Barry Streek reports on the Katz commission’s proposals which would imply tax relief for non-profit organisations
Proposals to give non-profit organisations tax benefits, exempt them from donations tax and discharge donations from bequests from estate duty have been proposed by the Katz commission.
The proposals include provisions for non- profit organisations to trade, for community property organisations to own property and for non-profit organisations to participate in unlisted empowerment opportunities.
It has also recommended that cash-strapped art galleries and museums be given the same tax benefits, a move which could save these institutions with tax-deductible donations.
Although the Katz commission has recommended a number of controlling measures, its approach will undoubtedly assist the beleaguered NGO sector and enable it to broaden its sources of revenue.
The government has not yet reacted to the Ninth Interim Report of the Commission of Inquiry into Certain Aspects of the Tax Structure of South Africa, but its approach to non-profit organisations, as reflected in the National Development Agency Act and the Non-Profit Organisations Act, suggests it might react sympathetically to the latest Katz commission proposals.
In its report, it says much of the fiscal legislation, including existing statutory formations and the manner in which these are currently being implemented in practice, was an “antiquated language”, derived from old English law with its ancient formulations originating in the Preamble to the Charitable Uses Act of 1601.
The commission said it had taken cognisance of “the extremely difficult conditions that are currently being experienced by non- profit organisations, many of which are compelled to seek alternative funding sources and means of generating donations and `earned’ income”.
These circumstances can be attributed not only to prevailing economic conditions, but also to a certain measure of defection by overseas donors who, ironically, are less motivated to support a post-apartheid society than they were in respect of beleaguered non-profit organisations prior to South Africa’s transition to democracy. “These circumstances have exacerbated fiscal anomalies and have sharply focused the restrictive nature of present fiscal legislation with particular reference to so-called `trading income’ and other endeavours by non-profit organisations to secure the survival of their operations.”
The commission said the present constraints on trading activities “are unduly restrictive and tend to discourage non- profit organisations from becoming financially independent”. It proposed that trading by non-profit organisations should be permitted within a carefully structured fiscal regime which facilitated oversight by the Commissioner of Revenue and limited the opportunity for abuse. It was persuaded that some form of tax relief to special- type organisations, such as community property organisations, was necessary. This would free them from transfer duty on the acquisition of land and would enable them to function without the imposition of income tax for an initial “entry period” of five to 10 years.
At present, the provisions of Section 18A of the Income Tax Act, providing for tax- deductable donations, were restricted to universities, colleges and educational funds, but the commission said this section should be widened to a broader category of organisations with grant-donor benefits similar to those currently reserved for educational institutions and funds.
After reviewing current legislations and practices, and in light of international precedent and experience, it re-commended the law should provide for a simple, generic definition of tax-exempt organisations, which could be characterised as “exempt public-benefit organisations”.
It said the defining characteristics of these organisations should include:
l a “public benefit” purpose or activity, within a schedule of these activities;
l formal registration in terms of the Non- Profit Organisations Act;
l a formal written constitution in terms of which the organisation is constituted as either a voluntary association, a trust or a Section 21 company;
l a minimum number of members;
l the application of the major portion of “gross receipts” for philanthropic purposes and not merely to benefit members of staff, or for some limited sub-category of beneficiary/ies;
l a prohibition on the payment of remuneration to employees in excess of levels which in the opinion of the Commission of Revenue were excessive;
l an obligation to spend in any particularly year at least 75% of net revenue; and
l the avoidance of conflicts of interest or self-dealing for the benefit of trustees, members or other persons associated with the organisations.
The commission proposed that the list of public-benefit activities include charity and altruism; upliftment and development of indigent and disadvantaged communities; welfare and social services; religion, philosophy and belief; politics, public policy and advocacy; education, including adult, civic and public education; job training, skills transfer and the promotion of entrepreneurial skills for the benefit of unemployed and indigent people.
It also includes recreation and sport; culture and arts; physical, mental and psychological health; environmental concerns, animal protection and wildlife conservation; the provision of legal, medical and other professional services for the benefit of indigent people, either free of charge or at a charge which was significantly less than that normally levied; international organisations directed to the promotion of peace, friendship, cultural exchange and other beneficial purposes; museums of a scientific, cultural and historical nature; and institutions for the advancement of science.
If these recommendations are accepted by the government it is clear that a wide range of non-profit organisations should benefit from the increased incentives for individuals and companies to make donations to them.