Public benefit organisations (‘PBOs’) provide invaluable healthcare, education, poverty alleviation, housing, conservation, environmental, cultural and religious services in South Africa. The important role that these organisations play in our society is recognised by the legislature which has provided PBOs with a number of tax advantages.
A PBO which has been approved by the Commissioner in terms of section 30 of the Income Tax Act is a partially tax exempt entity. Such a PBO’s receipts and accruals are exempt from tax in terms of section 10(1)(cN) but only to the extent that they are not derived from a business undertaking or trading activity. The exceptions to this rule are receipts and accruals from trading activities which meet any one of the following requirements:
- The trading activities are integral and directly related to the sole object of the PBO, are carried out substantially on a basis of cost recovery and do not result in unfair competition in relation to taxable entities.
- The trading activities are of an occasional nature and are undertaken substantially with assistance on a voluntary basis without compensation.
- The trading activities are approved by the Minister by notice in the Gazette having regard to the nature of the activities, their profitability, the object of the PBO and competition with non tax-exempt entities.
- The receipts and accruals relating to trading activities do not exceed the greater of R200 000 or 5% of the total receipts and accruals of the entity. Receipts and accruals which are not exempt in terms of the above are subject to income tax at a rate of 28 per cent.
Specific taxation regimes also exist for PBOs in terms of their potential liability for transfer duty, capital gains tax, VAT and Skills Development Levies.
In order for an organisation to qualify as a PBO it must either be a South African resident trust, association or non-profit company as defined in the Companies Act of 2008 (previously a section 21 company in terms of the Companies Act of 1973) or a South African branch of a foreign company, association or trust which is exempt from tax in its country of formation or incorporation.
The organisation must have its sole or principle object the carrying on of one or more public benefit activities in a manner which is not-for-profit and all activities must be carried out with an altruistic or philanthropic intent. No activity of the organisation may directly or indirectly promote the economic self-interest of a fiduciary or employee of the company except by way of reasonable remuneration.
The Commissioner will approve an organisation’s status as a PBO if the written constitution of the organisation states that:
- The organisation is required to have at least 3 unconnected persons who accept fiduciary responsibility for the organisation;
- The organisation is prohibited from distributing any funds to any persons (other than in pursuit of a public benefit activity) and is required to utilise all funds for the object for which it has been established;
- On dissolution of the organisation it is required to transfer its assets to another PBO or to the government;
- The organisation is prohibited from accepting donations which are revocable at the instance of the donor; and
the organisation is required to lodge amendments to its constitution with the Commissioner.
The Commissioner will not approve an organisation’s PBO status if it is or was a knowing party to a tax-avoidance scheme or if excessive remuneration has or will be paid to employees (taking into account what is generally considered reasonable in the sector in relation to the services rendered).
Donations are an important source of funding for many South African PBOs. This is recognised by the legislature which has made a number of concessions which make donations to PBOs more attractive from a tax point of view.
A specific exemption from donations tax is granted for donations made by or to a PBO. Donations tax would otherwise be payable at a rate of 20 per cent on the value of gratuitous disposals made by or to a PBO, including any disposal for consideration which is, in the opinion of the Commissioner, less than the market value of the asset transferred.
A donation is a disposal in terms of the Eighth Schedule to the Act which is deemed in terms of paragraph 38 to take place for proceeds equal to the market value of the asset on the date of the disposal. However, paragraph 62 of the Eighth Schedule to the Act provides that a capital gain realised by a donor on the donation of an asset to a PBO must be disregarded.
Donations are not deductible for tax purposes in terms of the general deduction formula because a donation is neither in the production of income nor laid out for the purposes of trade. However section 18A of the Act provides specifically for an income tax deduction which is available to donors who make donations in cash or in kind to PBOs which are registered with SARS and approved by SARS and which perform public benefit activities as contemplated in Part II of the Ninth Schedule to the Act. Such public benefit activities include activities which fall under the following headings: healthcare; welfare and humanitarian; education and development; conservation, environment and animal welfare; and land and housing.
The annual tax deduction for donations to qualifying PBOs in terms of section 18A is extremely generous – donations are deductible up to a maximum of 10 per cent of the donor’s taxable income calculated after the inclusion of taxable capital gains. A recent amendment which became effective on 1 March 2014 provides that in the event that a donor’s donations to qualifying PBOs in a particular year of assessment exceed the abovementioned 10 per cent limit, the excess can be carried forward and claimed as a deduction in the donor’s succeeding year of assessment. This amendment is welcomed as it allows a donor wishing to make a significant donation (exceeding 10 percent of the donor’s taxable income) to a PBO in a single year of assessment without the donor sacrificing the tax benefits in making such a large donation in a single amount.
The rules for valuing a donation made in kind to a PBO, for purposes of calculating the donor’s section 18A deduction, are set out in section 18A(3) and 18A(3A). In general, section 18A(3) provides that the asset is valued at the lower of its cost less tax allowances and its fair market value at the date of the donation.
Section 18A(3A) is a new section which was introduced into the Act with effect from 1 March 2014. This section sets out a formula for valuing a donation of immovable property to a PBO for purposes of calculating the donor’s section 18A deduction in circumstances where the immovable property is held as a capital asset by the donor and where the lower of the market value or municipal value of the immovable property exceeds the cost of the property. The purpose of this new section is to create parity in the value of the section 18A deduction which may be claimed by the donor where the immovable property is sold for cash following which the after tax proceeds are donated in cash to the PBO and where a direct donation of the property itself is made to the PBO. The formula set out in section 18A(3A) achieves this by indirectly taking into account the capital gain charge and recoupment that should have arisen had a deemed disposal occurred upon donation of the immovable property.
In order for a donation to a qualifying PBO to be eligible for an income tax deduction, the donor must be in possession of a tax certificate issued by the PBO. This certificate must at minimum include the following information:
- The reference number of the donee issued by the Commissioner for the purposes of this deduction;
- The date of receipt of the donation;
- The name of the donee which received the donation together with an address to which enquiries may be directed in connection therewith;
- The name and address of the donor;
- The amount of the donation or the nature of the donation if not in cash; and
- A ‘certification’ to the effect that the receipt is issued for the purposes of s 18A and that the donation has been or will be used exclusively for the object of the donee concerned.