In the past three months, there have been a number of developments in tax policy that are relevant to churches and faith-based organisations.

Income Tax Policy

1. PBO Registration

Organisations previously exempt from income tax in terms of former section 10(1)(f) of the Income Tax Act (which covered religious, charitable and educational institutions) had until 31 December 2004 to register with SARS as tax-exempt Public Benefit Organisations (PBOs) if they wished their tax exemption to continue uninterrupted. Technically, any previously exempt religious, charitable or educational body that has not applied for registration as a PBO is no longer tax exempt. However, SARS officials have indicated that they will be lenient with late applications from bona fide religious institutions. But if your organisation is eligible to register as a PBO and has not yet done so, please submit your application as soon as possible. No one is automatically exempt from taxation.

2. Trading Limitations

a. Limitations on "unrelated trading"

The Income Tax Act allows recognised PBOs to conduct business activities within certain prescribed limits. PBOs that earn income from trading in excess of these limits currently risk immediate loss of their tax exempt status. To avoid this, SARS has, in the past, advised organisations with significant income from trading to isolate their trading activities in a separate, taxable entity. (In terms of present legislation, an exempt PBO that has a business undertaking or trading asset acquired before 1 January 2001 may retain this until 1 January 2006 without jeopardising its exempt status.)

The SACC and other civil society organisations have objected both to the disproportionate penalties for exceeding the trading limitations and to the administrative burden associated with the proposed remedy of placing trading activities in a separate entity. At SARS' request, a number of religious institutions voluntarily provided SARS with financial data on their trading activities. This information allowed SARS and the National Treasury to reassess the current policy and to propose changes, which were announced by the Minister of Finance in his Budget Speech on 23 February.

It is proposed that PBOs be allowed to retain any business undertakings and trading activities without putting their tax exempt status at risk. Income received in excess of the PBO trading limits would, however, be taxable. Income accruing from activities directly related to a PBO's public benefit activities will remain exempt from income tax.

This change will still need to be enacted as part of a Revenue Laws Amendment Act later this year. It will not come into force until the effective date announced for the relevant provision at the time that the Act is promulgated. However, SARS recommends that PBOs wait until the proposed amendments are enacted before trying to determine if a particular business activity should be transferred into a separate entity.

b. Application of the de minimis rule

The Income Tax Act allows PBOs to earn income from certain types of trading:

• trading directly related to the public benefit objectives of the organisation,
• occasional trading that is conducted primarily by volunteers and does not compete unfairly with profit-making enterprises, and
• other types of trading specifically approved by the Minister of Finance.

Originally, SARS held that a PBO could apply either the de minimis rule or any combination of the other three concessions, but not both. This effectively meant that if an organisation had a significant amount of related trading, it could not undertake any unrelated trading at all.

Following a meeting with the faith community last year, SARS decided that this was not practical or fair. As a result, they have adopted a more restrictive de minimis rule - 5% of gross receipts or R25 000 - but will apply it only to residual trading income. This means that residual income from trading - the amount left over after income from other categories of permitted trading activity has been subtracted from gross trading income - must be less than 5% of gross receipts. This administrative change is discretionary; SARS retains the right to decide when to apply it, depending on the specific nature of a case.

3. Simplified Registration for Small PBOs

SARS has undertaken to develop a simplified registration process and annual tax return procedure for small PBOs. It is not yet clear how "small" will be defined, but it is likely that gross annual receipts will be a key condition.

Property Rates

1. Date of Commencement of Municipal Property Rates Act

The Municipal Property Rates Act, which was enacted by Parliament in 2004, has not yet come into effect. The Department of Provincial and Local Government indicated earlier this year that they expect that the Act will come into effect from 1 July 2005, which means that it will only affect municipal budgets beginning with the 2006/07 financial year.

Note that until the MPRA comes into effect, the old provincial ordinances (in terms of which land used by religious institutions is exempt from rates) still apply. Even after 1 July 2005, a municipality must follow the process and guidelines set out in the MPRA to adopt a rating policy before it can begin to assess new rates. This process includes opportunities for public comment. In addition, a new valuation roll must be drawn up and subjected to public inspection.

2.Use Of Property Owned by One Religious Community by Another Religious Community

The Municipal Property Rates Act prohibits a municipality 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".

Some religious bodies have queried whether this prohibition would continue to apply in situations where one religious community is the owner of a property, but allows another religious community (or another structure within the same religious community) to use it.

The Department of Provincial and Local Government has provided the SACC Parliamentary Office with excerpts from draft regulations to be published in terms of the MPRA. These indicate that the rates exclusion will apply in such a situation, provided the owner does not make a "profit" on the transaction. Section 8.1 of the draft regulations says:

In terms of section 17(1)(i) of the Act the deciding factor as to whether rates should be levied on a property owned and registered by a religious organisation is that the property in question should primarily be used as a place of public worship. Therefore, it does not matter whether the property is used by the same religious organisation that owns it or by another religious organisation that does not own it. However, in a case where one religious organisation allows another religious organisation the use of its property, there should definitely be no profit-making involved. If money changes hands between the two religious organisations, such money should be limited to settlements of other municipal financial obligations such as payments for user service charges e.g. on water, electricity, refuse removal, etc. For purposes of section 17(1)(i) of the Act, the religious community is regarded as a non-profit making entity regarding the use of the property, thus, any deviation from this principle automatically disqualifies the religious community from enjoying the benefits conferred by section 17(1)(i) of the Act.

The regulations also make it clear that this exclusion applies, with the same provisos, to situations where one religious community is allowed to use a manse owned by another religious community. However, it does not apply to situations where a religious community uses property owned by an entity that is not a religious community.