Author: Louis Botha.
On 31 August 2018, SARS published Binding Private Ruling 309 (BPR 309), which deals with the disposal of an asset by a public benefit organisation (PBO). Specifically, the ruling dealt with the application of the definition of “gross income” in s1 of the Income Tax Act, No 58 of 1962 (Act) and the capital gains tax exemption in paragraph 63A of the Eighth Schedule to the Act.
“Gross income” in s1(1) of the Act, in relation to any year or period of assessment, means, the total amount, in cash or otherwise, received by or accrued to or in favour of a South African resident, excluding receipts or accruals of a capital nature.
Paragraph 63A of the Eighth Schedule to the Act states that a PBO, approved by SARS in terms of s30(3) of the Act, must disregard any capital gain or capital loss realised in respect of the disposal of an asset if:
- that PBO did not use that asset on or after valuation date (1 October 2001) in carrying on any business undertaking or trading activity; or
- substantially the whole of the use of that asset by that PBO on and after valuation date was directed at a purpose other than carrying on a business undertaking or trading activity, or carrying on a business undertaking or trading activity contemplated in s10(1)(cQ)(ii)(aa), (bb) or (cc) of the Act.
In Binding General Ruling 20 (Issue 2) (BGR 20), SARS stated that in the strict sense the term “substantially the whole” is regarded by SARS to mean 90% or more. However, BGR 20 states that SARS would accept a percentage of not less than 85%. BGR 20 further states that the percentage must be determined using a method appropriate to the circumstances.
Facts of BPR 309
The applicant owns three properties that are adjacent to each other. The properties each consists predominantly of vacant land with a few buildings grouped together on sections of the land. The properties have to date been utilised to house the applicant’s organisation and to enable it to fulfil its various objectives as a PBO and in particular, to enable members of the public to conduct spiritual retreats. The properties were acquired with the proceeds of donations received.
The income of the applicant has decreased, and it expects that this trend would continue in the future. It further expects that it would become increasingly difficult for it to sustain and maintain its properties, and to earn sufficient income to continue to fulfil its core function of carrying on public benefit activities. In response, the applicant had taken a decision to utilise the properties to generate additional income by using them for business. However, that income was insufficient, and the applicant has decided to sell the properties.
The aggregate footprint of the buildings on the properties constitutes 4.9% of the aggregate extent of the properties. As the properties will be consolidated on disposal, the usage area calculations were applied to the whole area of the properties and it was determined that only 8% of the consolidated property was used for business. The applicant has therefore not violated the allowable 15% requirement in respect of business usage and accordingly substantially the whole of the use of the asset was directed at a purpose other than a business undertaking or trading activity.
The applicant proposes to sell the three properties to an unconnected and independent third-party developer. The title of the properties will be consolidated as one in the deeds registry and it will be sold as a single property.
Regarding the proposed transaction, SARS ruled as follows:
- the proceeds on the disposal of the property will not form part of the applicant’s “gross income” as defined in s1(1); and
- the applicant must disregard any capital gain or capital loss determined in respect of the disposal of the property in terms of paragraph 63A(b)(i)