New tax concessions to non-profit organisations are close to tax deductibility for all donations
Barry Streek
The non-profit sector achieved a significant – although still incomplete – victory in this year’s budget with the announcement of tax concessions to non- profit organisations by Minister of Finance Trevor Manuel in his budget speech.
His announcement stopped short of extending tax deductibility for donations to all non-profit organisations, but the budget review nevertheless describes this achievement as “a first step”.
The review emphasises that the range of organisations entitled to tax-deductible donations can only be broadened if the South African Revenue Service (SARS) “develops capacity to prevent abuse”.
Until now, deductions of donations for income tax purposes was restricted to tertiary educational institutions and certain funds. Manuel has now extended this tax deductibility to “pre-primary and primary schools, children’s homes, organisations caring for the aged and those focused on HIV/Aids care”.
This excludes most non-government organisations and cultural institutions, which the Katz commission recommended should also have tax-deductible status.
But revenue officials are concerned about possible abuses and, as reflected in Manuel’s announcement, feel the government should proceed cautiously before extending the provisions, enabling the SARS to develop the capacity to monitor the implementation of the concession effectively.
In any event, treasury officials have estimated that the new concessions will cost the treasury R100-million in the 2000/01 financial year and R300-million to R500- million in future years.
Manuel said that having considered the Katz commission report and the preliminary findings of the portfolio committee on finance, it was also proposed to provide a new definition of “public benefits organisations” which would qualify for tax exemption.
In his speech, Manuel paid tribute to non-profit organisations for playing “an important role in our society. They assist development by extending social services, often to the poorest of the poor.
“The Income Tax Act grants tax-exempt status to approved public-benefit organisations and allows for donations to some bodies to be deducted from taxable income. We recognise that it does not go far enough. It was for this reason that the government referred the matter to the Katz commission.”
The budget review went even further by saying non-profit organisations played “a vital role in promoting development and extending democracy”. Consideration would also be given to the development of “a comprehensive list of acceptable public- benefit activities, which must include the activities of the majority of non-profit organisations in the republic” and this list should be included in the Income Tax Act.
Similar provisions in other revenue laws might have to be changed. “Several non- profit organisations engage in business activities for which they are provided an income-tax exemption. This gives such organisations a competitive advantage over taxpaying business competitors.”
“In principle,” according to the review, “business income that is unrelated to the core public-benefit activity should be taxed.
“Should a non-profit organisation wish to trade extensively, such activities must be conducted in a separate legal entity, subject to the normal tax principles.
“Occasional business transactions and trading activities not related to the core public benefit will be permitted to a limited degree. Where income accrues to a non-profit organisation from a taxable trust, consideration will be given to making such income taxable in the hands of the trust.”
The SARS would have to focus on developing the capacity for a comprehensive evaluation of all applications for approval, as well as for reporting on the cost of the benefit that was granted to non-profit organisations.
“If a non-profit organisation engages in activities contrary to the conditions for which the exemption was granted, penalty provisions may apply, possibly including the withdrawal of the exempt status and/or monetary penalties.
“Government is acutely aware of the cash constraints being experienced by certain non-profit organisations,” said the finance review.
“As a first step” the review therefore proposed the limited extension of tax deductibility status to certain organisations.
Clearly, the lengthy campaign by the non- government organisation sector, co- ordinated by the Non-Profit Partnership, to win tax concessions has paid off – and it certainly looks as if the tax-deductible status will be extended to the entire sector once the SARS is able to administer it.