16 OCTOBER 2006




1.       The South African Council of Churches (SACC) is the facilitating body for a fellowship of 23 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 with a combined constituency of roughly 15 million adherents. 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.


2.       Our submission is informed by discussions with SACC member denominations and other faith communities through the Religious Tax Policy Working Group, which the SACC has convened for the past six years.  In addition, we have benefited from regular interactions with secular organisations concerned about the legal and tax environment for non-profit organisations, including the Non-Profit Consortium, the Legal Resources Centre and the Charities Aid Foundation.


Key Areas of Concern


3.       The draft Revenue Laws Amendment Bill (RLAB) and the supplemental amendments issued on 12 October propose amendments to the Income Tax Act, 1962 (hereafter the “ITA”) and related revenue laws contain clauses that affect seven aspects of tax law relevant to Public Benefit Organisations (PBOs).  They would:

·         Alter the tax rates for PBO trading activities;

·         Effect technical amendments to Eighth Schedule provisions governing Capital Gains Tax;

·         Add new public benefit activities to Parts I and II of the Ninth Schedule of the ITA;

·         Extend PBO treatment to most local branches of foreign charities;

·         Relax the rules for permissible PBO investments;

·         Abolish the NPO registration requirement for PBOs; and

·         Regulate the duty payable on goods imported for the 2010 FIFA World Cup and subsequently donated to a PBO.


Tax rates for PBO trading


4.       When the new tax system for PBOs was introduced in 2001, PBOs were only allowed to engage in a very limited range of trading activities without jeopardising their exempt status.  PBOs with substantial trading activities were advised to place these under the control of a separate, taxable entity.


5.       Upon reflection, revenue officials agreed with the sector’s objections that these limits were too restrictive and the penalties for breaching them too harsh.  As a result, subsequent revenue law amendments relaxed the limits slightly and, more importantly, allowed PBOs to retain trading activities without putting their exempt status at risk.  The trade-off was that PBOs would be required to pay taxes on most of the income received from trading that was not otherwise exempt. The rate imposed on income from trading depended on the PBO’s organisational form: Section 21 companies and associations of persons attracted the company tax rate of 29%, while trusts attracted the higher trusts rate of 40%.


6.       Revenue officials now argue that this differential rate imposes an unfair burden on trusts.  They propose to equalise the tax rate at 34%.  The explanatory memorandum justifies this rate on the grounds that it is aligned with the branch profits rate of foreign companies, which combines income tax and Secondary Tax on Companies.  It is also claimed that the 34% rate “puts PBO trading activities on par with operations conducted by PBO subsidiaries (all of which would be subject to both a combined income tax and Secondary Tax on Companies)”.


7.       Essentially, revenue officials seem to be trying to reconcile two sets of tax rates.  First, they are trying to equalize the tax rate imposed on all PBO trading income, regardless of the PBO’s legal form.  Secondly, they are trying to equalize the nominal rate of tax attracted by PBO trading activities with the effective tax rate on companies.


8.       We support the first of these objectives, but have reservations about the second.  We agree that trusts should not bear a disproportionate tax burden.  However, we fail to see why domestic PBOs should be treated like branches of foreign companies, we question the assertion that PBO subsidiaries would necessarily be liable for secondary tax on companies, and we have grave doubts about the policy rationale underlying the entire effort to equalize PBO and corporate taxes.


9.       Our understanding is that unlike income tax, which is payable on all company profits, secondary tax is payable only on profits distributed to shareholders in the form of dividends.  Thus, the effective tax rate experienced by companies (income tax + STC) would depend to some extent on what proportion of profits a company decided to distribute.  Even if we accept that 34% is an accurate average, we do not believe that a PBO subsidiary would necessarily attract STC if it donated its post-tax profits to its PBO arm, rather than distributing them as dividends to shareholders.


10.   We suspect that the real motivation for selecting the 34% tax rate is twofold.  First, it represents an attempt to prevent a potential loss to the fiscus as a result of lowering the rate of tax on trusts.  Secondly, it is yet another manifestation of revenue officials’ overzealous attempts to ensure that PBOs do not enjoy any “unfair” advantage in trading over profit-making enterprises.  We continue to believe that this is a straw man.  First, we believe that the majority of PBO trading activities do not directly compete with those of profit-making enterprises.  Even where they do, there is little evidence that they undersell or otherwise crowd out for-profit trade.  More importantly, the whole point of developing a separate tax regime for PBOs is to encourage them and their activities by giving them a privileged position relative to for-profit enterprises.  Efforts to “level the playing field” with for-profits therefore undermine the public policy objectives that gave rise to the PBO tax system in the first place.


11.   Consequently, we believe that Section 140 should be changed to make the rate of tax on all PBOs and recreational clubs 29 per cent, rather than 34 per cent.


Capital Gains Tax


12.   Sections 55 and 56 of the RLAB would reorganise provisions inserted in the Eighth Schedule of the ITA at the end of 2005.  They are essentially clarifying amendments that do not signifiicantly alter the impact of these clauses.  However, rereading these sections in conjunction with Draft Interpretation Note 24 (Issue 2), released by SARS in July 2006, has highlighted several concerns about the potential impact of these provisions.


13.   At first blush, the principle underlying these provisions – that PBOs should not be exempt from capital gains tax (CGT) on assets not directly used for public benefit activities – seems fair and consistent with the logic of the ITA.  Indeed, we accepted it as such in our October 2005 submission on last year’s RLAB, but raised concerns about how this would be applied to assets used for more than one purpose.  Further reflection on the practical applications of these provisions has confirmed and extended our earlier reservations.


14.   First, if CGT will be assessed on all assets not directly deployed in connection with public benefit activities, this would mean that PBOs would effectively be penalised for investing surplus funds in securities or any financial instrument.  This would be a particular problem for PBOs engaged in the provision of funds and resources to other PBOs.  Presumably their activities will be supported by a significant endowment which is likely to be invested in shares and other assets.  Taxing the returns on this investment will undermine their capacity to finance public beneifit activities and tend to frustrate the very objectives that the PBO tax regime was established to promote.


15.   Even if the assessment of CGT is limited to real assets (and the law is further amended to clarify this), there would still be practical problems with the assessment of CGT on assets that have a hybrid use or that undergo a change of use.


16.   With respect to hybrid use, the Eighth Schedule of the ITA currently requires “substantially the whole of the use” of an asset to be for public benefit activities if it is to be exempt from CGT on its disposal.  Draft Interpretation Note No. 24 explains that SARS interprets “substantially the whole” to mean 85% or more. This “all or nothing” approach is problematic. Suppose a PBO acquires a structure to accommodate certain public benefit activities. It later realizes that this structure can also be a community resource and decides to let others use it when it is not required for the PBO’s work. It lets out the premises at a nominal fee to community groups (some of whom pursue PBAs, either as recognized PBOs or not) and occasionally at slightly higher rates to business clients.  On the whole, its income is primarily related to cost recovery and its “profits” (which, of course, help to underwrite its other PBAs) remain sufficiently low that they do not attract tax, even under the partial taxation provisions.  However, it is a popular venue – in part because of the nominal fees – and so it is used virtually to full capacity, such that the owning PBO is only using it 50% of the time.   In this scenario, the PBO attracts full CGT on the disposal of the asset.  In effect, they are being penalized for being good stewards of this resource, ensuring that it is fully utilized and making it available at sub-market rates to community groups.  Had they just let it stand empty when they were not using it or had they charged higher rates, they would have been better off.  Would it not be fairer to pro-rate the CGT payable, such that the PBO would only be liable for 50%?  Of course, this would require the PBO to maintain records of usage to support their claim, but presumably such evidence would be required to support an 85% claim, anyway.


17.   Another example of hybrid use might be a manse owned by a worshipping congregation. It owns the property for 35 years.  For 7 of those years, the congregation has a pastor that has her own home and does not wish to use the manse.  The congregation therefore decides to rent out the manse at market prices and use the bulk of the income to finance a housing allowance for the pastor.  On a straight time calculation, the property was only used by the church as a manse for 80% of the 35-year period, so it would attract full CGT on disposal.  This also seems unfair.


18.   The third area of concern involves change of use. Suppose a PBO has an asset that it has used primarily (85%+) for public benefit activities for four years.  It is valued on 1 January 2007.   In February 2008, it decides it no longer needs the property for its work and puts it on the market.  Due to characteristics of the property or the market, they cannot find a buyer until June 2009, and the transfer process is not finalized until Jan 2010.  In an effort to generate revenue, the PBO rents out the property at market rates from March 2008 until July 2009.  In terms of the ITA, as amplified by Draft Interpretation Note 24, it appears that this property would attract CGT.


19.   We would urge Parliament to consider amending the legislation to give PBOs a two-year grace period in which to dispose of property that ceases to be uses primarily for public benefit activities. The period should also be calculated to the date of sale, rather than the date of transfer.


New Public Benefit Activities


20.   Sections 62 of the RLAB would expand the range of housing activities eligible for PBO status in terms of Part I of the Ninth Schedule, while sections 63 and 63 would add these and additional conservation, environmental and animal welfare activities to list of donor deductible activities in Part II of the Ninth Schedule.


21.   We do not believe that these changes are likely to have significant impact on faith-based organisations, but we support them in principle.


Local branches of foreign charities


22.   Section 26 of the RLAB would amend Section 30 of the ITA to include local agencies or branches of foreign charities in the definition of PBO, provided the parent organisation has the equivalent of PBO status in the country in which it is based.  This change necessitates consequent changes to a number of other sections of the ITA.


23.   In addition, the local branches of foreign PBOs would only be expected , on dissolution, to transfer their local assets (as opposed to all of their assets) to a similar organisation with in the Republic.


24.   We strongly support these changes.   However, section 19 of the RLAB would amend section 18A of the ITA to limit 18A (donor deductibility) benefits to domestic PBOs.  While it is understandable that SARS would wish to deny domestic tax credit for donations deployed outside of the Republic, it is likely that most donations to local branches of foreign charities would be used within the Republic.  Indeed, it would make more sense to make the 18A status of any given donation conditional on the end use of that donation (e.g., to activities occurring within the Republic and listed in Part II of the Ninth Schedule) rather than on the national home of the mediating agency.


Permissible investments for PBOs


25.   Section 26 of the RLAB would also abolish most of the restrictions on permissible PBO investments.  The only remaining prohibitions would be on foreign investment and on the direct or indirect distibution of proceeds to any person.  We strongly support these changes and the additional flexibility they afford to PBOs.


Abolition of NPO registration requirement


26.   Section 26 would also delete Section 30(3)(g) of the ITA, which requires a PBO to be registered with the Non-Profit Organisations Directorate of the Department of Social Development within a period specified by the Commissioner.  We have long campaigned for the abandonment of this requirement and are pleased that it is finally taking place.  We hope that the Department of Finance will now urge government departments and agencies to use PBO status, rather than NPO status, as a criterion for assessment of eligibility to access public funds.


Duty on goods imported for the 2010 FIFA World Cup


27.   Section 11 of the Second RLAB would amend Schedule 1 of the Value-Added Tax Act, 1991, to give effect to Government Guarantee 3, made to FIFA. It regulates the duty payable on goods imported duty free for use or sale during the 2010 World Cup, but then donated to a PBO.  We have no objection to the principle that reasonable duties should be paid on such items.




28.   The SACC thanks the Portfolio Committee for this opportunity to comment on the RLAB.  We hope that it will be possible for the Committee to accommodate our concerns.