As pointed out in last month’s article, only public benefit organisations (PBO’S) approved by the Commissioner in terms of section 30 of the Income Tax Act (“the Act”) qualify for tax relief. It is therefore important that organisations are aware of what is required to apply for and maintain their tax exempt status.
Applications for exemption must be submitted to the Tax Exemption Unit (TEU) by way of an EI1 form; available on the SARS website. The form must be accompanied by a copy of the constitution, will or other document in terms of which the entity is established. In the case of a company, the founding document to be submitted will be the company’s memorandum of incorporation. The scope of this article is not wide enough to include a discussion of the requirements of the Companies Act in this regard, but companies wishing to apply for approval are advised to obtain professional advice to ensure that their MOI’s comply with the requirement of both the Income Tax Act and the Companies Act.
It goes without saying that the founding document must identify an approved public benefit activity as the sole or principal object of the PBO. Furthermore, section 30 requires a founding document to contain provisions ensuring the following:
If the founding document does not contain these minimum provisions, the persons responsible for the administration of the funds and assets of the PBO may provide a written undertaking (form EI2) that the organisation will be administrated in accordance with the provisions of section 30.
The Commissioner may approve an organisation with retrospective effect from the date on which that organisation qualified for approval. The practical value of this provision cannot be over-emphasised, as the TEU may take several months to process an application for approval.
In order to maintain its exempt status a PBO also has to comply with the following requirements:
If the Commissioner is satisfied that an organisation failed to comply with the provisions of the Act and/or its founding document, the PBO must be given notice to take corrective steps. Should the PBO fail to remedy the situation, the Commissioner must withdraw that organisation’s approval from the commencement of that year of assessment. The PBO then has six months (or such longer period as the Commissioner may allow) to transfer its assets to another PBO, the Government or institution, board or body contemplated in section 10(1)(cA).
A PBO is also required to transfer its assets in the prescribed way upon its dissolution. Should it fail to do so, whether in the case of dissolution or withdrawal of approval, a severely punitive measure comes into play. The market value of all its assets, less bona fide liabilities, is deemed to be taxable income in the year that the PBO’s approval is withdrawn or its public benefit activities terminated.
Even though a PBO may have no tax liability, it is still required to submit an annual income tax return. This enables the Commissioner to assess whether the organisation is adhering to the requirements of the Act. The PBO’s year of assessment will coincide with its financial year. In the case of a trust however, its year of assessment will run from 1 March to the last day of February of the next year.
Section 30(9) requires a PBO to keep books of account, records and other documents for a period of four years after completion of the transactions, acts or operations to which they relate. In addition, the Tax Administration Act requires all taxpayers to keep records, books of accounts and documents used in the completion of an income tax return for a period of five years from date of the submission of the return.
As mentioned in the previous article, PBO’s carrying out public benefit activities listed in Part II of the Ninth Schedule, may apply for approval to issue receipts in respect of donations, rendering such donations tax deductible. In addition to the reporting requirements applicable to all PBO’s, an organisation with approval to issue section 18A receipts must also obtain and retain an annual audit certificate confirming that all donations in respect of which receipts were issued during that year were utilised solely in carrying out activities contemplated in Part II of the Ninth Schedule.
The price to pay for abuse of the tax benefits awarded to PBO’s is high. Any person who is in a fiduciary capacity responsible for the management or control of the income and assets of a PBO who intentionally fails to comply with the provisions of section 18A, section 30 or the organisation’s founding document, shall be guilty of an offence and liable on conviction to a fine or imprisonment for a period not exceeding 24 months.
This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)