On January 26 2018 the South African Revenue Service (SARS) issued a press release regarding its intention to investigate possible tax non-compliance in the religious sector. This update examines the issues raised by SARS in the press release and some of the relevant legal provisions that must be met in order for organisations, including religious organisations, to be approved as public benefit organisations (PBOs).

Issues raised

In its press release, SARS stated that its decision to investigate follows:

  • its preliminary investigation;
  • its meeting with the Commission for the Promotion and Protection of the Rights of Cultural, Religious and Linguistic Communities; and
  • general reports which suggest that certain religious organisations and leaders are contravening tax laws and enriching themselves at the expense of tax compliance and their altruistic and philanthropic purpose.

However, SARS acknowledged that some religious organisations are complying with their tax obligations.

The press release also referred to the fact that religious organisations may apply to SARS for an income tax exemption under Section 10(1)(cN) of the Income Tax Act (58/1962) by obtaining approval as a PBO under Section 30 of the act. The press release references Section 30 of the act, which includes the following requirements applicable to PBOs:

  • Activities must be conducted in a non-profit manner with an altruistic or philanthropic intent.
  • No such activity must be intended to directly or indirectly promote the economic self-interest of any person other than by way of reasonable remuneration paid for services rendered.
  • Religious institutions are prohibited from directly or indirectly distributing funds to any person other than in carrying out their religious activities.

SARS also raised concerns about, among other things:

  • the payment of taxes on trading activities that are unrelated to religious activities; and
  • the issuing of receipts to donors under Section 18A of the act – whose donations are not deductible from income tax in their hands – where the funds are donated towards the carrying out of religious activities.

Finally, SARS also encouraged religious organisations whose tax affairs are not in order to regularise them by applying for relief under the SARS voluntary disclosure programme (VDP).

Requirements to become approved PBO

A religious organisation, or any organisation which seeks to be tax exempt as a PBO, will be tax exempt only once such PBO approval has been granted. In addition to the requirements of Section 30 of the act referred to in the press release, an organisation must meet various other criteria in order to become an approved PBO. Section 30 of the act lists, among other things, the following additional requirements:

  • An organisation must be a 'non-profit company' as defined in Section 1 of the Companies Act (71/2008) or a trust or association of persons that has been incorporated, formed or established in South Africa.
  • The organisation must undertake public benefit activities, as listed in Part I of the Ninth Schedule to the act.
  • The organisation's founding document (eg, its trust deed or memorandum of incorporation), must stipulate, among other things, that:
    • the organisation has at least three persons who accept fiduciary responsibility for the organisation;
    • the organisation may use its funds solely for the object for which it has been established;
    • the organisation cannot accept donations that are revocable at the instance of the donor, unless certain specified circumstances are present;
    • the remuneration paid to an employee or other office bearer cannot be excessive in light of what is generally considered reasonable in the sector; and
    • the organisation will not use its resources directly or indirectly to support, advance or oppose any political party.

If an organisation, including a religious organisation, wishes to become an approved PBO, it must apply to the SARS Tax Exemption Unit, which will consider whether the organisation meets all of the requirements of Section 30. An organisation may also be approved retrospectively as a PBO, where SARS is satisfied that it complied with the requirements of a PBO before submitting its application for approval.

Public benefit activities and the issuing of receipts

One of the requirements to become a PBO under Section 30 of the act is that an organisation must conduct a public benefit activity (PBA) listed in Part I of the Ninth Schedule to the act. The PBAs in Part I are divided into the following categories:

  • welfare and humanitarian;
  • healthcare;
  • land and housing;
  • education and development;
  • religion, belief or philosophy;
  • cultural;
  • conservation, environment and animal welfare;
  • research and consumer rights;
  • sport;
  • the provision of funds, assets or other resources; and
  • general.

Under each of these categories, sub-paragraphs list the type of activity that will constitute a PBA. In order for an entity to issue receipts to donors under Section 18A of the act, which would entitle donors to deduct their donations for income tax purposes, such entity must conduct an activity listed in Part II of the Ninth Schedule to the act. Under Part II of the Ninth Schedule to the act, only activities listed in the following categories constitute PBAs:

  • welfare and humanitarian;
  • healthcare;
  • land and housing;
  • education and development; and
  • conservation, environment and welfare.

Is all income received by PBOs tax exempt?

Under Section 10(1)(cN) of the act, any receipts or accruals of an approved PBO that are derived from anything other than a business undertaking or trading activity are exempt from income tax.

However, where the PBO derives income from a business undertaking or trading activity, such income will be tax exempt only under specific circumstances listed in Section 10(1)(cN)(ii) of the act. A PBO will therefore have to pay income tax on any income from a business undertaking or trading activity that is not derived under the specific circumstances listed in the act.

Further, on February 12 2018 SARS issued Interpretation Note 24 (Issue 4), which sets out its view on how Section 10(1)(cN) should be applied.

Comment

Entities that conduct PBAs, including religious activities, are not automatically exempt from income tax. They must first apply to SARS for approval as a PBO, although such approval can be granted retrospectively. Non-profit companies are also not automatically exempt from paying income tax. In practice, it can take several months or longer for an application for PBO approval to be granted.

Where an organisation is or wishes to become a PBO (including a religious organisation) and has already received income before becoming a PBO, but has not declared such income to SARS, it must consider declaring such income in terms of a VDP application. The provisions regarding the VDP are contained in the Tax Administration Act (28/2011). Notably, although an organisation will pay no understatement penalties pursuant to a successful VDP application, it will still have to pay tax on the income declared, including interest on such tax.

For further information on this topic please contact Louis Botha at Cliffe Dekker Hofmeyr by telephone (+27 115 621 000) or email (louis.botha@cdhlegal.com). The Cliffe Dekker Hofmeyr website can be accessed at www.cliffedekkerhofmeyr.com.

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