Submission to the South African Revenue Service

Standing of the SACC

1. The South African Council of Churches (SACC) is the facilitating body for a fellowship of 26 Christian churches and associated para-church organisations. Founded in 1968, the SACC includes among its members Protestant, Catholic, African Independent, Pentecostal and Orthodox churches with a combined constituency of roughly 15 million members and adherents. SACC members are committed to expressing jointly, through proclamation and programmes, the united witness of the church in South Africa, especially in matters of national debate.

Overview of submission

2. We welcome the opportunity to review and to comment on the third batch of amendments to the revenue laws proposed by the South African Revenue Service (SARS) in recent weeks. Our remarks consider the potential impact of the proposals, particularly on:
   • The capacity of PBOs to finance their activities through trading;
   • The scope for PBOs to invest resources and to finance their activities through returns on investments; and
   • The ability of PBOs to import and distribute relief and aid.

Revision of trading restrictions

3. Sections 4, 8(1)(a) and 17(1)(b) through (d) of Batch Three propose amendments to sections 6 and 30(3) of the Income Tax Act, No. 58 of 1962 (hereafter "ITA"), which would alter the trading restrictions imposed on PBOs. This would affect the status of such trading restrictions with respect to a PBO's founding document, the potential for PBOs to engage in trading, and the implications of trading income for both a PBO's exempt status and tax liability.

Constitutional limitations on trading

4. Currently, a PBO is required to incorporate (or reference) in its constitution or founding document the trading restrictions that appear in section 30(3)(b)(iv) of the ITA. By deleting clause 30(3)(b)(iv)¹ and moving most of its provisions to section 10(1)(cN) of the ITA as a limitation on the extent of a PBO's income tax exemption ², it is no longer necessary for these limitations to be reflected in a PBO's founding instrument. We strongly support this relocation of the trading restrictions, as we believe that it is inappropriate, unwieldy and unnecessary to include such provisions in a founding document. The provisions are equally effective in the revised configuration.

Partial taxation of trading income

5. The revised configuration also makes possible a system of partial taxation of PBO trading income, as promised by the Minister of Finance in the 2005 Budget Review (pp. 85-86). Presently, the Commissioner of Revenue is empowered to summarily revoke an organisation's tax-exempt PBO status if it earns income from trading in excess of that permitted in terms of section 30(3)(b)(iv). The SACC, the Non-Profit Consortium and other civil society organisations have repeatedly objected to the harshness of this "all-or-nothing" approach. The new system would make trading income in excess of the limitations subject to taxation at the corporate rate of 29%, without otherwise jeopardising an organisation's PBO status. We applaud this less punitive approach.

Relationship among categories of permitted trading

6. The introduction of the partial taxation system also helps to resolve another contentious issue: the relationship among the various permitted types of income from trading. SARS' original position was that the three categories of permitted trading identified in sections 30(3)(b)(iv)(bb), (cc) and (dd) (certain directly related trading, trading of an occasional nature conducted by volunteers, and activities explicitly permitted by the Minister of Finance) could be concurrently applied. In other words, earning income from trading in one category would not affect a PBO's right to earn further income in one of the other two categories. In addition section 30(3)(b)(iv)(aa), the so-called de minimis clause, allows a PBO to earn up to 15 per cent of its gross annual receipts (or R25 000, if greater) from unrelated trading without jeopardising its tax-exempt status. However, invoking this clause was deemed to preclude the possibility of earning income in any of the other categories. In 2004, SARS made an administrative concession that effectively allowed the de minimis clause to be invoked in conjunction with income from other categories of permitted trading, but only if a reduced concession (5% of gross receipts) is applied to the residual income from unrelated trading.


7. The amendments now being proposed provide a much clearer and more elegant solution to this problem. A PBO's receipts and accruals will be exempt from income tax only to the extent that they are not derived from "carrying on any business undertaking or trading activity" ³ or to, if they are derived from business or trading, then to the extent that they fall into one of the three specific categories currently defined in section 30(3)(b)(iv)(bb) to (dd). All other income from trading is liable to be taxed, subject to the exclusions discussed below.

De minimis clause

8. Although most of the trading restrictions in section 30(3)(b)(iv) are simply relocated within the ITA, the existing de minimis clause would fall away altogether. Instead, the draft amendments ⁴ would introduce a tax rebate for PBOs of R10 800. This is equal to the rebate granted to individuals aged 65 and older. Assuming a tax rate of 29%, this effectively means that a PBO would be able to earn up to R37 200 from unrelated trading in a given year without being liable to pay tax.


9. For very small organisations, this change will be a slight advantage. Organisations with gross receipts of less than R250 000 per year will experience a slight increase in the amount that they are able to earn from unrelated trading without attracting tax. (Under the old system, an organisation that raised R250 000 could safely earn up to 15%, or R37 500 from unrelated trading - just over the new effective PBO tax threshold.) However, organisation with annual receipts greater than R250 000 will see a dramatic decline in their ability to earn income from unrelated trading without incurring tax.


10. We regret this aspect of the interrelated amendments proposed in sections 4, 8(1)(a) and 17(1)(b) to (d). We object on both practical and theoretical grounds. Practically, we believe that it imposes severe and unnecessary restrictions on the capacity of larger PBOs to earn income from unrelated trading. A PBO with annual receipts of, say, R20 million is able to earn less than 0,2% of its income from unrelated trading before it becomes liable for tax. Larger organisations are likely to operate a wider variety of programmes and may therefore earn small amounts of (unrelated) income from a number of different activities. This change will have a chilling effect on their dynamism and creativity, as well as their ability to explore potential strategies for self-sufficiency. Moreover, whereas a commercial enterprise would be able to deduct operational costs from its gross receipts from trading before calculating tax on its profits alone, it is not clear that PBOs would have the option to do this. As a result, for-profit enterprises may actually enjoy a relatively privileged tax position vis a vis PBOs.

Overall approach to trading restrictions on PBOs

11. We also wish to raise theoretical concerns about the SARS' position on PBO trading. PBOs face a hostile funding environment. South African PBOs have experienced a particularly difficult period of adjustment over the past decade in response to revised international funding patterns following the transition to democratic rule. International best practice in the non-profit sector stresses the diversification of funding sources and the exploration of certain commercial and marketing options as strategies to promote long-term organisational sustainability. While we appreciate that commercial activities must not be allowed to eclipse a PBOs primary focus on activities that benefit the public - and particularly poorer households - we would also like to see a legal and regulatory environment that enables PBOs to try out novel and responsible fund-raising strategies.


12. We share SARS' eagerness to ensure that PBO tax concessions do not create other problems. However, we believe that SARS has an exaggerated sense of the potential moral and economic hazard. To the extent that SARS hopes to prevent for-profit businesses from avoiding taxes by masquerading as exempt PBOs, we would submit that there are sufficient safeguards built into section 30 of the ITA to prevent this.


13. In fact, SARS' caution seems to be motivated primarily by a concern that PBOs will gain an competitive advantage over for-profit enterprises, allowing them to "squeeze out" private sector commercial activities and small businesses. SARS seems to feel it has an obligation to "level the playing field", implying that privileging certain players would be unfair. However, this approach is at odds with the principles and values that underpin the entire notion of PBO tax exemption. The Katz Commission and the Portfolio Committee on Finance argued strongly that PBOs play a desirable and beneficial role in society, strengthening democracy and enhancing the public sector's capacity to deliver public services and infrastructure. As a result, there are strong reasons to advantage PBOs, provided such advantages result in net benefits to the society at large.


14. We accept that it might be impractical or even detrimental to abandon all trading restrictions on PBOs. However, the categories of permitted trading are currently very narrowly drawn indeed. We believe that PBOs could still be afforded greater scope to raise funds from trading activities without unduly harming commercial enterprises or causing significant economic distortions. If SARS is reluctant to relax the restrictions in a general way by increasing the taxation threshold or the de minimis rule, then we would urge the introduction of new categories of permitted trading. ⁵ PBOs will still be required to devote any income generated to public benefit activities, so there is limited potential for abuse of a more lenient tax regime.

Investment limitations

15. Section 17(1)(a) of the draft amendments would alter section 30(3)(b)(ii) of the ITA to limit the range of financial institutions in which a PBO may invest its funds. Currently, a PBO may invest in any financial institution, as defined by section 1 of the Financial Services Board Act, 1990. ⁶ This identifies a dozen types of financial institutions. The amendment would limit PBOs to investing in just two types of institutions: unit trust schemes or banks (or mutual banks) that deal with trust property as a regular feature of their business. Other institutions (as distinct from securities) - pension funds, friendly societies, participation bond schemes, insurance houses, etc. - would be excluded.


16. We are concerned by the substantial limitation of the range of investment options open to PBO boards and financial managers. Whilst we acknowledge SARS' obligation to ensure that organisations that benefit from public funds exercise prudent control over those funds, we do not accept that all of the other types of institutions defined in the Financial Services Board Act necessarily constitute imprudent investments. Given the impact of business cycles and economic trends, the returns and security of different types of investments tend to fluctuate over time. Such tight restrictions inhibit PBOs from responding appropriately to these movements. The explanation of the provision in the draft bill expresses concern that many of these institutions are defined in the Act to include managers, agents and brokers who may not necessarily be registered, licensed or authorised to deal with trust property. If this is the primary concern, it should be possible to address it without using such a blunt instrument.

Exemption of certain goods from VAT

17. Section 70 of the draft proposes amendments to paragraph 5 of Schedule 1 of the Value-Added Tax Act, 1991. The change would remove an exclusion on the importation by certain bodies (including an "association not for gain") of clothing and food; it would instead empower the International Trade Administration Commission (ITAC) to regulate the conditions under which all goods may be imported by such bodies. It would also require the agency that receives and distributes such goods to provide a written undertaking that the goods will not be sold or disposed of for gain.


18. The SACC welcomes the increased flexibility gained by making the ITAC responsible for regulating such imports. We further suggest that the definition of an "association not for gain" in the VAT Act be harmonised with the definition of "public benefit organisation" in the ITA to achieve greater consistency across Acts.

1. See section 17(b) of Batch Three of the Draft Revenue Laws Amendments.

2. See section 8(1)(a) of Batch Three of the Draft Revenue Laws Amendments.

3. Neither "business undertaking" or "trading activity" is defined in the Act. The notion of reciprocity inherent in "trading" imposes fairly concrete boundaries on trading activities (i.e., there must be some sort of mutually agreed exchange of good, services or cash). However, the terminology "business undertaking" seems subject to much broader interpretation. We are concerned that it could be interpreted in ways that might encroach on other, currently acceptable fundraising activities of PBOs.

4. See section 4 of Batch Three of the Draft Revenue Laws Amendments.

5.The SACC has, in the past, proposed several new categories of permitted trading, such as: sales of goods and services arising out of public benefit activities, sales of goods and services in restricted or under-served markets, income from the rental of land or buildings to public sector bodies, and a capped allowance for income from commercial rentals. The last of these is particularly important to faith communities whose beliefs prevent them from earning income from the types of investments permitted in section 30(3)(b)(ii). In this regard, we note with appreciation the pledge, contained in section 8 of Interpretation Note 32 on prudent investments, to review the prohibition on PBO investment in immovable property once the partial taxation provisions have been finalised.

6. Note that a PBO may also invest in listed securities or any other investments determined by the Commissioner of Revenue to be prudent. (See SARS Interpretation Note 32 for further information on the Commissioner's determination in this regard.)