Executive Summary

The new Taxation Laws Amendment Bill deals with a number of issues of concern to the religious community arising out of the implementation of the Taxation Laws Amendment Act, 2000. In particular, it would introduce the following changes, discussed in more detail below:

• Provision for group registration for tax exemption;
• New tests for the "public character" of an organisation;
• Prohibition on the control of organisational decision-making by a single person;
• Discretionary powers for the Commissioner to waive the NPO registration requirement;
• Relaxation of the requirement that PBOs operate solely within the bounds of the Republic;
• Expansion of the list of exempt public benefit activities; and
• Extension of the deadline for application from 14 July 2002 to 31 December 2003.

SACC members are encouraged to study these changes, to notify relevant structures within their denominations, and to alert the SACC Parliamentary Office to any problems or concerns.

Background

On 7 March 2002, representatives of the interfaith Religious Tax Policy Working Group, convened by the SACC Parliamentary Office, met with Mr. Mark Kingon and Ms. Lynette Hazelhurst of SARS to discuss a number of matters of concern to religious bodies arising out of the implementation of changes to the tax laws affecting public benefit organisations (PBOs) as a result of the enactment of the Taxation Laws Amendment Act, 2000. During the past year, there have also been a number of bilateral meetings between individual denominations and SARS to discuss related issues.

On 27 May, SARS published for comment a draft Taxation Laws Amendment Bill (TLAB) which would modify a number of aspects of the new tax regime, including many of those raised by the religious community. The Portfolio Committee on Finance will hold public hearings on the Bill, beginning on 5 June. This update assesses key provisions of the Bill with particular reference to the matters raised in the memorandum presented to SARS by the Religious Tax Policy Working Group.

1. Registration for tax exemption

The Working Group expressed concern that the registration procedures outlined by SARS - namely that every legal entity would have to register independently for tax exemption - would place too great an administrative burden on both SARS and the religious community. It proposed the introduction of two additional provisions to reduce this burden and to facilitate compliance. First, it urged SARS to permit related organisations to register for tax exemption as a single group. Second, it recommended the introduction of a registration threshold so that bodies whose annual income was below a certain amount (such as the threshold for personal income tax) would be considered automatically exempt.

The proposed TLAB incorporates the first of these two recommendations. It would empower the Commissioner of Revenue to grant a group exemption where a number of organisations:

• share a common purpose;
• engage in public benefit activities; and
• operate under the direction of a regulating or co-ordinating body.

The TLAB would also insert a provision empowering the Commissioner to grant retrospective exemption to applying organisations that previously qualified for tax exemption but that did not apply for such exemption, provided they apply by 31 December 2003.

2. "Public character" defined

The current Act defines a PBO as an organisation "of a public character" that also meets other requirements. This term was not previously defined, however.

The TLAB would introduce three tests for the "public character" of an organisation:

• All its activities must be "for the benefit of, or widely accessible to, the general public at large, including any sector thereof (other than small and exclusive groups)";
• All its activities must be "for the benefit of, or readily accessible to, the poor and needy"; or
• At least 85 per cent of its funding must come from donations or state grants (either domestic or foreign).

These are new provisions which demand careful consideration from the religious community.

3. Control of organisational decision-making

PBOs are presently required to have at least three unconnected persons to accept fiduciary responsibility for the organisation.

The TLAB would add a further requirement that no single person may directly or indirectly control decision-making power with respect to the organisation. (This provision has also not yet been considered by the Working Group.)

4. NPO Registration

The Income Tax Act presently makes tax exemption for PBOs conditional on their registration as Non-Profit Organisations in terms of the Non-Profit Organisations Act, 1997. A number of denominations have objected to this requirement. Even those that acknowledge the potential transparency benefits of NPO registration for the PBO sector in general have argued for a more flexible approach, especially with respect to bodies that have internal mechanisms of accountability to their membership.

The TLAB addresses this matter in two ways. First, the provisions for group registration for tax exemption imply that only the exempt regulating or co-ordinating body would need to register as an NPO, not all of the constituent organisations. Second, it would permit the Commissioner of Revenue, in consultation with the Director of Non-Profit Organisations, to waive the NPO registration requirement if an applicant is able to show good cause for doing so.

5. Coverage of activities outside the Republic

The Income Tax Act currently requires an exempt PBO to undertake substantially the whole of its activities inside the Republic, unless the Minister of Finance waives this requirement. This could pose difficulties for denominations that operate under regional structures.

The TLAB lowers the bar only slightly. It would require that "at least 85 per cent of such [public benefit] activities, measured as the cost related to the activities and the time expended in respect thereof, are carried out in the Republic". Ministerial discretion remains intact.

Although the formula is somewhat ambiguous, many denominations that operate on a regional basis are still likely to have to apply for special dispensation. However, this is probably desirable as a blanket relaxation of the requirement could invite abuse of the exemption provisions.

6. Public benefit activities

In order to be approved as an exempt PBO, an organisation must engage exclusively in designated public benefit activities. A list of these activities was published last year and must now be incorporated into the Income Tax Act. The Working Group and other religious and secular bodies have commented extensively on the list and pointed out a number of omissions.

The TLAB will add the list of approved public benefit activities to the Income Tax Act as Part 1 of Schedule 9. The list has been expanded in a number of important areas. Omitted activities mentioned in the Working Group submission that have been added to the list include:

• The promotion of human rights and democracy [item 1(i)];
• The promotion or protection of the rights and interests of, and the care of, asylum seekers and refugees [item 1(n)];
• Community development and anti-poverty initiatives [item 1(o)]; and
• The donation (or provision at cost) of funds, assets or other resources to any PBO or association of persons engaged in public benefit activities [item 10].

In addition, the Bill would remedy an ambiguity in the current law by explicitly empowering the Minister of Finance to identify new public benefit activities and to table these in Parliament for incorporation into Schedule 9 within one year.

Matters raised in the Working Group submission that do not yet appear to have been fully addressed in the list are theological education, information services, and advocacy.

7. Donor deductibility

Section 18A of the Income Tax Act gives companies and individuals incentive to donate money to certain activities by allowing them to deduct such donations from the gross income reported on their tax returns. The 2000 TLAB expanded the range of activities eligible for this incentive. However, it also requires that beneficiary organisations be engaged exclusively the approved activities. This means that organisations that are currently engaged in both deductible and non-deductible public benefit activities must segregate their deductible activities in a completely separate organisation if they wish to take advantage of this incentive. The Working Group has argued that this imposes an unreasonable administrative burden and undermines the potential advantages to be gained from more comprehensive and holistic programmes.

The draft TLAB does not directly address these concerns. SARS officials have acknowledged the religious community's objections, but have said that they are only prepared to alter this requirement if an alternative mechanism can be identified to prevent abuse of the 18A concession.

However, in line with the changes mentioned above, the TLAB would amend section 18A to permit registration of a group of organisations for donor deductible status and empowers the Minister to add public benefit activities to the list of activities eligible for donor deduction (which list is to be incorporated into the Income Tax Act as Part 2 of Schedule 9).

8. Time frames

In its meeting with SARS, the Working Group noted that there is no central communication network within the religious sector. This makes it difficult to alert many bodies who may have considered themselves automatically exempt from income tax under the previous system to the implications of the new tax laws.

The TLAB addresses this concern by extending the deadline for the submission of applications for tax exemption from 14 July 2002 to 31 December 2003.

9. Participation in the SARS Working Group on PBO Tax Issues

SARS has formed a Working Group to consider issues arising out of the implementation of the new PBO tax provisions. The Religious Tax Policy Working Group asked to be represented in this forum and SARS has extended such an invitation. As this group usually meets in Pretoria, we have asked Mr. Allan Schwarer, chair of the SACBC's Legal Advisory Committee, to represent the Religious Tax Policy Working Group. He has asked that SARS' PBO working group be convened on an annual basis to review progress toward the implementation of the new system and to address any further problems that emerge.

For more information

The full text of the draft TLAB and the accompanying explanatory memorandum is available on the SARS web site in Acrobat (.pdf) format. To obtain a copy by e-mail or for further information, please contact the Parliamentary Office (Tel. 021-423-4261). The Parliamentary Office is also available to brief denominational personnel on the new tax system.