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South Africa Issues Public Benefit Organisation Tax Guide

by Lorys Charalambous,, Cyprus

16 December 2014

The South African Revenue Service (SARS) has issued a revised version of its tax exemption guide, which is intended to assist non-profit organizations (NPOs) that qualify for approval as public benefit organizations (PBOs) in South Africa.

The guide covers the exemptions from taxes that may affect PBOs, including income tax, donations tax, estate duty, transfer duty, dividends tax, securities transfer tax, the skills development levy, capital gains tax, value added tax and employees' tax.

It is firstly noted that, while "tax benefits are designed to assist NPOs by augmenting their financial resources and providing them with an enabling environment in which to achieve their objectives," the fact that an organization has a non-profit motive, or is registered as an NPO under the Non-Profit Organizations Act 71 of 1997 (or is set up as a non-profit company under the Companies Act), does not mean that it automatically qualifies for preferential tax treatment or approval as a PBO.

It is confirmed that an organization will only enjoy preferential tax treatment after it has applied for and been granted approval as a PBO conducting an approved "public benefit activity" (PBA) by SARS' Tax Exemption Unit, and as long as it continues to comply with the relevant requirements and conditions as set out in the NPO Act.

Those requirements and conditions include the submission of annual income tax returns to the TEU, which assesses whether an approved PBO is operating within the prescribed limits of the relevant approval granted, and determines whether the "partial taxation principle" must be applied to receipts and accruals derived from a trading activity or business undertaking which does not qualify for exemption.

In that regard, until 2006, the tax code contained strict provisions prohibiting PBOs from conducting trading or business activities outside certain narrowly defined permissible trading rules, and a PBO that did not comply with these trading rules could have had its tax exempt status terminated altogether.

In that year, legislation was introduced to allow for a system of partial taxation of PBOs under which the receipts and accruals from business undertakings or trading activities in excess of permissible tax-free limits became subject to normal tax without the PBO losing the exemption for its underlying PBAs. The basic exemption is generally calculated as an amount equal to the greater of 5 percent of the total receipts and accruals of the PBO during the relevant year of assessment, or ZAR200,000 (USD17,200).

As a further tax break, a taxpayer making bona fide donations in cash or of property in kind to a PBO is entitled to a deduction from taxable income if the donations are supported by the necessary receipt issued by the organization or, in certain circumstances, by an employees' tax certificate reflecting donations made by an employee.

While deductions during a tax year may not exceed 10 percent (previously five percent) of the taxable income of a taxpayer, recent legislation has decreed that any excess amount of donations made which is disallowed solely for the reason that it exceeds the amount of the deduction allowable for a year of assessment may be carried forward the next succeeding year, and included as part of the 10 percent rule for that year. In addition, if any excess remains it can be further rolled over.

TAGS: individuals | South Africa | compliance | tax | business | tax compliance | revenue guidance | employees | tax authority | legislation | gift tax | tax breaks | charities | Africa | Tax

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