A2_bOrganisations with philanthropic missions serving the general public may enjoy the benefit of SARS’ generosity if they have all their ducks in a row. There are, however, quite a number of requirements and stipulations which must be adhered to in order to qualify, and companies that want to apply, should ensure that they keep to all the stipulations.

The Income Tax Act (“the Act”) uses the term Public Benefit organisation as an all-encompassing concept for “old” section 21 companies, trusts or associations with the sole or principal object of carrying on one or more public benefit activities. South African branches of international companies, associations or trusts that are exempt from income tax in their resident countries also fall within the ambit of the legislation.

Part I of the Ninth Schedule to the Act lists a number of activities that qualify as public benefit activities. The Schedule includes activities resorting under the following headings:

  • Welfare and Humanitarian
  • Health Care
  • Land and Housing
  • Education and Development
  • Religion, Belief and Philosophy
  • Culture
  • Conservation, Environment and Animal Welfare
  • Research and Consumer Rights
  • Sport

A company, trust or association whose sole or main object is to provide funds to an organisation carrying out one of the activities listed above is also regarded as a public benefit organisation. Apart from the requirement that the organisation’s sole or main object has to be the carrying out of one or more public benefit activities, these activities need to be carried out in a non-profit manner and with altruistic or philanthropic intent.

In accordance with the essence of a non-profit institution, the activities of the organisation may not be intended to directly or indirectly promote the economic self-interest of any fiduciary or employee of the organisation. Employees may, however, receive reasonable remuneration for their services. A further requirement is that the activities must be for the benefit of, or be widely accessible to, the general public. Although the activities may focus on a certain sector of society, for instance children or AIDS sufferers, it may not serve the needs of a small or exclusive group.

Public benefit organisations need to apply to the Commissioner for approval in terms of Section 30.  This provision contains a number of stringent requirements; not only with regard to the applying for approval but also maintaining that status. These requirements will be discussed in more detail in the following edition of the Newsletter.

In terms of section 10(1)(cN) of the Act the receipts and accruals of a public benefit organisation are exempt from income tax. However, any income derived from a business undertaking or trading activity carried on by the organisation, subject to certain exemptions, remains taxable. An approved public benefit organisation need not register as a provisional taxpayer.

Treasury seems to accept that the vast majority of public benefit organisations are dependent on donations. Accordingly, there are a number of concessions to encourage generous donors:

  • Donations to public benefit organisations are exempt from Donations Tax.
  • Property bequeathed to such an organisation in terms of a will is not taken into account for purposes of Estate Duty.
  • Section 18A of the Income Tax Act entitles a taxpayer to a deduction, limited to a maximum of 10 percent of his taxable income, in respect of donations to approved public benefits. No deduction will be allowed unless the taxpayer is in possession of a receipt meeting the requirements of the provision.

In order to curb abuse of this provision, an organisation needs to apply to the Commissioner for approval to receive tax deductible donations. This application is usually done simultaneously with the general application for exemption. Only organisations that carry on one or more of the activities listed in Part II of the Ninth Schedule will qualify. The list of activities in this part is less comprehensive than Part I:

  • Welfare and Humanitarian
  • Health Care
  • Education and Development
  • Conservation, Environment and Animal Welfare
  • Land and Housing

The receipt issued in respect of the donation must certify that the donation will only be utilised in the furtherance of the organisation’s goals. Should the funds be applied for another purpose, not only would the donor be denied his deduction but the amount will also be taxable in the hands of the organisation.

Public benefit organisations are exempt from the payment of Transfer Duty when acquiring a property, but only if the whole or substantially the whole of the property is used for the carrying on of one or more approved public benefit activities. Should an organisation be fortunate enough to hold shares, dividends distributed to it will not attract Dividends Tax. There will also be no Securities Transfer Tax payable on the transfer of a listed security. As far as the disposal of assets is concerned, there is no liability for Capital Gains Tax if substantially the whole of the asset (85 percent or more) was used in the carrying on of approved public benefit activities.

Public benefit organisations carrying on activities falling in specified categories (Welfare and Humanitarian, certain Health Care activities and Religion, Belief and Philosophy) are exempt from the payment of the Skills Development Levy (SDL). The liability for Employees’ Tax, however, remains unaffected.

The one tax type not addressed in this article is Value Added Tax (VAT). The treatment of non-profit organisations in the VAT Act is a completely different kettle of fish and will be discussed in detail in a subsequent article.

This has been an attempt to explain what a public benefit organisation is and briefly list the benefits of obtaining the Commissioner’s approval. Next month’s article will focus on all the bits and bobs that are needed to ensure that an organisation complies with the legal requirements.

This article is a general information sheet. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.

Public benefit organisations: Profit from tax benefits
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