure 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 2015. 

A number 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’.

In our 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.

The 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.

The 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.



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