OVERVIEW OF SUBMISSION

2. We appreciate the opportunity to comment on the Draft Revenue Laws Amendment Bill. We believe that a progressive tax system can play an important role in addressing poverty and inequality in our nation It can also create an environment in which non-profit organisations that benefit the public can flourish

3. Most of the SACC's members - and many faith-based organisations generally – are recognised by the Receiver of Revenue as Public Benefit Organisations (PBOs). Our remarks therefore focus on those sections of the Bill that affect PBOs. In particular, we comment on proposed changes to:

· PBO trading restrictions [secs. 9 and 18(b)];

· The tax liabilities associated with donations to a PBO [sec. 28] and penalties for noncompliance with these provisions [sec. 58];

· Permitted investments for PBOs [sec. 38]; and

· The calculation of tax on capital gains accruing to a PBO [sec. 88].

We also note that there are several changes to the list of approved public benefit activities that appears in the Ninth Schedule to the Income Tax Act [secs. 92-94]~ As these are largely of a textual nature, we do not offer any comments on these sections.

TRADING RESTRICTIONS

4. Sections 9, 18 and 38 of the Bill propose amendments to sections 6,10(1)(cN) and 30(3) of the Income Tax Act, No.58 of 1962 (hereafter "ITA"), which would alter the trading restrictions imposed on PBOs. These changes would affect the status of trading restrictions with respect to a PBO's founding document, the potential for a PBO to engage in trading, and the implications of trading income for both a PB 0's exempt status and tax liability.

Constitutional limitations on trading

5. Currently, a PBO is required to incorporate (or reference) in its constitution or founding document the trading restrictions that appear in section 30(3)(b)(iv) of the ITA. Section 38(l)(b) of the Bill would delete ITA sec. 30(3)(b)(iv), while section 18(1)(b) would reintroduce most of these provisions to ITA sec. 10(1)(cN) of the ITA. In this position, the trading restrictions no longer determine whether an organisation qualifies as a PBO. Instead, they only limit the extent of a PBO's income tax exemption. Consequently, it is no longer necessary for these limitations to be reflected in a PBOs founding instrument. We strongly support this change. We have always felt that it was inappropriate, unwieldy and unnecessary to include such provisions in a founding document. The provisions are equally effective in the revised configuration.

Partial taxation of trading income

6. The revised configuration also makes possible a more flexible system of partial taxation of PBO trading income, as promised by the Minister of Finance in the 2005 Budget Review (pp. 85-86). Presently, the Commissioner of Revenue is empowered to summarily revoke an organisations tax-exempt PBO status if it earns income from trading in excess of that permitted by the ITA. The SACC, the Non-Profit Consortium and other civil society organisations have repeatedly objected to the harshness of this "all or-nothing'" approach. The new system would make trading income in excess of the limitations subject to taxation without otherwise jeopardising an organisation's PBO status. We applaud this less punitive approach.

Relationship among categories of permitted trading

7. The introduction of the partial taxation system also helps to resolve another contentious issue: the relationship among the various permitted types of income from trading. Originally, SARS ruled that the three categories of permitted trading currently identified in sections 30(3)(b)(iv)(bb), (cc) and (dd) (certain directly related trading, trading of an occasional nature conducted by volunteers, and activities explicitly permitted by the Minister of Finance) could be concurrently applied. In other words, earning income from trading in one category would not affect a PBO's right to earn further income in one of the other two categories. In addition section 30(3)(b)(iv)(aa), the so-called de minimis clause, allows a PBO to earn up to 15 per cent of its gross annual receipts (or R25 000, if greater) from unrelated trading without jeopardising its tax-exempt status. However, invoking this clause was deemed to preclude the possibility of earning income in any of the other categories. In 2004, SARS made an administrative concession that effectively allowed the de minimis clause to be invoked in conjunction with income from other categories of permitted trading, but only if a reduced concession (5% of gross receipts) is applied to the residual income from unrelated trading.

8. The amendments now being proposed provide a much clearer and more elegant solution to this problem. A PBO's receipts and accruals will be exempt from income tax only to the extent that they are not derived from "carrying on any business undertaking or trading activity" or, if they are derived from business or trading, then to the extent that they fall into one of the three specific categories currently defined in section 30(3 )(b)(iv)(bb) to (dd). All other income from trading is liable to be taxed, subject to the exclusions discussed below.

De minimis clause

9. Although most of the trading restrictions in section 30(3)(b)(iv) are simply relocated within the ITA, the existing de minimis clause would fall away altogether. Instead, section 9 of the Bill would introduce a general PBO tax rebate of R10 800. This is equal to the rebate granted to individuals aged 65 and older. Assuming a tax rate of 29%, this effectively means that a PBO would be able to earn up to R37 200 in income from unrelated trading in a given year without being liable to pay tax.

10. It should also be noted that, whereas the existing de minimis clause applies to gross receipts, the calculation of tax would be on the basis of taxable income. In other words, a PBO would be able to deduct from gross receipts expenses incurred in the generation of that income (including a reasonable percentage of overhead costs) before calculating tax.

11. For some organisations, this change may be advantageous. They will no longer face loss of their exempt status if they are successful in exploring more commercial fundraising strategies. At the same time, the income basis of taxation (receipts minus costs) may help to reduce their tax liability.

12. However, two types of organisations are most likely to be adversely affected by the change: larger PBOs and groups (registered as a single entity in terms of ITA sec. 30(3A)). A PBO with annual receipts of say, R20 million is able to earn less than 0,2% of its income from unrelated trading before it becomes liable for tax.

The use of the individual tax rebate as the basis for the PBO rebate creates a false analogy; the tax considerations for individuals and PBOs are often diametrically opposed. The public interest is rarely served by the emergence of a few wealthy individuals and increasing economic inequality.

However, the growth of an organisation may well be socially beneficial, especially if the organisation adheres to the requirements for recognition as a PBO. Larger organisations are likely to operate a wider variety of programmes and may therefore earn small amounts of (unrelated) income from a number of different activities. This change may have a chilling effect on their dynamism and creativity, as well as their ability to explore potential strategies for self-sufficiency.

13. The switch from a percentage exemption to a fixed rebate will also tend to discriminate against collections of closely-related PBOs registered as a group. Such a group will only be entitled to a single rebate, while a collection of similar bodies that register independently will enjoy multiple rebates. Organisations will have incentives to register in as decentralised a manner as possible - which is likely to increase the administrative burden on SARS and the PBO sector alike. Indeed, section 38(1)(e) would introduce a provision compelling any group member that earns taxable income to withdraw from the group and register independently if the rest of the group wishes to retain PBO status.

14. These changes would have particular implications for faith communities. For faith communities, decisions about institutional structure, governance and the relationship among constituent bodies are not (or should not be) shaped by business or tax considerations but by theological beliefs. If approved, these amendments would mean that denominations and faith groups that give greater autonomy for local worshipping communities will be at much less risk of their fundraising activities attracting tax than will more bodies with stronger central administrations.

15. Consequently, we would propose:

1. That section 38(1 )(e), requiring the independent registration of group members that earn taxable income, be deleted; and

b. That a variable tax rebate be introduced for PBOs that takes into account the size of an organisation (or group).

Overall approach to trading restrictions on PBOs

16. We also wish to reiterate more general concerns about the impact of the trading restrictions on PBOs. International best practice in the non-profit sector stresses the diversification of funding sources and the exploration of relevant commercial and marketing options as strategies to promote long-term organisational sustainability. While we appreciate that commercial activities must not be allowed to eclipse a PBO's primary focus on activities that benefit the public - and poorer households in particular - we would also like to see a legal and regulatory environment that enables PBOs to try out novel and responsible fund-raising strategies.

17. We share SARS' eagerness to ensure that PBO tax concessions do not create other problems. However, we believe that the potential moral and economic hazards have been minimised. To the extent that SARS hopes to prevent for-profit businesses from avoiding taxes by masquerading as exempt PBOs, we would submit that there are sufficient safeguards built into section 30 of the ITA to prevent this.

18. In fact, SARS' caution seems to be motivated primarily by a concern that PBOs will gain a competitive advantage over for-profit enterprises, allowing them to "squeeze out" private sector commercial activities and small businesses. SARS feels it has an obligation to "level the playing field", implying that privileging certain players would be unfair. However, this understanding is at odds with the principles and values that underpin the entire notion of PBO tax exemption. The Katz Commission and the Portfolio Committee on Finance argued strongly that PBOs play a desirable and beneficial role in society, strengthening democracy and enhancing the public sector's capacity to deliver public services and infrastructure. As a result, there are strong reasons to advantage PBOs, provided such advantages result in net benefits to the society at large.

19. We accept that it might be impractical or even detrimental to abandon all trading restrictions on PBOs. However, the categories of permitted trading are currently very narrowly drawn indeed. We believe that PBOs could still be afforded greater scope to raise funds from trading activities without unduly harming commercial enterprises or causing significant economic distortions. If the government is reluctant to relax the restrictions in a general way by increasing the taxation threshold or the de minimis rule, then we would urge the introduction of new categories of permitted trading.' PBOs will still be required to devote any income generated to public benefit activities, so there is limited potential for abuse of a more lenient tax regime.

20. In particular, we would urge the Portfolio Committee to consider designating as permitted trading income any rent accruing from a dwelling that is owned by a religious community for the purposes of housing a religions leader who officiates at a place of public worship, but which is not being used for that purpose for a period of time. Most congregations provide accommodation for a clergyperson, but some clerics prefer to buy their own homes. Rather than dispose of the property and be left with no way of housing future clergy, a congregation will often let out the dwelling and use the income to provide their current religious leader with a housing allowance. If an individual congregation is recognised as a PBO, the income earned is likely to be near or below the effective tax threshold proposed for PBOs

If, on the other hand, a more centralised denomination is required to aggregate this trading income from a few dozen of its member congregations, then their tax liability could become quite substantial.

DONOR DEDUCTIBILITY

21. ITA sec. 18A allows donors to deduct contributions for certain public benefit activities from their gross incomes before calculating tax. Currently, the donor becomes liable for the tax on such a donation if it is not used for the designated activities. Section 28(1)(e) would place the responsibility on the receiving PBO to ensure that the funds are properly spent or, alternatively, to pay the relevant tax on the misspent funds. In addition, section 58 of the Bill would introduce criminal penalties for fiduciary officers of a PBO who intentionally fail to comply with the provisions of ITA sec. 18A. We believe it is both appropriate and more practice to place the onus of compliance on the PBO, rather than on the donor.

INVESTMENT LIMITATIONS

22. Section 38(l)(a) of the draft amendments would alter section 30(3)(b)(ii) of the ITA to limit the range of financial institutions in which a PBO may invest its funds. An earlier draft of the legislation proposed to limit the range of institutions approved for investment by PBOs much more severely. In response to submissions received by SARS, this restriction has been reconsidered. The current formulation is much less restrictive and more appropriate to the circumstances. We thank SARS for the careful attention given to these concerns

CAPITAL GAINS TAX

23. Final]y, section 88 of the Bill would limit a PBO's exemption from Capital Gains Tax to capital gains accruing from the sale of assets used exclusively to carry out public benefit activities. We believe this to be consistent with the logic of the partial taxation policy reflected in the Bill. However, we are concerned about its impact in the case of property that is used for more than one purpose, whether simultaneously (e.g., a religious training centre that that hosts conferences out of term) or consecutively (e.g., a manse that is let out for several years during the tenure of a minister who owns her own home). We would propose that the test be primary use, rather than exclusive use.