Membership based organisations are fundamental to the sustainability and development of the economy of South Africa as they provide vital industry and professional support services to a wide range of important occupations and trades ranging from accountants, lawyers and doctors to artisans and engineers. The majority of these organisations operate on a non-profit basis for the benefit of their members and ultimately play an important role in increasing employment in South Africa and uplifting poor communities.
Section 10(1)(d)(iv)(bb) of the Income Tax Act, No 58 of 1962 (Act) therefore provides for the exemption of the receipts and accruals of any company, society or other association of persons established to promote the common interests of persons (being members of such company, society or association of persons) carrying on any particular kind of business, profession or occupation which has been approved by the Commissioner of SARS under s30B of the Act.
Section 30B of the Act, essentially sets out the requirements that such organisations must comply with in order to receive approval from SARS as a tax exempt organisation. Section 30B(2)(b)(ix) of the Act specifically requires that in order to be approved as a tax exempt association in terms of s10(1)(d)(iv)(bb), read with s30B, the founding document of the organisation must provide that “substantially the whole of the entity’s funding must be derived from its annual, or other long term members or from an appropriation by the Government of the Republic in the national, provincial or local sphere”. While “substantially the whole” is not explicitly defined in the Act, it is a well-accepted principle that it means 85% or more.
In an increasingly inter-connected and globalised world, the attractiveness of membership-based organisations and the willingness of members to pay membership fees is becoming increasingly less. Section 30B organisations are therefore finding it progressively more difficult to comply with the 85% funding threshold as they do not receive any funds from government and cannot maintain sufficient membership fees. As a result, many organisations have begun to look elsewhere to source their funding including receiving fees for the provision of educational activities and training to members (and non-members) on an ongoing and ad hoc basis.
The provision of training and education by such organisations to their past, present and future members (and in some cases non-members) provide a variety of important functions including ensuring that all members are adhering to certain principles of conduct, remaining up to date with ever-changing professional standards and governing legislation, and ensuring that the training received by its members is of an international standard. However, one could make the argument that fees derived from the provision of training and educational programmes would not ordinarily fall within the ambit of funding derived from annual or other long term members and hence would fall outside the 85% funding requirement, placing the organisation in jeopardy of relinquishing its tax exempt status.
Notwithstanding this, most of the organisations provide such education and training on a non-profit cost-recovery basis, and one could therefore argue that such receipts should in any event not be taxed. To the extent that the policy is not to tax such organisations on these receipts, then there may be merit in extending the partial taxation regime currently governing public benefit organisations to membership based organisations. In this way, membership based organisations could maintain their tax exempt status by not falling foul of the 85% funding requirement and in addition, any receipts or accruals derived from the provision of education and training to its members (or otherwise) on a cost-recovery basis would also potentially not be taxable.
Furthermore, any receipts derived from trading activities would become taxable, while not placing the overall tax exempt status of the organisations in danger of being withdrawn. This solution would be very beneficial to not only the sustainability of membership based organisations but to the general public as a whole.