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The South African Revenue Service (SARS) has issued a binding general ruling (BGR) that provides clarity on the interpretation and application of the Income Tax Act's funding requirement for tax-exempt membership-based organizations.
It is noted that such organizations, which are mainly societies and associations established to promote the common interest of persons carrying on any particular kind of business, profession, or occupation, usually operate on a non-profit basis for the benefit of their members. In South Africa, they provide industry and professional support services to a number of occupations and trades, ranging from accountants and lawyers to sole traders and engineers.
The Act provides for a tax exemption for receipts and accruals of any company, society, or other association of persons established to promote the common interests of its members, subject to approval by SARS.
To receive tax-exempt status from SARS, the founding document of the organization must provide that "substantially the whole of the entity's funding must be derived from its annual, or other long term, members or from an appropriation by the Government of the Republic in the national, provincial, or local sphere."
In the BGR, SARS confirms that it regards the term "substantially the whole" to mean 90 percent or more. SARS will, however, in exceptional circumstances accept a percentage of not less than 85 percent.
In addition, it points out that it is not a requirement that an organization should derive funding solely from membership or subscription fees. An entity that receives funding other than in the form of a membership or subscription fee from any annual or long-term member will also qualify as receiving the appropriate funding.
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