Presentation on theme: "Income Tax Exemptions Tax Exemption Unit (TEU). CONTENT: Background of Legislation Income Tax Exemption Qualifying Requirements Tax Deductibility of Donations."— Presentation transcript:
Income Tax Exemptions Tax Exemption Unit (TEU)
CONTENT: Background of Legislation Income Tax Exemption Qualifying Requirements Tax Deductibility of Donations – Section 18A Approval Tax Deductible Receipts Trading & Partial Taxation Permissible Trading Activities Consultation and Participation Process Tools and Services Offered to Stakeholders TEU Staff Overview of Business Processes Income Tax Returns (IT12EI) Statistics
BACKGROUND: New legislation came into operation on 15 July 2001 The objective of the legislation is to: Group types of organisations together; Treat all types of organisations uniformly; Provide qualifying requirements; and Ensure consistency. New concepts introduced: “Public benefit Organisations (PBOs)” and “Public Benefit Activities (PBA)”. List of qualifying PBAs approved by Minister are contained in Ninth Schedule to the Income Tax Act (ITA), divided in Part I and Part II. Measures for non-compliance introduced. To date no approved organisations have lost their tax exempt status due to non-compliance. The TEU is continuously involved in consultation and education with representatives of organisations relating to compliance issues. Organisations with a non-profit motive or registered non-profit organisations (NPOs) registered with the Directorate: NPO do not automatically qualify for exemption from income tax.
INCOME TAX EXEMPTION: Formal application must be lodged to the TEU for consideration. An Application Form EI 1 and Written Undertaking EI 2 must be completed and submitted together with a copy of the legal founding document and latest annual financial statements. “Founding document means the document that establishes and governs the organisation”. Exemption is only granted to organisations that comply with the relevant provisions of the Income Tax Act (ITA) both on application and during the existence of the organisation. A letter confirming the tax exempt status is issued to the organisation. Section 30 of the ITA contains the formal requirements & conditions that organisations must comply with. Section 10(1)(cN) of the ITA provides for partial taxation and therefore exempts certain income & provides for taxation of income derived from business activities. Section 18A of the ITA provides for the tax deductibility of donations made to approved PBOs, certain entities established by law (universities), government, provincial administrations or local authorities, carrying on certain approved PBAs as listed in Part II of the Ninth Schedule to the ITA.
QUALIFYING REQUIREMENTS: 1 1 TYPE OF LEGAL ENTITY: Four (4) types of legal entities are included in the definition of a PBO: Section 21 Company registered with CIPRO, Registrar of Companies; Trust registered with the Master of the High Court; Voluntary Association of Persons (established in terms of a Constitution); or A foreign branch established in the RSA by a foreign charity. Non-qualifying organisations: Close Corporations; Co-operatives (Co-op); and Private Companies.
QUALIFYING REQUIREMENTS (cont): OBJECTIVES: Main object must be to carry on one or more PBAs in a non-profit manner. PBOs can either conduct the PBA or provide funds to other approved PBOs. No PBA may enrich founders, members, employees or office bearers. PBA must benefit the general public. PBAs are grouped in the Ninth Schedule in the following categories: Welfare & Humanitarian Health Care Land & Housing Education & Development Religion, Belief or Philosophy Cultural Conservation, Environment & Animal Welfare Research & Consumer Rights Sport Provision of funds, assets & other resources General
QUALIFYING REQUIREMENTS (cont): 3 3 FIDUCIARY RESPONSIBILITY: “Fiduciary means a person who holds a position of trust & responsibility, who has the power to make decisions relating to the administration and financial matters of the organisation”. A PBO is required to have at least three (3) unconnected persons to accept fiduciary responsibility for the organisation. “Connected persons means spouses, children and close relatives”. No person is allowed to have autonomous powers.
QUALIFYING REQUIREMENTS (cont): 4 4 USE OF FUNDS: Funds must be used to carry on PBAs. Surplus funds may be invested for future use by the PBO. May conduct trading activities to fund approved PBAs. Not acceptable to have a commercial business activity as a main aim or objective. May not distribute funds to any person unless it is in the course of undertaking a PBA. Payment of reasonable remuneration is allowed. 5 5 DISSOLUTION (ceases operations/liquidated): Remaining funds must be given to: Other approved PBOs; Exempt entities established by law e.g. universities, public schools; and Government; Distributions may not be made to: Founders, members, employees or office bearers; or Other tax-paying organisations.
QUALIFYING REQUIREMENTS (cont): 7 7 AMENDMENTS: Copies of all amendments to the founding documents must be submitted to SARS as soon as they are effected
TAX DEDUCTIBILITY OF DONATIONS – SECTION 18A APPROVAL: Government recognises that PBOs are dependent on donations from the public. The Minister has identified certain categories of PBAs that qualify for section 18A approval. These PBAs are contained in Part II of the Ninth Schedule to the ITA: Welfare & Humanitarian Health Care Land & Housing (limited to specific selected activities) Education & Development Conservation, Environment & Animal Welfare This list may be extended from year to year at the discretion of the Minister (taking representations from the sector into account). Donations for which tax deductible receipts were issued may only be utilised in carrying out approved PBAs in Part II of the Ninth Schedule. The PBAs must be carried out in the RSA.
TAX DEDUCTIBLE RECEIPTS: Qualifying PBOs are authorised in terms of section 18A of the ITA to issue tax deductible receipts (section 18A receipts) to donors for bona fide donations received. These receipts are special prescribed receipts which entitles the donor to a tax deduction from his personal taxable income (not exceeding 10% of taxable income calculated before allowing any deduction under section 18A, medical and dental expenses). The information which must appear on the receipts are contained in the letter issued by SARS confirming section 18A approval.
TRADING & PARTIAL TAXATION: BACKGROUND: 2001: Legislation had a “All or nothing approach”. Strict rules prohibiting PBOs from carrying on business activities. Exemption of non-complying PBOs were withdrawn or the PBO was required to transfer the business activities to separate taxable entities. 1 APRIL 2006: Legislation now allows for partial taxation whereby the business activities in excess of the prescribed limits become taxable without the PBO losing its tax exempt status.
PERMISSIBLE TRADING ACTIVITIES: Three (3) categories of permissible trading activities: INTEGRAL AND DIRECTLY RELATED: Directly related/connected/linked to the PBA conducted by the PBO, example: school fees paid by scholars to a school; accommodation fees paid by aged person to a old age home; Not less that 85% of the trading activity must be conducted on a cost recovery basis; and May not be in competition with other tax-paying organisations. OCCASIONAL TRADE: Infrequent, occasional or as a special event, example: fundraising activities such as cake sales, raffles and jumble sales; and Undertaken mainly with assistance of helpers or volunteers who are not remunerated for their services. MINISTERIAL APPROVAL: Trading activities which fall outside the provisions of the aforementioned permissible trading categories must be approved by the Minister by notice in the Government Gazette, various factors are taken into account by the Minister.
PERMISSIBLE TRADING ACTIVITIES: BASIC EXEMPTION: BASIC EXEMPTION: Is applied to trading activities that do not qualify in the 3 permissible trading categories. The greater of 5% of the total receipts or R will not be subject to tax. Taxed on the taxable income from all non-permissible trading activities e.g. rental income, the letting of parking facilities, a hall, tennis courts etc. to members of the public. Taxed at a single rate of 28% irrespective of the type of legal entity.
CONSULTATION AND PARTICIPATION PROCESS: The function of the TEU is to administer the provisions of the legislation as they relate to income tax exemptions. Consultation and participation with the sector takes place directly with the Legal and Policy and Legal Drafting divisions within SARS Head Office structure in consultation with National Treasury. Since the introduction of the legislation in 2001 SARS and National Treasury have had ongoing discussions with representatives of the NPO sector relating to problems encountered with the legislation. These representative organisations have also been involved in identifying and making proposals to amend the legislation. Discussions are held as the need arises but at least once a year. Examples of which amendments implemented as a result of consultation are: Deletion of the requirements relating to prudent investments; Deletion of the requirement relating to 85% of activities conducted in the RSA; Deletion of the compulsory registration as a NPO with the Directorate: NPO; Broadening of the list of qualifying PBAs for section 18A purposes; Inclusion of new PBAs in the Ninth Schedule; and Increase in the percentage for the allowable deduction in terms of section 18A.
TOOLS AND SERVICES OFFERED TO STAKEHOLDERS: A webpage on the SARS website (www.sars.gov.za / Taxpayers / Exempt Organisations) which contains all relevant forms, publication, legislation etc;www.sars.gov.za A Tax Exemption Guide for PBOs in South Africa (as well as other guides relevant to other types of exemptions such as recreational clubs); An address, is available to which enquiries relating to any tax exemption matters can be Easy and accessible list of organisations which are approved for section 18A purposes on the webpage (updated monthly); Educational campaigns in consultation with the Director: NPO.
TEU STAFF: The TEU is divided into the following business areas: APPLICATIONS: Applications Data Capturer (1); : Analysts (4 including Team Leader). CONTROL UNIT (2) MAINTENANCE (4) AUDIT & ASSESSMENT (2 including Team Leader). A total of 17 persons, which includes support staff, are currently employed.
OVERVIEW OF THE BUSINESS PROCESSES: All post including applications received by post, fax, or hand deliveries are dated and allocated a WIP number (tracking number) in the Post Room. Applications, correspondence, returns etc are sorted and routed by the Control Unit to the relevant business areas for attention. Complete applications are captured on the PBO system within the core Income Tax System (ITS) and programmically allocated a reference number. The application and supporting documentation are placed on a folder and allocated to Tax Exemption Analysts for consideration. A letter confirming approval or reasons of disapproval are issued by the relevant Analyst to the representative who applied for an income tax exemption on behalf of the organisation. Approved organisations are taken on register for income tax purposes.
INCOME TAX RETURNS (IT12EI): All approved PBOs are allocated an income tax (IT) reference number. An income tax return (IT12EI) has been developed specifically for exempt organisations. All PBOs must submit a income tax return annually to the TEU. Returns allow SARS to determine whether the PBO is operating within the prescribed limits of the exemption granted and if applicable raise assessments on the non-permissible trading income received.
STATISTICS: Total number of applications captured to date: (includes recreational clubs, professional associations; (entities established by law & home owners associations) Total number of applications approved for section 18A: (Approximately 5% of the total number of applications received)