TAX LAW REVISIONS WILL AFFECT CHURCHES

Legislative history

The Income Tax Act (Act 58 of 1962) remains the primary legislation regulating the taxation of income received by individuals and organisations. Most religious institutions are currently exempt from income tax in terms of section 10(1)(f) of the Act. Furthermore, section 18A of the Act encourages taxpayers to make donations to certain non-profit organisations by allowing them to deduct such gifts from their gross taxable income. At the moment, however, this incentive applies only to certain educational institutions.

Soon after the transition to democratic rule, the government appointed a commission, chaired by Michael Katz, to review all of the tax laws and make recommendations for a systematic overhaul. The Katz Commission issued a series of reports on different topics. Its ninth and final report, issued in March 1999, was entitled "Fiscal Issues Affecting Non-Profit Organisations (NPOs)".

The Katz Commission recommended a number of changes to the law including:

• simplifying the tax exemption criteria by creating a single, generic category of "exempt public-benefit organisations";
• expanding the donor deductibility provisions to promote giving to a broader range of public-benefit organisations-- including, for example, religious, charitable, and welfare groups; and
• relaxing restrictions on exempt organisations' ability to earn income from trading.

In October 1999, the Portfolio Committee on Finance held hearings on the Katz Commission reports. The SACC made a written submission endorsing, with qualifications, many of the Katz Commission's recommendations and supporting a more detailed submission by the Non-Profit Partnership. Meanwhile, the Department of Finance and the South African Revenue Service opposed many of the Katz proposals on the grounds that they would diminish state revenue.

The Portfolio Committee's report represented a compromise between the two positions. This middle road was reflected in Finance Minister Trevor Manuel's February 2000 budget speech. Manuel announced plans to create a new category of exempt public-benefit organisations and to permit greater deductibility of donations. These and other changes became part of the Taxation Laws Amendment Act (Act 30 of 2000) enacted on 22 June.

Provisions of particular relevance to religious bodies

Tax exempt status of "Public Benefit Organisations"

The Act abolishes a large number of specific income tax exemptions--including the one for religious, charitable and educational institutions--and replaces these with a general income tax exemption for "public benefit organisations". To qualify, an organisation must be engaged in a "public benefit activity" and must apply to the Commissioner of Revenue for recognition as a public benefit organisation. Within a year after the new measures take effect, the Minister of Finance is required to publish a detailed list of activities "of a philanthropic and benevolent nature" that are deemed to benefit the public.

Applications for recognition as a public benefit organisation must be accompanied by a copy of the organisation's constitution. This must commit the organisation to certain financial practices, including restrictions on trading (see below). [The Act provides for a five year transition period during which the Commissioner may grant exempt status to an organisation even if its constitution does not strictly comply with the required conditions.] Applicants must also:

• refrain from paying "excessive" remuneration to any officer, employee, or member;
• conform to certain reporting standards; and
• be registered in terms of, and comply with, the Non-profit Organisations Act (Act 71 of 1997).

Deductibility of donations

The Act makes a wider range of charitable contributions deductible on individual or corporate tax returns. The ceiling on deductions has also been raised to R1000 or 5 per cent of gross taxable income, whichever is greater. The Act does not stipulate what donations will be deductible. Instead, it requires the Minister to designate the public benefit activities to which donations will be deductible. In the 2000 Budget Review, the Minister already indicated his intention to extend deductibility to contributions to:

• pre-primary schools that offer an approved educare programme;
• primary schools;
• organisations mainly involved in preventing HIV infection or providing care to those whose livelihoods have been impoverished by AIDS;
• children's homes providing care to abandoned, abused or orphaned children; and
• organisations mainly involved in caring for destitute aged persons.

A donor wishing to deduct a contribution must have a receipt containing specific information issued by the beneficiary. An organisation engaged in any of the above activities as part of a broader programme may ultimately need to set up a separate entity to administer its donor-deductible initiatives if it wishes to enable donors to take advantage of this concession.

Income from trading

The Act permits an organisation to engage in four types of trading activities without jeopardising its exempt "public benefit" status:

• Activities that do not generate income in excess of R25 000 or 15 per cent of gross receipts, whichever is greater.
• Activities related to an organisation's purposes that are substantially directed toward cost recovery and do not compete unfairly with non-exempt traders.
• Activities that are occasional and are conducted primarily using uncompensated, voluntary assistance.
• Any other activities explicitly approved by the Minister.

Additional resources

Copies of the Act (No. 30 of 2000) are available for R5 from the Government Printer (Private Bag X85, Pretoria 0001) and should also be available soon on Parliament's web site. The helpful explanatory memorandum issued with the Bill is in the "What's New" section of the SA Revenue Service web site. The Ninth Report of the Katz Commission is available on the Department of Finance site. For more information, contact the Public Policy Liaison Office.