Ninth Interim Report of the Commission of Inquiry into certain
Aspects of the Tax Structure of South Africa

(Katz Commission)

FISCAL ISSUES AFFECTING NON-PROFIT ORGANISATIONS (NPOS)

4. CURRENT PRACTICE

4.1 As indicated, there has been extremely little litigation challenging the refusal of privileged tax status, despite the large numbers of disappointed applicants. Apart from the cost of litigation, many NPOs discover that the amount of "net income" which would be subject to tax (after excluding donations which are considered of a capital nature) after making provision for operating expenses, is not sufficient to warrant the cost and risk of instituting review proceedings to challenge the Commissioner's decisions.

4.2 The Commissioner's office frequently provides extensive reasons for its decision, in conformity with the precepts of section 33 of the Constitution. However, such stated reasons often serve to illustrate the difficulty inherent in the present legislative provisions.

4.3 Examples of anomalous decisions, to which the Committee's attention has been drawn, include the following.

4.3.1 First Example

4.3.1.1  The Commissioner refused to categorise an organisation as tax-exempt, whose main object was "to train and educate young people to become qualified artisans, to create work opportunities for unemployed people, and to promote cultural aspects in the community and family of the people of the Catholic faith". The Commissioner explained that in the light of the criteria employed, the organisation could not be regarded as either "religious", "charitable" or "educational" within the meaning contemplated by section 10(1)(f) of the Act.

4.3.1.2  The Commissioner recorded the basis for this decision, as follows.

"Section 10(1)(f) of the Income Tax Act (the Act) provides for an exemption from income tax in respect of the receipts and accruals of a religious, charitable or educational institution of a public character.

1. "The term "religious" is not defined in the Act and there have been no South African Income Tax judgments in this regard. However, in considering what is religious, the Commissioner takes factors such as the following into consideration:

1.1 The organisation's purpose.

1.2 The actual operations of the organisation.

1.3 Regular religious services conducted. This would entail a system of faith, a creed and form of worship.

1.4 A regular congregation, the members of which contribute by way of voluntary gifts.

1.5    A complete organisation of ordained ministers.

1.6 A distinct and definite ecclesiastical government.

1.7 Public character - the organisation must be managed and controlled by a body of members who hold their position by virtue of election. There must be no autonomous control by certain members. The whole beneficial interest, including administration and control, must vest in the members who are the public.

2. If the organisation's sole or at least main purpose or activity is to provide education, the following principles must be complied with:

2.1 Acquisition of knowledge in a formal institution of learning.

2.2 Systematic instruction, schooling or training, a formal course of study, instruction or training.

The concept of education envisaged in section 10(1)(f) of the Act requires at least an element of systematic or formal instruction, schooling or training.

3. The word "charitable" is not defined in the Act and consequently it is difficult to lay down hard and fast rules. However, some definitions do provide guidelines and criteria, such as relief of poverty, protection and care of the sick, helping the helpless and almsgiving.

The main object of the organisation is to train and educate young people to become qualified artisans, to create work opportunities for unemployed people and to promote cultural aspects in the community and family of the people of the catholic faith.

The nature of the objects and activities of the organisation has been considered in the light of the aforementioned criteria and I am of the opinion that the organisation cannot be regarded as either a religious, charitable or educational institution of a public character as contemplated in section 10(1)(f) of the Act."

4.3.2 Second Example

4.3.2.1 A section 21 company was refused tax exemption, notwithstanding that its main purpose was "to alleviate poverty, and promote enterprise development in marginalised Southern Africa, by developing and marketing educational and training materials and services, as an institution of a public character". The specific focus of this organisation was to develop innovative training materials and computer-based methodologies to advance entrepreneurship as a strategy for addressing conditions of poverty and unemployment. Its contribution over the initial years of its activity involved enabling more than 7 000 previously-unemployed persons to start their own small businesses. In submitting its application to the Commissioner, attention was drawn to the statement of the Minister of Finance in the 1998 budget speech indicating the creation of the Government's "Umsobomvu Trust", to the effect that the Government, in establishing this Trust, was "responding to the key objective of the presidential job summit, which is to convert the challenge of unemployment into the opportunity for job creation". In refusing this application, the Commissioner advised as follows:

"Section 10(1)(f) of the Income Tax Act provides for an exemption in respect of the receipts and accruals of religious, educational, and charitable institutions of a public character.

The Courts have, in the past, held that an educational institution of a public character, as contemplated in section 10(1)(f) of the Act, is regarded as a formal institution of learning where a formal course of study, instruction or training is imparted.

In a recent appeal case heard overseas, the High Court held that the word "education" connotes the process of training and development of the knowledge, skill, mind and character of students by normal schooling. It is not used in the wide sense according to which every acquisition of further knowledge constitutes education.

Furthermore, it must be noted that the Income Tax Act does not define "charitable". Under common law it has an extensive meaning. It has, however, been held that the fact that the Legislature has specified each category separately in section 10(1)(f), "charitable" is to be used in a narrower sense. This has also been confirmed in the judgment delivered in 56 SATC 18 (on page 25).

In approving an exemption from income tax in terms of section 10(1)(f) of the Income Tax Act, this Department has always interpreted "charitable" in the strict and narrow sense of relief of the needs of the poor.

The nature of the objects and activities of the company has been considered in the light of the aforementioned criteria and I am unable to agree that the company can be regarded as either a charitable or educational institution of a public character, as envisaged by section 10(1)(f) of the Income Tax Act."