Non-profit organisations can apply for approval as a “public benefit organisation” (“PBO”) in terms of section 30(3) of the Income Tax Act in order to qualify for tax exemption under section 10(1)(cN) of the Income Tax Act.
In terms of these provisions, the organisation’s sole or principal object must be the carrying on of one or more public benefit activities (“PBAs”) as defined in Part I of the Ninth Schedule to the Income Tax Act. To determine this sole or principal object, the South African Revenue Service (“SARS”) will consider the organisation’s founding document or constitution (for example the Memorandum of Incorporation (“MOI”)). The wording of these documents is therefore crucial in the application process.
In a Tax Court decision earlier this year, such an application was denied on the grounds that SARS could not reasonably anticipate that the activities of the organisation would at all times meet the requirements for PBO status.
The organisation in this regard rented out remodelled or developed units in buildings for residential accommodation to inter alia low and medium-income households. It applied for income tax exemption status but both the application and its subsequent objection to SARS’ decision in this regard was denied. The organisation was approved in terms of the Social Housing Act and achieved accreditation status from the Social Housing Regulator Authority. Its MOI stated its main objects as the development, holding, letting or another disposal of affordable residential accommodation to and for the benefit of low to medium-income households.
In order to qualify as a PBO, the organisation’s sole or principal object had to be the development, construction, upgrading, conversion or procurement of housing units for the benefit of persons whose monthly household income is equal to or less than R15,000 (see paragraph 3(a) of Part I of the Ninth Schedule).
The organisation tried to argue that due to its accreditation in terms of the Social Housing Act, it automatically qualified as a PBO. The Court considered the legislative regime governing social housing, the evolution and interpretation of paragraph 3(a) of Part I of the Ninth Schedule. For purposes of this discussion, it is important to note that the court found that the main object in the MOI provided for a definitional frame (“low to medium income households”) which was fundamentally different from paragraph 3(a) (which refers to a specified amount of money). The result was that the content may coincide at times (the upper limit for qualification under the Social Housing Act was below R15,000 for the years under consideration) but may differ at times. SARS was therefore correct in denying the application.
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