Currently, conduit Public Benefit Organisations (PBOs) (PBOs which do not carry on a Public Benefit Activity listed in Part II of the 9th Schedule, but which provide funds or assets to other approved PBOs) are obliged to distribute or incur an obligation to distribute, to other approved PBOs, at least 75% of the donations received for which a section 18A deductible receipt was issued, within 12 months of the end of the year of assessment in which the donation is received. SARS has discretion to defer, reduce or waive the obligation to distribute 75% of the funds, having regard to the public interest and purpose for which the PBO wishes to accumulate the funds.
According to the Explanatory Memorandum (EM), the purpose of the rule is to discourage conduit PBOs from locking in funds and to obtain a degree of matching between the timing of the tax deduction claimed by the taxpayer and the distribution of the donation by the PBO. Various PBOs have indicated that the rule is too restrictive and negatively affects their financial sustainability. The proposal is, therefore, to lower the distribution threshold to 50%, and by doing so to allow PBOs more flexibility to earn passive income.
Furthermore, a provision will be introduced to regulate the undistributed funds of the conduit PBO. The provision determines that these funds should be invested in financial instruments issued by certain prescribed financial institutions. In addition, 100%of the returns on these investments must be distributed to qualifying PBOs within the following periods:
- if the conduit PBO was incorporated prior to 1 January 2015 – every five years from the date that the 2014 Taxation Laws Amendment Act comes into operation; and
- if the conduit PBO is incorporated after 1 January 2015 – every five years from the date that the Commissioner issued a reference number to the PBO.
The EM notes that conduit PBOs will be required to change their founding documentation to facilitate this condition.
It is proposed that these amendments will become effective from 1 March 2015, and apply to donations made on or after this date.