Interpretation of the term ‘substantially the whole’

TAXATION10Authors: Nicole Paulsen and Gigi Nyanin.

The South African Revenue Service (SARS) released Binding General Ruling No. 20 (issue 2) (BGR 20) on 20 January 2016, which provides clarity on the interpretation of the term ‘substantially the whole’ as referred to in specific sections of the Income Tax Act, No 58 of 1962 (Act).

By way of background, the term ‘substantially the whole’ was introduced in the revised tax system for public benefit organisations (PBOs) in 2000, to achieve a more supportive fiscal environment and to give effect to the proposals and recommendations made by the Katz Commission, as set out in the Ninth Interim Report of the Commission of Inquiry into Certain Aspects of the Tax Structure of South Africa.

In general, the term ‘substantially the whole’ allows approved associations, PBOs, recreational clubs and small business funding entities (SBFE) to carry on limited business undertakings or trading activities, provided that the sole or principal object of:

  • an approved association, remains the promoting of the common interests of persons (being members of a company, society, or association of persons) carrying on any particular kind of business, profession or occupation approved by the Commissioner for SARS;
  • a PBO, remains the carrying on of a public benefit activity as listed in Part I of the Ninth Schedule to the Act;
  • a recreational club, remains the provision of social and recreational facilities for its members; and
  • a SBFE, remains the provision of funding for small, medium and micro-sized enterprises.

Accordingly, to the extent that ‘substantially the whole’ of such undertaking or activity is directed towards the recovery of costs, the receipts and accruals derived by any of the aforementioned entities from any business undertaking or trading activity will be exempt from normal tax.

In BGR 20, SARS ruled that the receipts and accruals from business undertakings and trading activities of the aforementioned entities will be exempt from normal tax, if at least 90% or more of the undertaking or activity is directed toward the recovery of costs. SARS has however made provision for leniency where 85% or more of the business undertakings or trading activities of the aforementioned entities, are directed at the recovery of costs.

BGR 20 applies from the date of issue until it is withdrawn, amended or the relevant provisions of the Act are amended.