We appreciate the opportunity to address the Portfolio Committee on Finance on the proposed amendments to the Income Tax Act that will impact on the non-profit sector. We would like to raise the following concern regarding the proposed amendments:
2. PROPOSED AMENDMENT TO SECTION 4 OF THE SKILLS DEVELOPMENT LEVY ACT 1999
Removal of exemption from Skills Development Levy for Public Benefit Organisations
It is proposed in terms of the Bill that section 4 of Act 9 of 1999 be amended to delete paragraph (d) thereof which would have the effect of requiring approved Public Benefit Organisations with an annual payroll of more than R500 000 to pay the skills development levy.
SARS’s reason for the proposed change:
“The proposed amendment will give effect to the proposal in the 200 Budget Review aimed at placing Public Benefit Organisations on par with other employers regarding the payment of the skills development levy.”
The proposal in the 2007 Budget Review provides for the following:
“Public benefit organisations and the skills development levy: The skills development levy is payable by employers to help develop employee skills (subject to an exemption for small businesses). Public benefit organisations (PBOs) do not fully participate in this developmental facility. The scope of this levy will be extended to place PBOs on par with other employers for skills development.”
We propose that the existing section 4 (c) of the Skills Development Levy Act not be amended and be retained in its existing format. We provide the following reasons in support of our proposal:
Nature of PBOs:
a. In order for an organisation to qualify for the exemption under section 4 (c) of the Act it must be an approved PBO which carries on any approved public benefit activity as contemplated in paragraphs 1, 2(a), (b), (c) and (d) and 5 of Part I of the Ninth Schedule to the Income Tax Act, or it must provide funds solely to a PBO carrying on the aforementioned public benefit activities.
b. In order to be approved as a PBO an organisation must comply with a number of requirements listed in section 30 of the Income Tax Act, including:
1. It must carry on its activities in a non- profit manner and with an altruistic or philanthropic intent;
2. No such public benefit activity is intended to directly or indirectly promote the economic self-interest of any fiduciary or employee of the organisation, otherwise than by way of reasonable remuneration payable to that fiduciary or employee;
3. Each public benefit activity carried on by that organisation is for the benefit of, or is widely accessible to, the general public at large, including any sector thereof (other than small and exclusive groups); and
4. It is prohibited from directly or indirectly distributing any of its funds to any person (otherwise than in the course of undertaking any public benefit activity) and is required to utilise its funds solely for the object for which it has been established
c. It is clear that approval as a PBO is subject to stringent requirements aimed at ensuring that the broader public remains the primary beneficiaries of the activities of an approved PBO.
PBOs (previously religious and charitable institutions) have
been exempted from the Skills Development Levies Act since its inception
precisely because of their activities being directed for the benefit of the
broader public. Since 1994, the non-profit sector in
e. It is further clear that PBOs are deserving of this exemption given the broader public benefit involved and the stringent requirements for approval contained in section 30 of the Income Tax Act.
f. The current section 4 provides for further exemptions for public service employers, in the national or provincial sphere of government and any national or provincial public entity, if 80 per cent or more of its expenditure is defrayed directly or indirectly from funds voted by Parliament and certain municipalities.
g. In addition to the above small businesses are also exempted through section 4 (b) in situations where the total amount of remuneration, paid or payable by that employer to all its employees during the following 12 month period will not exceed R500 000. This benefit exemption is accessible to qualifying PBOs. We however submit that it is not an equivalent substitute for the existing section 4 (c) as many of the current exempted PBOs’ payroll would exceed the limit of R500 000.
h. It is however noteworthy to consider the reason offered by SARS in support of increasing the current limit of R500 000 from R250 000 for small businesses, being:
Currently, a business with a payroll of less than R250 000 per annum and which does not have any employees who are liable for PAYE, is exempt from the payment of skills levy. As part of the initiative to provide relief for small businesses and to reduce their compliance costs, the Minister of Finance proposed in his Budget Review this year that the threshold for the exemption from the skills development levy be increased to R500 000. The requirement of not having any employees liable for PAYE will also be deleted.
Explanatory Memorandum on the Taxation Laws Amendment Bill, 2005
i. We submit that this rationale is equally applicable to approved PBOs with annual payrolls of more than R500 000.
Number of employees in non-profit sector:
1. In one of the most comprehensive studies on the South
African non-profit sector it has been found that the non-profit is a
significant employer in
j. Although not all of these employees are not employed at approved PBOs it is clear that a substantial number of PBOs may be affected by the proposed amendment to the Skills Development Levies Act.
k. For example, a PBO with annual payroll of about R2 million, which is currently exempted from paying the skills development levy, will have to make provision for an additional amount of R20 000-00 to cover for the skills development levy. This would constitute a significant change to the budget of such a PBO.
The need for substantial motivation:
l. In the 2007 Budget Review, it is suggested, that Public benefit organisations do not fully participate in this developmental facility.
m. This motivation is unfortunately not substantiated in either of the source documents and we find it problematic for such drastic step to be proposed without having provided the relevant statistics. Given the number of full-time employees in the non-profit sector the National Skills Development Framework presents as much a benefit to employees in the non-profit sector as in the commercial sector.
n. The following excerpt is taken form the website of the Sector Education and Training Authority (Seta) for Finance, Accounting, Management Consulting and other Financial Services (Fasset) which clearly illustrates that exempt institutions can still benefit from this development facility:
Firms who do not pay the SDL can still become involved with the Fasset Seta in a variety of ways. These firms will not miss out on the useful benefits available to all firms Such as free training, special cash grants and free Adult Basic Education and Training (ABET) .
In order to participate in these benefits, an employer must complete the Employer Registration Form for Exempt Employers. Fasset will then issue an Exempt Levy Registration Number.
o. The current proposal provides for the removal of an existing tax benefit offered to PBOs. The proposed amendment has its origins in an unsubstantiated motivation which should not be used as a basis to provide for the removal of a significant tax benefit that has been offered to Public Benefit Organisations since the inception of the this Act.
p. In the event that this motivation is proven to be accurate we suggest that other ways should be explored for PBOs to fully participate in this developmental facility which is aimed at developing the skills of employees.
q. It is important to note that most PBOs are reliant on donor funding and accordingly operate with budgets that are prepared in line with committed donor funding. The proposed change would eliminate an existing tax benefit and increase the monthly expenditure of those PBOs with an annual payroll of more than R500 000.
Size and Scope of the Non-Profit Sector in South Africa, School for Public and
Development Management, University of the