Income Tax

Effective 15 July 2001, the basis for income tax exemption changed. The previous exemption for "religious, charitable and educational institutions of a public character" was abolished and a new exemption was created for "public benefit organisations". A public benefit organisation (PBO) is defined in law as an organisation that:

• Is a trust, an association of persons or a Section 21 company;
• Pursues public benefit activities (a list of which appears in the Ninth Schedule of the Income Tax Act and includes "the promotion and/or practice of religion which encompasses acts of worship, witness and community service based on a belief in a deity and a recognised creed");
• Has incorporated certain provisions, including restrictions on trading activities, into its constitution or founding document;
• Is registered as a Non-Profit Organisation (or has shown good cause why it should not register);
• Complies with the reporting requirements set out by SARS; and
• Refrains from paying "excessive remuneration" to any employee, office bearer or member.

In order to claim tax exemption as a PBO, an organisation must be registered with SARS. The Income Tax Act makes provision for a group of related organizations pursuing similar objects (such as all of the congregations of a denomination) to register as a group, but in this case one entity (such as a denominational or regional office) must be responsible for ensuring that all of the other members of the group comply with the reporting requirements and other aspects of the law.

Organisations that previously enjoyed exemption as a religious, charitable or educational institution will remain exempt, provided that they apply for PBO registration by 31 December 2004. Currently exempt organisations are, however, advised to apply for PBO status as soon as possible to ensure that their tax exemption does not lapse. The application deadline has already been extended twice and is unlikely to be extended again.

The SACC Parliamentary Office, in consultation with SACC member churches and representatives of the NPO sector, has been raising a number of concerns with SARS about the provisions and implementation of the new PBO tax system. Two of the most important are:

• Restrictions on income from trading - Currently, a PBO is only permitted to earn income from certain types trading activities (i.e., the sale of goods or services). These include "related" trading that does not compete unfairly with for-profit businesses and trading activities that are of an occasional nature and are conducted using mainly volunteer labour (such as a church bazaar). Related trading is defined as trading directly related to the objects of an organisation (such as the sale of Bibles and religious materials by a church press). Alternatively, a PBO may earn up to the greater of 15% of its gross receipts (all cash in) or R25 000 a year from trading activities, but if this provision is used all trading income (including income from "related" trading or occasional activities) must be included in the calculation. We believe that these restrictions are too narrowly drawn and are exploring a more appropriate configuration with SARS.



• Registration of small PBOs - SARS has a duty to ensure that organisations that receive tax concessions from the state are accountable and transparent in their financial affairs. However, there are many small PBOs, including local congregations, that lack the administrative capacity to meet the record-keeping and reporting requirements designed to achieve this goal. The SACC is arguing that a simplified registration and reporting system should be available to organisations with gross annual receipts less than a certain threshold, just as individuals are exempted from filing annual returns if their income is below a certain level.

Property Rates

The Constitution (s. 229) gives municipal governments the right to levy rates on property, subject to regulation by national legislation. Due to delays in enacting the relevant legislation, the rating ordinances of the four former provinces currently remain in effect. All four considered land used by religious institutions - including residences for ministers of religion registered in the name of the institution concerned - to be exempt from rates. Such land did not need to be zoned for religious purposes to be exempt; the sole test was "exclusive use".

On 4 March, the Parliament enacted the Municipal Property Rates Act, which will repeal the old provincial ordinances and empower local governments to assess rates. Interventions by the SACC secured several important changes to the bill originally tabled. Most important for churches, the Act prohibits municipalities from levying rates on "a property registered in the name of and used primarily as a place of public worship by a religious community, including an official residence registered in the name of that community which is occupied by an office-bearer of that community who officiates at services at that place of worship".

This exclusion lapses if the property is sold or if it ceases to be used as a manse or a place of public worship. If the exclusion lapses, the religious community owning the property becomes liable to the municipality concerned for any rates that would normally have been payable on the property during the previous year. The amount due is regarded as rates in arrears and is subject to interest at the usual rate.

In general, before a municipality can levy rates, it must adopt a rating policy that:

• Treats persons liable for rates equitably;
• Considers, and take steps to minimise, the burden of rates on the poor;
• Takes into account the effect of rates on PBOs pursuing certain public benefit activities; and
• Establishes criteria for granting exemptions, rebates or preferred rates for certain categories of properties.

Once a rating policy has been enacted, a valuation role must be drawn up. All properties, including churches and most other excluded categories, must be valued. Property is to be valued at market rates, in accordance with "generally recognised valuation practices, methods and standards". A valid pre-existing municipal valuation roll may continue to be used for up to four years after the Act comes in to effect or until a new valuation roll is drawn up.

Once a valuation roll has been drawn up, it must be open to public inspection for at least 30 days, during which time objections to the valuation of specific properties may be lodged. An objector who is not satisfied with the decision of the municipal valuer regarding his or her objection has a right of appeal to a valuation appeal board, appointed by the MEC for local government. A valuation roll takes effect at the start of the financial year following the completion of the public inspection period and remains valid for up to four financial years.

Where rates are assessed on properties for the first time, they must be phased in over three years, so that 25% of the assessed rate in payable in the first year, 50% in the second, and so on. Rates on certain PBOs must be phased in over four years, with no rates payable in the first year. This allows such organizations to apply for rates exemptions or reductions. The phasing-in period may be extended by the relevant MEC for local government, provided it does not exceed six years.

Further Information

For more information on property rates or income and related taxes, please see "Churches and Taxation in Democratic South Africa". The Gauteng Council of Churches is planning to host a seminar on church tax issues on 30 March 2004; please contact the GCC (011 339 4288) if you wish to attend. Finally, the Parliamentary Office maintains an e-mail list for information on developments in tax policy. Please contact us if you would like to be added to the list.