Public Benefit Organisations – Are you liable for Tax? Yes it is possible…..
Every Public Benefit Organisation (PBO) (registered as such with the South African Receiver of Revenue (SARS)) is exempt from the payment of income tax. There is, however, a misunderstanding of this concept, by PBO’s, due to the fact that there are certain circumstances where a PBO will be liable for income tax. A PBO can engage in business undertakings or trading activities, which, in their ordinary sense, involve the making of profit. The revenue from such undertakings and activities can be subject to income tax. SARS permits a PBO to have as its principal object (rather than its sole object), the carrying on of public benefit activities. SARS contemplates that a PBO may carry on certain activities which are not public benefit activities (non-PBA’s). The PBA’s of a PBO must, however, be carried on in a non-profit manner. In general the definition of for profit would be – anything which occupies the time, attention and labours of man for profit.
What quantum of non-PBA’s is appropriate?
To reiterate, a PBO can carry on non-public benefit activities. However, the entitlement of a PBO to carry on non-PBA’s in a for-profit manner is by no means unrestricted. The sole or principal object of a PBO must remain the carrying on of public benefit activities. The trading activity may never supersede or take preference over the carrying on of the PBA’s. A number of factors could be taken into account such as time, cost, space allocated, etc. or a combination thereof. The extent to which a PBO devotes its time and resources to any for-profit activities will determine whether it still has the conducting of public benefit activities as its sole or principal object. Moreover, any after-tax profits made by a PBO from its for-profit activities must be used to fund the organisation’s activities, and cannot be distributed as dividends or profit shares to any person. What percentage of its time and resources can a PBO use to conduct commercial activities, without offending against the requirement that its principal object must be directed at public benefit activities? It should ensure that it never expends more than fifteen (15) percent.
All three of the following requirements must be complied with, in order for the income from the trading activity to be exempt from income tax:
The undertaking or activity is –
- integral and directly related to the sole or principal object of the PBO.
- is carried out or conducted on a basis substantially the whole of which is directed towards the recovery of cost (goods are not sold to maximize profits but rather with the intention of recovering the direct and reasonable indirect costs); and
- does not result in unfair competition in relation to taxable entities.
If the undertaking or activity does not meet these three criteria the following will apply:
- The income will be subject to income tax, but
- There is a basic exemption, which states that income up to the greater of the following will be exempt:
- 5% of the total receipts and accruals of the organisation, or
- R150 000
Income above the greater of these two amounts will be taxable.
In summary, the position is this:
- A PBO must have as its sole or principal object the carrying on of one or more public benefit activities.
- A PBO must devote the bulk of its time, attention and resources [at least 85%] to the carrying on of those public benefit activities.
- All the public benefit activities of a PBO must be conducted on a non-profit basis.
- A PBO is entitled to engage in commercial activities. PBO’s should not expend more than 15% of its time and resources.
- Income from commercial activities will be subject to income tax if that activity does not meet the exemption criteria.
- The non-PBA’s of a PBO must be secondary or ancillary to its principal public benefit object.
- Any profits generated must be ploughed back into the organisation; they cannot be distributed as dividends or profit shares to any person.For further information, see the South African Revenue Services Website for the Tax Exemption Guide: http://www.sars.gov.za/home.asp?pid=170