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Tax exemption is not a formality – the Tax Court considers the PBO status of a non-profit company
- 03 June 2019
- Corporate Tax
- Louis Botha and Louise Kotze
Important:
This article is based on tax law for the tax year ending 28 February 2020.
Authors: Louise Kotze and Louis Botha
In terms of s30 of the Income Tax Act, No 58 of 1962 (Act), an entity can only become a public benefit organisation (PBO) if it meets the requirements in that section and is approved by the South African Revenue Service (SARS) as a PBO. In practice, to be approved as a PBO, an application must be submitted to SARS’s Tax Exemption Unit (TEU).
From an income tax perspective, it is beneficial for an entity to be a PBO as its receipts and accruals will be exempt from income tax, to the extent that such receipts and accruals meet the requirements of s10(1)(cN) of the Act. In terms of s10(1)(cN) of the Act, any receipts and accruals derived otherwise than from any business undertaking or trading activity will be exempt from income tax, including for example, donations received by the PBO from its donors. Receipts and accruals derived by a PBO from a business undertaking or trading activity will only be exempt from income tax, if they meet the requirements stipulated in s10(1)(cN)(ii) of the Act.
In the recent Tax Court case of ABC Company v Commissioner of the South African Revenue Services (Case No. 14106) (as yet unreported), the Tax Court had to pronounce on whether ABC Company (Taxpayer) was a PBO and whether its application for PBO status should have been approved.
Facts
The Taxpayer is a non-profit company that rents out remodelled apartments for residential accommodation to, inter alia, low and medium income households. The Taxpayer’s Memorandum of Incorporation (MOI) provides that one of its primary objects is “the development, holding, letting or other disposal of affordable residential accommodation to and for the benefit of low to medium households”.
Since 2012, the Taxpayer has complied with the qualifying criteria for accreditation set out by the Social Housing Regulator Authority (SHRA) and therefore qualifies as a “social housing institution” in terms of the Social Housing Act, No 16 of 2008 (SHA). By qualifying as such, social housing institutions benefit from public funds which subsidise the development costs of the apartments, thereby reducing the debt to be recouped by the Taxpayer through rental receipts.
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This article first appeared on cliffedekkerhofmeyr.com.