The sub-committee on taxation for non-profit organisations has received a number of submissions relating to the tax environment for non-government organisations (NGO’s). In considering these submissions the sub-committee wishes to draw to the publics’ attention a range of issues which it considers require careful debate and analysis before a set of final recommendations can be formulated.

Closing date for submissions to the commission is December 23.

Submissions should be sent to the following address:

The Secretary
Tax Commission
Private Bag X349
Pretoria
0001

or faxed to (012) 323 2917

PRESENT POSITION; DEDUCTIONS

At present South African tax law provides for a very restricted range of tax deductions for contributions to NGO’s. Section 18A of the Income Tax Act (the Act) is the only specific deduction for this purpose and only applies to bona fide donations made to:

1. universities or colleges as defined;
2. educational funds as defined. The deductible amount is limited to 5% of the taxable income of a company or in the case of any other taxpayer R500 or 2% of the taxable income, in both cases calculated before allowing any such deduction.

EXEMPTIONS

At present the general exemption for NGO’s is governed by s10(1)(f) of the Act. There are a number of other exemptions including in respect of funds, the sole object is to provide funds for any religious, charitable or educational institution which is exempt under s10(1)(f) and which complies with the balance of requirements as set out in s10(1)(fA). An exemption is also granted to non profit companies or bodies for the promotion of research, health services, nature conservation, cultural, social or recreational amenities or group, commercial or professional interest in terms of s10(1)(cB) and to non profit housing companies and associations and related bodies in terms of s10(1)(cC) and s10(1)(cI), s10(1)(cJ), s10(1)(cF) and s10(1)(cL).

PROBLEMS WITH THE PRESENT DISPENSATION

In its own deliberations and in numerous of the submissions to the Commission the following became apparent:

1. The scope for deductibility is extremely narrow. Other than in the circumstances provided in s18A of the Act, taxpayers who wish to claim a deduction for a contribution to an NGO are required to rely upon the so called general deduction formula in terms of s11(a) and s23(g) of the Act which effectively means that the contributing taxpayer has to justify the deduction on the basis of a commercial rationale. By insisting that to be deductible a contribution to a NGO must constitute expenditure in the production of income and only to the extent to which such expenditure was incurred for the purposes of trade, the tax system provides a very restricted incentive for funds to be granted to NGO’s, particularly when compared comparatively to more generous dispensations.
2. S10(1)(f) of the Act, although having received textual amendment in recent times, contains a number of difficulties, including
1. the definition of what is a religious, charitable or educational institution of a public character;
2. the distinction drawn between funds and institutions such that different requirements pertain to the respective sections;
3. the extent to which NGO’s should continue to obtain exemption if they conduct a trading operation for profit [see, in particular the Appellate Division decision in Chancellor, Masters and Scholars for the University of Oxford v CIR 1996(1)SA1196(A)].

THE NEED FOR FURTHER INQUIRY

1. On a level of principle the question arises as to the justification for a favourable tax dispensation for NGO’s. In the submissions made to the Commission the favoured justification was that many NGO’s carry out socially desirable work, activities which contribute to the promotion of social, educational and developmental objectives deemed desirable in society. There is also the further important argument which was raised regarding the role which NGO’s play in a vibrant democracy and their function as transmission belts for the demands of numerous, otherwise disempowered communities. The question arises as to the appropriate mechanism for defining what activities should be treated favourably, assuming that the fundamental justification for such a dispensation is accepted.
2. Should there be a legislative definition for activities entitled to favourable tax treatment i.e. an amendment to the present position or should government give content to a general definition and publish a list of activities in the Government Gazette which would obtain a tax benefit. This list could then be altered as government deemed fit.
3. Should the same set of requirements apply to both the exemption and the tax-deductible contribution?
4. Should trading activities by NGO’s be allowed in a new dispensation?
5. How, if government is to allow tax-deductible contributions to NGO’s should these be limited and how should their exploitation for a tax avoidance be prevented. Should the prevailing system apply to deductions or would it be both better in principle and possible administratively to introduce a system in which the NGO obtains the benefit of the tax relief, resulting in the government effectively contributing a portion of the contribution to the NGO by paying the amount by which the contribution attracts a deduction from tax (or relief from tax) directly to the designated NGO.
6. Organisations which seek tax benefits as defined in this document should fall under some measure of control in that they are obtaining a contribution from the public purse. On what basis should this process be based? For example any such organisation could be required to register with the Directorate for Non Profit Organisations. This might not be sufficient for tax benefits such that registration with the Commissioner for Inland Revenue should be a mandatory requirement. Given the present administrative burden on Revenue the question arises as to whether the office of the Directorate for NGO’s could assume a greater role, as a Charitable Commissioner which would be the body which would determine the tax status of such bodies.

CONCLUSION

The questions and the basis for raising them provides further scope for interested parties to assist the Sub-Committee in the formulation of its report. This document should be understood as no more than an attempt by the Chairperson of the Sub-Committee to capture the essential issues which the Sub-Committee have debated in order to afford another, last opportunity for public contributions on these defined issues. The Sub-Committee welcomes written comment on the issues outlined herein and will, in its sole discretion, decide to issue invitations for oral submissions.

DM DAVIS

CHAIRPERSON OF THE SUB-COMMITTEE