Submission to the Portfolio Committee on Finance and the Select Committee on Finance
3 June 2002

Introduction

The South African Council of Churches (SACC) endorses many of the provisions of the draft Taxation Laws Amendment Bill (hereafter "the Bill") as valuable and necessary adjustments to the new system of tax exemption for public benefit organisations introduced by the Taxation Laws Amendment Act, 2000. In particular, we support the introduction of group registration, the amplification of the public benefit activities list, and the extension of the application deadline. We also applaud moves to enable the Commissioner to waive the NPO registration requirement, but suggest that these discretionary powers should be grounded in written criteria. We raise concerns about the omission of theological education, information services and advocacy from the public benefit activities list, the administrative burden placed on very small public benefit organisations, and the formulation of the tests for operating within the Republic and "public character".

Registration for tax exemption

1. The SACC objected to the registration procedures originally outlined by SARS which would have required each legal entity to register independently for tax exemption. We argued that this would place too great an administrative burden on both SARS and the religious community, particularly smaller, independent churches.



2. We proposed the introduction of two further options to reduce this burden and to facilitate compliance. First, we urged SARS to permit related organisations to register for tax exemption as a single group. Second, we 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. Although such small bodies would not be liable to pay income tax, the establishment of their exempt status remains important to enable them to enjoy exemption from other taxes.



3. The Bill 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 regulating or co-ordinating body would be required to ensure that constituent organisations comply with the provisions of the Income Tax Act regulating public benefit organisations (PBOs).



4. The SACC endorses this amendment as a significant step towards a more flexible registration mechanism that seeks to reconcile the responsibilities and interests of the government and religious bodies.



5. At the same time, we recognise that the primary beneficiaries of this change will be larger, more centralised denominations that have the capacity to exercise administrative oversight over a network of constituents (parishes, congregations, etc.). We remain especially concerned about the new tax system's impact on smaller, independent congregations (especially in rural areas) which often have limited access to both information and administrative capacity.



6. We urge the introduction of an automatic exemption from income tax (and ancillary taxes) for associations of persons that undertake public benefit activities on extremely limited incomes. Associations of persons that engage solely in public benefit activities, that do not own land or buildings and that have total annual receipts of less than a certain amount (such as the personal income taxation threshold) should be automatically recognised as tax exempt. Such a body should still be required to maintain financial records for at least five years; to draw up annual financial statements; to make these available to members of the public on request; and to make its records available for inspection by SARS on written request. They should be excused from submitting a constitution to SARS for approval; filing an annual tax return or financial statement with SARS; or registering as an NPO. However, they should not be excused from complying with the constitutional requirements set out in section 30(3)(b) of the Income Tax Act, 1962, nor the provisions related to tax evasion schemes, excessive remuneration and funding of public benefit activities found in sections 30(3)(c), (d) and (f).

NPO Registration requirement

7. 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 SACC member denominations have objected to this requirement. Others have acknowledged the potential transparency benefits of NPO registration for the PBO sector in general, but have questioned the appropriateness of such oversight with respect to religious bodies, especially where they have internal mechanisms of accountability to their membership. In addition, churches have raised concerns about the administrative burden imposed by the NPO Act's reporting requirement. The SACC has therefore asked for a more flexible application of this provision.



8. The Bill would amend sec. 30(3)(g) of the Income Tax Act, 1962, to enable 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. Whilst we would see this as an improvement, we would prefer for there to be a set of written guidelines to assist the Commissioner in deciding what constitutes "good cause". Among the factors to be considered should be the nature of the organisation and the extent to which it has established effective alternative mechanisms of public accountability.

Activities outside the Republic

9. 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 problems for a number of the SACC's member denominations that are organised on a regional basis.



10. The Bill helps to clarify this requirement by changing "substantially the whole" to "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". Ministerial discretion remains intact.



11. The attempt to introduce greater precision is welcome, although it is unlikely to remedy the problem faced by denominations that operate under regional structures. Nevertheless, we recognise that a blanket relaxation or elimination of this requirement could invite abuses.



12. However, the provision, as currently worded, is difficult to interpret. How should one integrate the cost and time calculations to arrive at a single percentage? Many of the church's pastoral activities, for instance, are low-cost but time intensive. If an organisation commits 20 per cent of its staff time and 10 per cent of its budget to work outside the Republic, does it meet this test? Do time and money always receive equal weighting?

Approved public benefit activities in terms of sec. 30

13. In order to be approved as an exempt PBO, an organisation must engage exclusively in designated public benefit activities. Section 30 of the Income Tax Act requires that a list of these activities be incorporated into the Act. The Bill would satisfy this requirement by adding a Ninth Schedule to the Act.



14. The Minister gazetted a draft list nearly a year ago. The Working Group and other religious and secular bodies have commented extensively on this list and pointed out a number of omissions. Many of these have been included in Part One of the Ninth Schedule, including:
    • 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 the Ninth Schedule.



15. The SACC has also raised three other issues that do not yet appear to have been fully addressed in the list:
    • Theological education - A number of churches undertake theological education, and such courses are frequently not accredited in terms of the Acts cited in section 4 of the list (Education). These courses would more appropriately be considered to be covered by item 5(a): "The promotion and/or practice of religion which encompasses acts of worship, witness and community service based on a belief in a deity." However, theological education does not fit very comfortably in any of the three categories named (worship, witness and community service). Whilst it could also be subsumed under item 5(b) - "The promotion and/or practice of a belief" - we propose that "teaching" be added to the list in 5(a).
    • Information services - Two different types of activities should be included: compilation and distribution of news, information and analysis by non-profit organisations such as community media and the facilitation of access to information held by a public or private body in terms of section 32 of the Constitution. These activities go beyond the research and PBO support activities envisioned in items 8(a) and 11(a), respectively.
    • Advocacy - PBOs serve the public both by delivering services directly and by prompting other public and private agencies to do so. Advocacy is often central to the latter enterprise. Although the advocacy work of church agencies is clearly covered by item 5(a) as an act of social witness and community service, there is no similar generic coverage for the advocacy activities of secular organisations. These are insufficiently accommodated by "promotion of democracy" [item 1(i)] or "promotion of the common interests of public benefit organisations" [item 11(a)]. We propose the insertion of a new item 11(aA): The promotion of policies for or actions by public or private sector institutions intended to enhance the frequency, capacity or effectiveness of one or more of the public benefit activities contemplated in this part.

Definition of "public character"

16. The current Act defines a PBO as an organisation "of a public character" that also meets other requirements. However, this term is not currently defined.



17. Section 22(b) of the Bill 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).



18. The "or" at the end of item (c)(ii) indicates that an organisation would be considered to be a public benefit organisation if it satisfied any one of these three tests. We would propose, instead, that an organisation be required to meet either the first or second test and the third test. [We note that it would be equally undesirable to require organisations to meet all three tests. Part One of the proposed Ninth Schedule requires that certain activities enhance the provision of services to poor and needy persons in order for them to be considered public benefit activities, but this condition is not applied to all items on the list.]

Extension of application deadline

19. The SACC strongly endorses the Bill's provisions extending the deadline for the submission of applications for tax exemption from 14 July 2002 to 31 December 2003.

Standing of the SACC

20. The South African Council of Churches (SACC) is the facilitating body for a fellowship of 24 Christian churches, together with one observer-member and associated para-church organisations. Founded in 1968, the SACC includes among its members Protestant, Catholic, African Independent, and Pentecostal churches, representing the majority of Christians in South Africa. 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.



21. In terms of the Taxation Laws Amendment Act, 2000, churches and church agencies are no longer tax exempt on the basis of their religious nature. Instead they will only be exempt if they can satisfy the Commissioner that they qualify as public benefit organisations (PBOs). This generic category encompasses a wide range of organisations with diverse aims and administrative structures. Although the SACC has benefited from continuing cooperation with secular PBOs to assess the impact of the new tax system, we have also recognised that the changes often have unique implications for churches and other religious bodies.



22. Consequently, the SACC Parliamentary Office has facilitated a consultative process among SACC member denomination to identify potential problems with SARS' proposed implementation arrangements and to develop possible alternatives. More recently, we have worked to broaden this discussion to include Christian churches that are not SACC members, as well as parallel structures in other faith communities. Our discussions have included representatives of the Zion Christian Church and the South African Jewish Board of Deputies. We have also been in contact with Hindu and Muslim organisations.



23. SACC members have met with South African Revenue Service (SARS) officials on several occasions, both independently and through the SACC consultative group. We have found SARS officials to be consistently attentive to the concerns we have raised. In this regard, we wish to express particular appreciation to Mr. Mark Kingon and Ms. Lynette Hazelhurst of SARS for their responsiveness and openness to our proposals.

Summary of recommendations

The South African Council of Churches recommends the following changes to the draft Taxation Laws Amendment Act:

• Introduce an automatic exemption from income tax (and, thus, ancillary taxes) for associations of persons with annual incomes less than the personal income tax threshold.
• Develop written criteria for determining when there is "good cause" to exempt an organisation from the NPO registration requirement.
• Establish a clearer test for determining what proportion of an organisation's activities occur outside of the Republic.
• In Part One of the Ninth Schedule that appears in sec.39 of the bill, insert:
• "teaching" in item 5(a) to read "...which encompasses acts of worship, teaching, witness..."
• a new item 8(c): "The compilation and distribution of news, information and analysis by non-profit organisations such as community media, and the facilitation of access information held by a public or private body in terms of section 32 of the Constitution."
• a new item 11(aA): The promotion of policies for or actions by public or private sector institutions intended to enhance the frequency, capacity or effectiveness of one or more of the public benefit activities contemplated in this part.
• In item (c) of the amendment that appears in sec. 22(b), insert "or" at the end of subitem (i) and "and" at the end of subitem (ii).

Presented in an oral submission on 7 June 2002 by Adv. Allan Schwarer, chair of the SA Catholic Bishops' Conference Legal Advisory Committee, and Douglas Tilton, SACC Parliamentary Office.