SOUTH AFRICAN COUNCIL OF CHURCHES
Draft Revenue Laws Amendment Bill - Submission to the Portfolio Committee on Finance
20 October 2003
Introduction 1. The South African Council of Churches (SACC) is the facilitating body for a fellowship of 23 Christian churches, together with one observer-member and associated para-church organisations. Founded in 1968, the SACC includes among its members Protestant, Catholic, African Independent, and Pentecostal churches with a combined constituency of roughly 15 million adherents. SACC members are committed to expressing jointly, through proclamation and programmes, the united witness of the church in South Africa, especially in matters of national debate.
2. For the past three years, the SACC Parliamentary Office has facilitated a consultative process among SACC member denominations to identify and address the implications for religious bodies of proposed changes to the tax system affecting public benefit organisations. This has resulted in the formation of an ad hoc Religious Tax Policy Working Group. More recently, we have worked to broaden this discussion to involve Christian churches that are not SACC members, as well as parallel structures in other faith communities.
3. The SACC has also worked closely with other organisations, such as the Non-Profit Partnership (NPP), concerned about the legal environment for nonprofit organisations. Together with the NPP, the SACC has raised with revenue officials a number of reservations about the implementation of the new tax structure for public benefit organisations introduced by the Taxation Laws Amendment Act, 2000 (Act No. 30 of 2000). The SACC made submissions on this legislation, as well as on the Taxation Laws Amendment Act, 2002 (Act. No. 30 of 2002). Most recently, the SACC, the NPP and the Charities Aid Foundation met with National Treasury and SARS officials on 25 September 2003 to discuss a number of shared concerns. The present submission reflects insights gleaned from the SACC’s interactions with representatives of faith communities as well as the larger nonprofit sector.
Key Areas of Concern
4. The SACC welcomes a number of provisions of the current draft Revenue Laws Amendment Bill (hereafter, "the Bill") pertaining to public benefit organisations. In particular, we applaud the expansion of the list of public benefit activities in Part II of the Ninth Schedule of the Income Tax Act, 1962 (hereafter, "the ITA"), that are eligible for donor deduction in terms of section 18A of the ITA. We also appreciate the enhanced scope for organisations that pursue both Part I and Part II activities to issue receipts for donations earmarked for Part II activities without the need to segregate those activities in a separate organisation (see section 40).
5. At the same time, however, we remain concerned about a number of aspects of the new tax system that are not addressed by the current Bill. These include:
- The complexity of the registration and reporting requirements and their impact on small PBOs in particular;
- The effects of trading restrictions on organisational sustainability; and
- The lack of a clear strategy for the expansion of Part II of the Ninth Schedule of the ITA and the omission of certain public benefit activities from this list.
In addition, we raise a concern about one of the proposed amendments to Part I of the Ninth Schedule of the ITA.
The Complexity of Registration and Continuing Exclusion of Small PBOs 6. There are tens of thousands of small, community-based and religious organisations (including local congregations) engaged primarily or exclusively in approved public benefit activities. A recent study put the number of nonprofit organisations in South Africa at more than 100 000 [Mark Swilling and Bev Russell, The Size and Scope of the Non-profit Sector in South Africa (Johannesburg and Durban: University of the Witwatersrand and University of Natal, 2002), p.21]. Most have very limited income – generally from small personal donations and/or membership fees – and little administrative capacity. Some do not even have any formal founding document or constitution.
7. The Income Tax Act requires all such bodies to register as taxpayers (although SARS has yet to develop a form appropriate to this purpose). Once registered, they are required to file annual returns, regardless of whether or not they have any taxable income (as distinct from gross receipts).
8. Many of these groups are not currently registered as taxpayers, nor do they know that they are expected to be. Indeed, SARS indicates that it has only received something like 6000 applications for PBO registration to date.
9. A number of factors have contributed to this situation. In the religious sector, for example, some denominations that previously enjoyed a general tax exemption that covered all of their congregations are no longer able to use this method because they are unable to comply with the requirements for group registration; as a result, they are advising all congregations to register independently as PBOs. Some organisations still consider themselves exempt from taxation in terms of the previous general exemption for "religious, charitable and educational institutions". Others, alert to the political objectives that frequently motivated attempts to regulate the sector prior to 1994, have traditionally operated outside of the regulatory framework. Furthermore, small community and faith-based organisations generally have poor access to information and communications networks though which they might learn about their new obligations in terms of the ITA. Existing networks (e.g., NPP, the SACC) have limited capacity to contact these organisations and or to assist them to comply with the new legislation. Even SARS, which has access to more extensive resources, is unable to do this effectively.
10. Consequently, many small PBOs remain both uninformed about the new tax system and poorly equipped to comply with it. SARS appears to have no clear strategy for dealing with such organisations. Given the legacies of the past, a simplistic "ignorance is no defence" stance is unfair as many well-meaning but poorly resourced organisations will end up operating outside the law unintentionally. It is also ill advised, as it provides no easy point of entry for such organisations once they learn of their obligations. The manifest flaws in this policy cannot be addressed effectively either by a commitment to leniency on SARS’ part or by cynical assessments of SARS’ enforcement capacity.
11. It is unrealistic to expect all of these groups to navigate the current registration requirements. Moreover, full compliance would be costly and undesirable, as it would require SARS’ staff to process a very large number of applications and returns that would generate no revenue whatsoever.
12. In order to address this problem, the SACC proposes that small PBOs – defined as associations of persons with gross annual receipts of less than a specified threshold (determined from time to time by the Commissioner) – be required to meet a less rigorous set of registration requirements. A small PBO might, for example, be required to submit a one-page form, listing the names and contact details of the organisation’s chief executive officer and at least three fiduciary officers and making a written undertaking that the organisation will comply with the main aspects of Section 30 of the ITA. Small PBOs could also be excused from filing annual tax returns, in much the same way as the filing requirement is waived for individuals with limited incomes.
13. This approach would have multiple benefits. On the one hand, it would immediately reduce the recurring administrative burden on both SARS and small PBOs – with limited risk of loss to the fiscus. On the other hand, it would enable SARS to focus its enforcement compliance efforts on larger PBOs whilst allowing SARS to develop a database of small PBOs to facilitate future communication concerning tax obligations.
14. The SACC and the NPP presented a more detailed submission on this matter to Treasury and SARS on 24 September. Revenue officials expressed interest in this approach, but felt that there was not sufficient time to develop legislative proposals for inclusion in the current Bill. We accept this assessment and are prepared to work with revenue officials to develop workable proposals for incorporation in future legislation. However, we believe that it is inappropriate to set a deadline for the registration of currently exempt organisations that falls before the matter can be resolved. We would therefore urge that the deadline for filing applications for PBO registration be moved to 31 December 2004. This could be accomplished by amending section 196 of the current Bill to read: " … applies for approval by the Commissioner in terms of section 10(1(d)(iii) or (iv) or section 30 of that Act before 31 December 2004, …"
Trading Restrictions and Organisational Sustainability 15. Many PBOs finance their activities in part through trading activities. The scale of these activities can vary considerably, from a one-off fete to regular and large-scale business activities. Presently, the ITA severely limits PBOs’ ability to raise funds through trading. Revenue officials commonly justify these restrictions on the grounds that tax exemption gives PBOs an unfair competitive advantage over tax-paying enterprises. It is asserted that the moral and economic hazards of privileging PBO trading activities offset the public benefits that flow from building a thriving and sustainable PBO sector.
16. However, the primary hazard presented by PBO trading is not that PBOs will crowd out profit-making enterprises – for, after all, the net effect of this would be that a growing proportion of economic activity would be geared to producing public rather than private benefits – but rather that profit-making enterprises will masquerade as PBOs, exploit concessions intended to stimulate and enhance the sustainability of the PBO sector, and thereby harness public resources for private gain. If trading restrictions were the only mechanism in the ITA to forestall this possibility, then tight constraints might be justified. As it happens, there are numerous other provisions in the ITA to prevent abuse of PBO tax concessions, including restrictions on the distribution of resources to members, directors or staff.
17. In the present funding environment organisations are compelled to be innovative and self-reliant in their approach to fund-raising. International funders are often more likely to extend support to organisations that demonstrate initiative in developing independent sources of funding. It is sound financial and organisational practice for PBOs to diversify their funding bases and to explore trading activities as one source of income. This is by no means a derogation of their primary objectives. It is a simply one way to enhance their sustainability and to enable them to serve communities more reliably. PBOs that embark on this strategy have no reliable way of predicting in advance the success of their efforts; they may therefore overrun the trading limitations quite unintentionally. Moreover, trading activities are often linked to an organisation’s public benefit activities, even if the trading itself does not qualify as "related trading". For example, an organisation might provide essential community services at reduced rates, or a commercial enterprise might be integral to skills training and employment programmes.
18. Presently, the ITA not only places enormous obstacles in the path of an organisation seeking to earn a portion of its income from trading, it also imposes excessive penalties on an organisation that transgresses the trading limitations, even inadvertently. Such an infraction is currently grounds for the withdrawal of a PBO’s tax-exempt status. Already, at least one SACC member denomination has been threatened with termination of its tax exemption due to SARS’ classification of some of its activities as "trading". (This warning was issued in spite of the fact that the denomination has filed a written undertaking of its intention to comply with the terms of section 30 of the ITA.)
19. We believe that, ultimately, the limit on income a PBO is allowed to earn from trading should be substantially raised or abolished altogether. This is an issue that was flagged for further discussion in our recent meeting with revenue officials. In the interim, however, we propose that earning income from trading in excess of the limits in section 30(3) should cease to be grounds for summary deregistration of PBOs. Instead, income in excess of the limits should be subject to normal principles of taxation.
Expanding Donor Deductibility 20. The SACC welcomes the enlargement of the list of activities eligible for donor deduction in terms of section 18A, which appears in Part II of the Ninth Schedule of the ITA. However, there appears to be no explicit policy guiding the expansion of this list. As a result, several activities have been omitted from Part II for no obvious reason. These include: promotion of access to the media and press freedom, provision of career guidance and counselling and hostel accommodation.
21. We urge Parliament to extend 18A coverage to all registered PBOs. At a minimum, Part II should be expanded to include all of the public benefit activities listed in the first four sections of Part I of the Ninth Schedule (Welfare and Humanitarian, Health Care, Education and Development, and Land and Housing).
Residential Care for Retired Persons 22. Section 128 of the Bill proposes that item (c) of paragraph 3 of Part I of the Ninth Schedule be amended to limit the provision of residential care for retired persons to cases where such care is provided to poor and needy persons without recovery of cost. This seems to prohibit any cost recovery whatsoever, including the provision of subsidised care where a portion of the cost of the services provided may be recovered in fees charged. It is not clear why this restriction is imposed. Surely the provision of such services to poor and needy clients at rates below market rates constitutes a public benefit. It may be unrealistic to expect such services to be provided where there is no scope for even partial cost recovery. We would therefore propose that the words "without recovery of cost" be replaced by "at less than market rates".