Submission to Portfolio committee on finance on the DRAFT REVENUE LAWS AMENDMENT BILL, 2003 Dated 8 October 2003 made by the non profit partnership and the legal resources centre
The Non-Profit Partnership, and the Legal Resources Centre hereby submit to Portfolio Committee on Finance their comments on the draft Revenue Laws Amendment Bill, 2003, specifically as it relates to Public Benefit Organisations (PBOs).
At the outset we wish to reiterate our thanks to the National Treasury and the South African Revenue Services for accommodating our comments, concerns and recommendations. In particular, we welcome their commitment to the establishment of a working group to ensure regular communication between PBOs and revenue officials. We believe that it is in the public interest to promote a thriving and responsible PBO sector, and we appreciate the efforts of SARS and Treasury to implement a fair and consistent set of tax concessions that can promote the financial sustainability of the non-profit sector.
To date, however, consultation between the sector and SARS/Treasury has focussed primarily on refining the contents of the Public Benefit Activities lists. Whilst this has made exemption potentially available to a broader range of non-profit organisations, many remain unable to access tax concessions due to other restrictions in the legislation.
In a recent meeting with the National Treasury and South African Revenue Services we noted a number of key issues requiring the most urgent attention. We had identified these issues after consultation with more than 850 organisations over the past 18 months. Briefly these issues relate to:
- The rigidity of Part I of the Ninth Schedule and, in particular, the lack of a generic category for public benefit activities comparable to those listed in the schedule;
- Extension of Part II of the Ninth Schedule;
- The difficulties encountered by organisations engaged in activities that fall within both parts of the Ninth Schedule;
- Limitations on Trading Activities and, in particular, provisions for the deregistration of organisations that exceed the stipulated trading limitations;
- A simplified registration and filing procedure for smaller PBOs and extension of compliance date.
- The limitations imposed on Section 18A funding PBOs.
- Extending the time limitation for organisations to submit applications for PBO approval.
We believe that it is feasible and appropriate to address some of these concerns through amendments to the Draft Revenue Laws Amendment bill. In other cases, we recognise that more extensive and detailed discussions may be necessary before a mutually satisfactory solution can be identified; however, we will note our concerns in order to highlight priorities for future debate.
This submission also makes recommendations in respect of the following technical provisions in the Bill:
- Amending paragraph 40 thereof to allow for funding 18A organisations that continues to qualify for exemption under section 21 (2) (a) of the Taxation Laws Amendment Act, 2000 (Act No. 30 of 2000), and
- Amending paragraph 194 thereof to allow PBOs that continues to qualify for exemption under section 21 (2) (a) of the Taxation Laws Amendment Act, 2000 (Act No. 30 of 2000) to obtain exemption under the Skills Development Levies Act, 1999 (Act. No. 9 of 1999).
The rigidity of Part I of the Ninth Schedule
1.1 We welcome the addition of further activities to paragraphs 3, 4 and 11 of Part I of the Ninth Schedule as recommended in the Draft Revenue Laws Amendment Bill. However, no list is likely to capture the vast and dynamic range of activities undertaken by the non-profit sector. We therefore continue to support the incorporation of a generic category in each section of the list in Part I.
It is suggested that the following general item be inserted at the beginning of the Part I of the Ninth Schedule:
- “Any activity intended to promote the extension or protection of the rights, freedoms and values enumerated in Chapter 2, (the Bill of Rights), of the Constitution of the Republic of South Africa, 1996.”
- “Without derogation from the foregoing, any of the following activities”: -
This insertion is suggested for the following reasons:
The creation of a specific list creates the danger of leaving out deserving activities in the context of the multiplicity of activities undertaken by non-profit organisations in this country. Serious consideration should therefore be given to the creation of a safety-net of a general definition of a public benefit activity. Fortunately, there is a solution which is probably nearly complete, although not entirely perfect, and which is likely to find general consensus. That solution is the Bill of Rights enacted as Chapter 2 of the Constitution of the Republic of South Africa. It is submitted that any activity intended to promote the extension or protection of the rights, freedoms and values set out in the Bill of Rights should qualify for exemption from income tax as a public benefit activity.
The Bill of Rights is described in section 7(1) of the Constitution as “a cornerstone of democracy in South Africa”, Subsection (2) proceeds to provide that the “state must respect, protect, promote and fulfil the rights in the Bill of Rights.” It is submitted that it would be a positive step, one that is within the power of the government to achieve, to honour its constitutional obligation in terms of section 7(2) by extending exemption from income tax to non-profit organisations working to help the inhabitants of this country to enjoy the rights conferred upon them by the Bill of Rights.
1.2 At a minimum, we believe that the contents of the list must be under continuous review and that representatives of the sector should participate in the review process. We are therefore extremely encouraged by the National Treasury and the South African Revenue Services’ willingness to establish a regular working group through which the list can be assessed and amplified.
Extension of Part II of the Ninth Schedule
2.1 Similarly, we welcome the extension of Part II. Although we continue to support the view that all public benefit activities should be eligible for 18A concessions, we appreciate the enlargement of the list in Part II through the inclusion of most activities listed in Paragraphs 1-4 of Part I.
2.2 We are, however, curious about the following omissions from Part II of Schedule 9:
Education & Development
- Training of persons employed in the national, provincial or local spheres of government, for purposes of capacity in those spheres of government
- Career guidance and counselling services provided to persons for purposes of attending any school or higher education institution as envisaged in Paragraph a & b of both part I and part II.
We perceive activities under this heading to be of crucial importance to South Africa’s social reconstruction processes, and are therefore concerned that the omission of these activities may undermine the financial sustainability of the Education and Development sub-sector, especially in view of the fact that the activities omitted often co-exist with other approved activities within one organisations.
Land and Housing
- The promotion, facilitation and support of access to land and use of land, housing and infra-structural development for promoting official land reform programmes
- The protection, enforcement or improvement of the rights of poor and needy tenants, labour tenants or occupiers, to use or occupy land or housing
- The administration of collective housing projects comprising housing units that have been developed, constructed, upgraded, converted or procured for the benefit of the poor and needy as contemplated in paragraph a of both part I & II.
The Minister of Finance’s 2002 Budget Speech made particular reference to the provision of tax incentives for urban renewal and also made particular reference to extending the Section 18A benefits within the Land & Housing sub-sector. The activities above are integral to land reform and urban renewal and are thus consistent with the Minister’s proclaimed aims.
We submit that the activities above, in both paragraphs 3 & 5 are in line with the national government’s aims and objectives and should be included in part II of the Ninth Schedule.
- The difficulties encountered by organisations engaged in activities that fall within both parts of the Ninth Schedule
- When organisations in the sector respond to needs within their communities they are invariable obliged to address a range of interrelated needs simultaneously. Often they must engaging in activities that are contained in both parts I & II of the Ninth Schedule. Approved Public Benefit Organisations pursuing both Section 18A and non-section 18A activities face the dilemma of having to place their Section 18A activities in a separate legal entity to avoid penalties in terms of the Income tax act. This is costly and demanding, and defeats the promotion of the financial sustainability of the non-profit sector.
- We therefore welcome the proposed insertion in section 18A of paragraphs (2A) and (2B), which appear to countenance the possibility of organisations that undertake activities in both Part I and Part II of Schedule Nine issuing receipts in respect of section 18A for donations to support Part II activities, provided the organisation’s accounting procedures allow for the ring-fencing of funds donated for Part II activities.
Limitations on Trading Activities and, in particular, provisions for the deregistration of organisations that exceed the stipulated trading limitations
In the present funding environment organisations are compelled to be innovative and self-reliant in their approach to fund-raising. Organisations are revising their fund-raising strategies to include income generation. This is by no means a derogation of their primary objective. It is merely a means to an end, i.e. self-sustainability, as well as sustaining the communities that they serve.
The current legislation severely restricts the potential for organisations to raise funds through trading, and severely punishes breaches of the legislation. The Act must promote financial sustainability. In its current format it entrenches reliance on donor funding and inhibits financial sustainability.
It is noteworthy that while organisations bemoan the limited parameters within which they may trade, a significant number of organisations are more concerned with the consequences of exceeding the limitations and this deters those organisations from applying to access the benefits. Organisations overwhelmingly express the desire to be treated as normal taxable entities in respect of those portions of their trading income that may exceed the parameters set out in the legislation. Notwithstanding this they are also keen to see the parameters adjusted to facilitate their financial sustainability.
It is submitted that the specific proposals in reference to trading activities made in the Ninth Interim Report of the Commission of Inquiry into certain Aspects of the Tax Structure of South Africa should be revisited in this regard.
In light thereof, we propose that:
- On the basis of the de minimus rule, no tax implications should arise in respect of such trading income up to a limit of R 100 000.00 per annum or 50% of gross receipts, whichever is the greater.
- Income derived from related trading or fee-generation be exempt from tax, to the extent that the gross receipts derived from such income generating activities do not exceed 50%of the gross receipts of the organisation.
- Where no intention to exceed the trading limitations can be imputed to the organisation, trading income in excess of these limits should be subject to normal principles of taxation.
- We respectfully submit that fears that a risk to the fiscus arises from treating surplus income as normal taxable income, is defeated by the very fact that the surplus income is rendered taxable and thus a source of revenue for the fiscus.
- We submit that concerns relating to the abuse of these provisions are sufficiently catered for under various sub-provisions within section 30 of the Act. These include provisions relating to the payment of remuneration, carrying on activities in a non-profit nature, accessibility of the activities of the organisation and the prohibition on not promoting the economic self-interest of fiduciaries and employees.
A simplified registration and filing procedure for smaller PBOs and extension of compliance date
We support the submission by the South African Council of Churches in which a simplified registration and filing procedure is suggested.
We also agree that more time is to develop legislative proposals in this regard, but we urge the application deadline in terms of section 30 of the Act be changed to 31 December 2004 – just as the Bill would do for applications in terms of section 10(1)(d)(iii) and (iv).
We submit that this extension should also apply to public benefit organizations for the following reasons:
- According to a recent study almost hundred thousand non-profit organizations operate within South Africa, more than fifty thousand of which are informal or voluntary associations. The legislative framework does not sufficiently provide for the inclusion of these organisations into the tax system. An extension of the compliance date would provide this matter to be addressed adequately (see submission of South African Council of Churches for more detail).
- One of the requirements for approval as public benefit organizations is registration in terms of the Nonprofit Organisations Act, unless exempted by the Commissioner. This mean that most organizations must first apply to the Directorate for Nonprofit Organisations for registration in terms of the NPO Act before becoming approved public benefit organizations. Registration in terms of the NPO Act takes two months after the application was submitted to the Directorate.
A delay in NPO registration would also cause a delay in the application for approval as a PBO. In recent months the Legal Resources Centre has experienced several delays in the processing of NPO applications.
- The Bill introduces the benefit of 18A status to number of additional activities. Organisations that may not have considered reapplication because of the limitations of section 30, may now wish to do so because of eligibility to the benefits in section 18A. An extension of the deadline would allow for such organizations to do so within an extended time period.
The limitations imposed on Section 18A funding PBO’s
By insisting that the end-user, not merely the first recipient, of any grant be an 18A organisation, Section 30, and now, Section 18A too [as recommended in paragraph h of the draft Revenue Laws Amendment Bill] is effectively precluding any form of public-private partnership in which an 18A lead-agency sub-contracts work to commercial service-providers. This flies in the face of acknowledged international best practice in development, which now emphasises PPPs and the harnessing of private-sector expertise to the pursuit of public developmental goals.
Safs, I don’t know if this is correct, the 18A organisation would still be allowed to be part of a PPP agreement, provided that the activities are Part II Activities. I think that it would also be addressed in terms of the ring-fencing. ,
Short of eliminating the distinctions between Part I and Part II of the Ninth Schedule, we propose that the legislation be amended to permit Section 18A funding organisations to advance funds to non-Section 18A approved organisations, subject to the provision that they are engaged in public benefit activities as described in the Ninth Schedule and that they have applied for 18A status.
Amending paragraph 40 thereof to allow for funding 18A organisations that continues to qualify for exemption under section 21 (2) (a) of the Taxation Laws Amendment Act, 2000 (Act No. 30 of 2000), and
- Paragraph 40 of the Bill provides for an amendment to section 18A (1) (a) (i) to allow the PBO to continue to qualify for exemption under section 21 (2) (a) of the Taxation Laws Amendment Act, 2000 (Act No. 30 of 2000).
- Section 18A (1) (b) deals with PBOs that are providing funding to other PBOs as referred to in section 18A (1) (a) (i). These funding 18A PBOs should also be qualify for the continued exemption under section 21 (2) (a) of the Taxation Laws Amendment Act, 2000 (Act No. 30 of 2000).
- It is therefore recommended that Section 18A (1) (b) be amended to allow for the following phrase to be added thereto:
" any public benefit organisation approved by the Commissioner under section 30, or which continues to enjoy exemption under section 21 (2) (a) of the Taxation Laws Amendment Act, 2000 (Act No. 30 of 2000), which-“
Amending paragraph 194 thereof to allow PBOs that continues to qualify for exemption under section 21 (2) (a) of the Taxation Laws Amendment Act, 2000 (Act No. 30 of 2000) to obtain exemption under the Skills Development Levies Act, 1999 (Act No. 9 of 1999).
2.1 Section 4 (c) of the Skills Development Levies Act, 1999 (Act No. 9 of 1999), requires a similar addition as reflected in paragraph 9 (1) a) to the Bill, to allow for PBOs continuing to have exemption under section 21 (2) (a) of the Taxation Laws Amendment Act, 2000 (Act No. 30 of 2000) to obtain exemption under the Skills Development Levies Act, 1999 (Act No. 9 of 1999).
2.2 It is therefore recommended that section 4 (c) of the Skills Development Levies Act, 1999 be amended to allow for the following phrase to be added thereto:
“ any public benefit organisation contemplated in section 10 (1) (cN) of the Income Tax Act, or which continues to enjoy exemption under section 21 (2) (a) of the Taxation Laws Amendment Act, 2000 (Act No. 30 of 2000), which-“