Author: (Tax Associate at Cliffe Dekker Hofmeyr). On 26 January 2018 the South African Revenue Service (SARS) issued a media release (Media Statement) regarding its intention to investigate possible tax non-compliance in the religious sector. In this article we will discuss the issues raised by SARS in the Media Statement as well as some of the relevant legal provisions that have to be met in order for organisations, including religious organisations, to be approved as a public benefit organisation (PBO).
In the Media Statement, SARS states that its decision to investigate follows its own preliminary investigation, its meeting with the CRL Rights Commission and general reports suggesting that certain religious organisations and leaders are not in compliance with tax laws, and may be enriching themselves at the expense of tax compliance and their altruistic and philanthropic purpose. However, SARS also acknowledged that a number of religious organisations are indeed complying with their tax obligations.
The Media Statement then refers to the fact that religious organisations may apply to SARS to be exempt from income tax in terms of s10(1)(cN) of the Income Tax Act, No 58 of 1962 (Act), by being approved as a PBO in terms of s30 of the Act. The Media Statement goes on to reference the criteria of s30 of the Act, which contains, among others, 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; and
- 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 unrelated to religious activities and the issuing of receipts to donors in terms of s18A of the Act, which donations are not deductible from income tax in a donors 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 their tax affairs by applying for relief under the SARS voluntary disclosure programme (VDP).
The requirements to become an approved PBO
It is important to note that a religious organisation, or any organisation which seeks to be tax exempt as a PBO, will only be exempt from tax once such PBO approval has been granted. In addition to the requirements of s30 of the Act that are referred to in the Media Statement, there are a number of other criteria that an organisation must meet in order to become an approved PBO. Section 30 of the Act lists, among other things, the following additional requirements:
- The organisation must be a non-profit company as defined in s1 of the Companies Act, No 71 of 2008, or a trust or an association of persons that has been incorporated, formed or established in South Africa;
- It must carry on public benefit activities, listed in Part I of the Ninth Schedule to the Act;
- The organisations founding document, such as its trust deed or memorandum of incorporation, must stipulate the following, among other things:
- It must require the organisation to have at least three persons who accept fiduciary responsibility for the organisation;
- It may use its funds solely for the object for which it has been established;
- It may not 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 will not be excessive, having regard to what is generally considered reasonable in the sector; an
- It 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 submit an application to the SARS Tax Exemption Unit, which will consider whether the organisation meets all the requirements of s30 of the Act. An organisation may also be approved retrospectively as a PBO, where SARS is satisfied that the organisation complied with the requirements of a PBO prior to submitting its application for PBO approval.
Public benefit activities and the issuing of receipts in terms of s18A of the Act
One of the requirements to become a PBO in terms of s30 of the Act is that an organisation must conduct public benefit activities (PBAs) listed in Part I of the Ninth Schedule to the Act. The PBAs in Part I are divided into the following 11 categories:
- Welfare and humanitarian;
- Health care;
- Land and housing;
- Education and development;
- Religion, belief or philosophy;
- Conservation, environment and animal welfare;
- Research and consumer rights;
- Providing of funds, assets or other resources; and
Under each of these categories, there are subparagraphs listing the type of activities that will constitute PBAs. In order for an entity to issue receipts to donors in terms of s18A of the Act, which would entitle donors to deduct their donations for income tax purposes, such entity must conduct activities listed in Part II of the Ninth Schedule to the Act. Only activities listed in the categories welfare and humanitarian, health care, land and housing, education and development, and conservation, environment and welfare, referred to above, constitute PBAs in terms of Part II of the Ninth Schedule to the Act.
Is all income received by a PBO tax exempt?
In terms of s10(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 only be tax exempt under very specific circumstances listed in s10(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.
Furthermore, SARS has also issued Interpretation Note 24 (Issue 4) on 12 February 2018, which sets out SARSs view on how s10(1)(cN) should be applied.
Comment and practical considerations
Any entity that conducts PBAs, including religious activities, is not automatically exempt from income tax. It must first apply to SARS to be approved as a PBO although such approval can be granted retrospectively. A non-profit company is also not automatically exempt from paying income tax. Based on our recent experience, it can take quite a few months, or longer, before an application for PBO approval is granted.
Where an organisation is a PBO or wishes to become a PBO, including a religious organisation, and has already received income prior to 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, No 28 of 2011. It should be noted that although an organisation will not pay any understatement penalties pursuant to a successful VDP application, it will still have to pay tax on the income declared, including interest on such tax.