[FAQ] Foreign donations received for missionary work

[FAQ] Foreign donations received for missionary work

• 01 April 2021
• Individuals Tax
• Piet Nel

This article is based on tax law for the year ending 28 February 2021.

Background

The taxpayer is a South African missionary who receives foreign donations in excess of R2 million a year and utilizes these funds for missionary work. His family consisting of his wife, four children and his parents are all involved in the missionary. The funds are utilized for the furtherance of missionary work in South Africa and Zimbabwe. A small percentage is used for personal living expenses. The taxpayer receives these foreign donations in his personal capacity. He is not registered as a public benefit organisation. The taxpayer can prove to SARS that the funds that he receives are foreign donations and not foreign income.

Is this "foreign donation" taxable in South Africa?

Answer

The Income Tax Act

We accept that, when you say the individual is a South African missionary, that the individual is ordinarily resident in (or a tax resident of) the RSA. You must read SARS’s “Draft Interpretation Note – Taxation of amounts received by or accrued to missionaries”.

The fact that they are derived from a foreign source is irrelevant. Because of the amounts involved, and of the draft interpretation note, but also SARS practice in this respect, we suggest that you must support the tax position you take with a tax opinion. The taxpayer bears the onus to prove the tax position taken.

The Income Tax Act doesn’t define the phrase “receipts of accruals of a capital nature”. Our courts however, have laid down the law with respect to when an amount would be capital in nature, for purposes of the definition of gross income.

Judge Smallberger, for the majority, in Commissioner for Inland Revenue v Pick ‘n Pay Employee Share Purchase Trust [1992] ZASCA 84; 1992 (4) SA 39 (A), said that:

“The appropriate test in a matter such as the present is a well-established one. The receipts accruing to the Trust will be revenue if they constitute “a gain made by an operation of business in carrying out a scheme for profit-making” …” “The corollary is that they will be non-revenue if they do not derive from “an operation of business in carrying out a scheme for profit-making” …”

“In this respect I agree with what is said in Meyerowitz and Spiro on Income Tax: para 299 that "[t]he rather clumsy phrase: 'operation of business in carrying out a scheme of profit-making' in plain language really means that receipts or accruals bear the imprint of revenue if they are not fortuitous, but designedly sought for and worked for".”

Judge Smallberger’s conclusion, in this case, was that “… any receipts accruing to the Trust were not intended or worked for, but purely fortuitous in the sense of being an incidental by-product. They were therefore non-revenue. That makes them accruals of a capital nature falling outside the definition of "gross income" in the Income Tax Act, and therefore not subject to tax.”

Judge Southwood, in CSARS v Wyner (SCA Case No: 581/2002), agreed with this and stated the principle as follows: “This means that receipts or accruals will bear the imprint of revenue if they are not fortuitous, but were designedly sought for and worked for ...” The principle then is that a receipt or accrual will be capital in nature if it was not derived by the taxpayer from an “operation of business in carrying out a scheme for profit-making”. When the taxpayer has not designedly worked for it, but the receipt is purely fortuitous in the sense of being an incidental by-product, it will not be derived from an operation of business in carrying out a scheme for profit-making. Remember that the taxpayer bears the onus to prove that the payment was not made for services rendered, or partly so.

A receipt or accrual must be included in gross income if it was in respect of services rendered. This is in terms of paragraph (c) of the definition of gross income. The relevant parts of this paragraph read as follows:

In this Act, unless the context otherwise indicates, "gross income", means … but including, without in any way limiting the scope of this definition, such amounts (whether of a capital nature or not) so received or accrued as are described hereunder, namely

(c) any amount, including any voluntary award, received or accrued in respect of services rendered or to be rendered or any amount (other than an amount referred to in section 8(1), 8B or 8C) received or accrued in respect of any employment or the holding of any office:

In respect of services rendered:

At issue, in the first instance and relevant to this ground of the objection, is whether the amounts in question, were “… received or accrued in respect of services rendered …” and in particular, the underlined part - “in respect of”. Judge Howie (in Stevens v CSARS [2006] SCA 145 (RSA)) said that the phrase (“in respect of”) “… connote(s) a causal relationship between the amount received and the taxpayer’s services or employment.”

Webinar Commentary

Further webinar commentary on Income - Gross Income Series can be accessed here.

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