Entities that conduct their activities in a non-profit manner may apply in certain circumstances to the Commissioner for the South African Revenue Service (“the Commissioner”) to be approved as a public benefit organisation (“PBO”) in terms of the Income Tax Act.One of the requirements to qualify as a PBO is that the entity must utilize its funding solely or mainly for purposes of conducting its philanthropic activities (referred to as “public benefit activities” or “PBAs”).
These entities are generally dependent upon donations from the general public to fund their PBAs. Although a PBO is not prohibited from entering into other business undertakings or trading activities to supplement its income, it will only receive partial tax relief in respect of such income to the extent that the undertakings or activities fall outside certain tax-free parameters.
The question therefore arises whether or not PBOs are allowed to build up a capital fund to allow for these PBOs to become self-sustained to an extent and not to be completely dependent upon the generosity of the general public to be able to conduct its activities on a year-to-year basis.
SARS’ Tax Exemption Guide for Public Benefit Organisations (“the Guide”) seems to suggest that only excess funding can be invested for future use. This is supported by specific rules relating to the investment and distribution of donor funding that were introduced in section 18A of the Income Tax Act, but which rules only apply to PBOs providing funding to other approved organisations (including PBOs). Although SARS seems to acknowledge the fact that a capital fund is required to allow for a sustainable source of funding for these specific “PBO-funding” PBOs, no specific rules exist for other “ordinary” PBOs. It is therefore uncertain as to what extent other PBOs will be allowed to invest their donor funding in investments and use the return on these investments for the furtherance of its activities.
In terms of the Guide the passive investment of surplus funds in shares or an investment in a financial institution is not normally regarded as a business undertaking or trading activity. However, if it is undertaken in an active manner, such as the advancing of interest-bearing loans at market-related rates, it could be regarded as a business undertaking.
The take away is that PBOs must carefully consider the provisions of sections 18A and 30 of the Income Tax Act as well as its application to the relevant PBO’s specific circumstances in instances where such PBOs wish to start building up a capital fund.
No. 58 of 1962