(Katz Commission)
FISCAL ISSUES AFFECTING NON-PROFIT ORGANISATIONS (NPOs)
3.1 Attention has been directed by a number of bodies to deficiencies in fiscal legislation, including the existing statutory formulations and the manner in which these are currently being implemented in practice. The following seem to be of the greatest significance.
3.1.1 Much of the antiquated language of these provisions is derived from old English law with its ancient formulations originating in the Preamble to the Charitable Uses Act of 1601. In terms of these archaic Anglo-Saxon formulations, a purpose is considered "charitable" only if it falls "within the spirit and intendment" of the Preamble. This refers inter alia to:
"the relief of aged, impotent and poor people, maintenance of sick and maimed soldiers and mariners, schools of learning, pre-schools, and scholars in universities, repair of bridges, ports, havens, churches, seabanks and highways, education and preferment of orphans, relief, stock or maintenance for house of correction, marriages of poor maids, aid or ease of any poor inhabitants . . . setting out of soldiers and other taxes . . .".
It is self-evident that such terminology is a product of its time, and no longer reflects a contemporary understanding of development, altruism, or public benefit.
3.1.2 As a result of the application of this medieval language, and in the absence of any statutory definitions, the interpretation and implementation of these provisions has imposed a substantial interpretative burden upon the Commissioner.
3.1.3 The difficulties facing both applicants and the Commissioner are compounded by the negligible litigation and hence judicial interpretation of these provisions.
3.1.4 It is recognised that the taxation of NPOs poses particular problems, not only because of limited resources of the South African Revenue Service, but also because of the special character of the organisations and their activities. Any attempt to levy taxation on such organisations is faced with difficulties in defining "income", "expenditure", and "trading", and in distinguishing accruals of a capital nature (such as donations) from accruals of a revenue nature. There exists an inherent difficulty in placing value upon, and bringing to account, goods, services and products which derive from donations, or that are secured and provided at less than actual cost.
3.1.5 The legislation stipulates that eligibility for tax benefits is conditional upon compliance with a range of enumerated criteria and disciplines, which are set out at length in section 10(1)(fA), involving long lists of what may be termed "public interest", rather than "fiscal" qualifying conditions. This leads to considerable uncertainty of application.
3.1.6 A particular area of concern involves the treatment of earned or so-called "trading" income, which is both prohibited by Statute (vide section 10(1)(fA)(ii)(ee)) in respect of "Funds", and, where permitted, then subject to tax. For reasons already indicated, it is considered that NPOs should be encouraged to become more financially self-sufficient therefore such prohibitions and constraints seem inappropriate and incongruous. However, it is recognised that there are legitimate concerns about "unfair competition", and the potential abuse of any tax-exempt status.
3.1.7 There exists a widely-held view that tax deductibility for the benefit of donors represents an important incentive to philanthropy and would be a valuable benefit for hard-pressed NPOs. At present, donor deductibility is permitted only within the very narrow confines delineated by section 18A. It has been cogently argued that the ambit of these provisions should be substantially enlarged. In reality, such arguments are only valid in the event that donor deductibility leads to greater munificence by donors, a result which is difficult to assess. The research is largely of an anecdotal variety, to the effect that greater donor deductibility results in greater philanthropy. The fiscal argument for granting such benefits rests upon the notion that donations support important public needs, thereby relieving Government of financial burdens it would otherwise bear. Professor Lester M. Salamon, in his landmark review of international NPO tax practice, has commented:
"In a sense, such special tax advantages reduce the "cost" or "price" of the gift by reducing the tax liabilities that the donor would otherwise bear. Whether such tax incentives actually induce taxpayers to make charitable contributions or merely influence the timing and amount of such gifts is open to debate, but there appears to be compelling evidence that they have some effect at least on the timing and amount of gifts."10
However, Salamon qualifies this observation by noting that:
11"Critics charge, by contrast, that such incentives are undemocratic since they vest in the hands of private persons, decisions over how to allocate revenues that would otherwise come to the government in the form of taxes."
11) The International Guide to Nonprofit Law, Lester M. Salamon (1997)
12) The
International Guide to Nonprofit Law, (1997), at 24