THE METHODIST CHURCH OF SOUTHERN AFRICA
DRAFT SUBMISSIONS
PROPOSED AMENDMENTS TO TAX ACT AFFECTING PUBLIC BENEFIT ORGANISATIONS (PBO)
Draft Revenue Laws Amendment Bill, Batch Three published by SARS recently required submissions by interested parties by 7 September 2005. The undersigned was alarmed by some proposed changes and the implications particularly on the Methodist Church of Southern Africa (the MCSA) and its mission effectiveness. As a result the undersigned made urgent email submissions to SARS on 14 September, 2005.
At the request of Mr Mark Kingon, Head of the Tax Exemption Unit of SARS in Pretoria, Messrs Doug Tilton, Allan Schwarer (representing the Catholic Bishop’s Conference) and a representative of the MCSA visited SARS to discuss our various concerns on 30 September 2005. Some of our concerns were satisfactorily dealt with but other matters were not resolved and left "in the air". In some instances SARS expressed understanding of and sympathy for the MCSA’s situation. No definite assurance was received that proposed legislation would be amended hence we must assume the worst case scenario which would be very prejudicial to the MCSA.
On Monday 3 October 2005 SARS published the new Revenue Laws Amendment Bill. (SARS web site www.sars.gov.za – look in the "What’s New" section). As we understand things we will have an opportunity to make oral submissions at the public hearings before the parliamentary finance committees possibly on 19 and 20 October at a venue to be announced. Furthermore our information is that the closing date for written submissions to the Secretary of the Portfolio Committee on Finance is Friday 14 October. We need to say immediately that, given the structure of the MCSA and the importance of the issues raised in the said Bill, the MCSA is firmly of the opinion that she cannot do justice to her concerns given the above deadlines. Accordingly the MCSA’s request to the said parliamentary sub committee is to extend the above deadlines at least to the end of November but preferably to the early portion of 2006.
However if this extension is not granted below please find the draft submissions by the MCSA which is the best the MCSA could do in the circumstances. The said submissions are also made without conceding that said deadlines referred to above are reasonable.
Undermentioned paragraphs 4 (letting of Manses) and 5 (discrimination against PBOs with group registration) are the matters of greatest concern to the MCSA.
In an increasingly competitive environment the Church had to find creative ways of generating income to survive and provide vital mission assistance to the community. The nature and extent of such societal responsibility is vast and includes virtually all the activities listed as approved Public Benefit Activities in the Ninth Schedule of the Income Tax Act which qualify such PBOs to be exempt from tax, eg. welfare and humanitarian, health care, land and housing, education and development, religion, culture and conservation. In providing these benefits to the community PBO s thereby relieve the financial burden which otherwise falls on the State. Tax benefits are designed to assist PBO s with resources to enable them to fulfill their responsibilities to the community and achieve their objectives.
We accept and support the fact that the Tax Act needs to ensure that PBOs:
Consequently circumstances will arise where PBOs will become liable for some forms of taxation. But, we submit, the application of such tax legislation must recognize the role played by PBO s in community upliftment, be reasonable, fair and simple to determine and administer.
In our submission we sometimes need to use our terminology. May we clarify that "Society" refers to a local church. "Circuit" refers to a group of societies in a geographic area under a single administration. "Manse" refers to a house owed by the church occupied by a Minister of Religion. "Connexion" refers to all "Circuits", and activities of the MCSA in Southern Africa under one authority.
We need to mention that the MCSA has always been compliant. We have registered for tax exemption on a Group basis. We have compiled and lodged with SARS a single, simple, Consolidated Financial Statement of all MCSA Circuits and Societies (over 1000 entities) together with our tax Return.
But we are alarmed with some of the tax amendments. We would have some difficulties which we will allude to later in this submission, viz; Unrelated trading activities, Letting of manses and Group Registration,
Most income of an approved PBO is exempt from taxation. The categories of income which are fully or partially subject to taxation relate to "Trading Income".
Trading or the carrying on of a business undertaking by a tax exempt organization is a major cause for concern to the fiscus, as exempt entities should not be seen to be in competition with other taxpaying entities, by conducting the same or similar business activities in a tax-free environment, thereby undermining fair competition.
It is however accepted that certain exempt organizations do engage in trading activities, in order to further the public benefit activity conducted by the PBO, or as part of fund raising activities conducted by the organization. In these circumstances trading or business activities may be acceptable.
3.1 Certain trading income not subject to taxation:
In terms of the proposed new legislation, PBOs are entitled to carry on business or trading activities within specific parameters. The following types of trading are permitted and therefore not subject to taxation:
3.2 Certain unrelated trading income subject to taxation:
Where a PBO conducts unrelated trading or business which falls outside the permissible trading rules it will have to pay income tax on net taxable income, after deducting allowable expenses incurred in the production of such income and reasonable overheads. Capital expenditure cannot be deducted. All accounting principles will have to comply with the normal provisions of the Income Tax Act.
The rate of tax applied to net taxable income will be the corporate rate of 29%.
Provision is made for a rebate of R10 800 for all PBOs to be deducted from any tax payable on trading or business income. This effectively makes the first R37 000 of net taxable income from unrelated trading tax free after deducting the R10 800 rebate. Example: Taxable income R37 000 x 29% = R10 730 tax, less the rebate of R10 800 = nil tax payable.
Where a Circuit or Society of the MCSA (see below) conducts both related and unrelated trading activities, it will not be possible to determine at the beginning of the year of assessment whether such Circuit/Society would be liable to pay tax on income from unrelated trading. This can only be determined at the end of the financial year. It therefore becomes necessary for such Circuit/Society to maintain separate accounting records for each type of trading activity.
Therefore Societies/Circuits which do conduct unrelated trading activities will need to keep track of income generated by those trading activities, as well as any expense incurred in conducting those trading activities. If they earn more than the effective tax threshold, they will need to :
Circuits/Societies involved in unrelated trading will have to be individually responsible for any possible tax liability. There is no way the MCSA can handle such submissions Connexionally on behalf of such Circuits/Societies and process/pay tax assessments and try to recover tax retrospectively. Hence the need for them to register with SARS separately.
The administrative and financial consequences of the said approach will be very adverse on the mission effectiveness of the MCSA. Such changes would significantly increase administration workload and cause changes to Circuits’ and Societies’ accounting systems (there are 330 circuits and over a thousand societies within the MCSA). In this regard it must also be remembered that many of our circuits and societies are in very poor rural communities which often do not have the administrative capacity which such a route will require. There also are Circuits and Societies which cover South Africa and another Southern African country – thus further complicating the administrative implications of such a route.
Furthermore, this is a fundamental deviation from the present Group Registration process whereby ALL MCSA Financial reports of Circuits and Societies are consolidated and submitted to SARS in one relatively simple Return – in this regard extensive written and oral submissions already have been made to SARS and the other relevant parties giving the theological and administrative reasons for why the MCSA should be allowed a group registration (attached find one such submission).
(With the said Group Registration all usual tax free Circuit/Society income and expenditure Financial returns are at present reflected in the normal Financial Statements which are consolidated with the MCSA’s Group Connexional Tax Return lodged with SARS.)
Many Circuits rent out their manses and pay the Minister a housing allowance because he/she owns their own house. According to Tax legislation, "Trade" includes letting of property and is therefore taxable.
We believe that in the case of the MCSA the letting of a Manse is directly related to the primary objective of the MCSA because her constitution stipulates that the Church must provide a manse or that, by implication, the Church provides resources to the Minister for him/her to acquire a house. Where a Minister acquires his/her own house, such arrangements are usually temporary until another Minister needs to be stationed in that Circuit/Society and requires a manse. The allowance received by the Minister is taxable in his/her hands. If the Circuit/Society were compelled to pay tax on such rental income it would be seriously compromised and would be compelled to sell the manse and invest the proceeds which would be inadequate when needing to purchase another manse in the future.
We believe therefore that this is a unique situation which some Denominations experience. Consequently the Income Tax Act should provide, as a generic exemption, rental income from manses registered in the name of the PBO, in a manner similar to the Property Rates Act. If this is not practical the MCSA should apply for Ministerial approval for such rental received from letting manses to be regarded as exempt in terms of Section 30(3)(b)(iv)dd – however at present there is no guarantee that such approval will be obtained. Thus the need to address this problem in the draft legislation.
5 QUERY WITH SARS: REBATE TO PBO s WITH GROUP REGISTRATION
The Act permits PBO s to register either on a group or individual basis. As referred to above, the doctrine and structure of the MCSA requires a group registration because of, inter alia, our Connexional structure. For the reasons set out in our attached memorandum referred to above, the MCSA opted for Group registration.
In terms of proposed amendments to Section 6 of the Income Tax Act each PBO will be able to deduct from the normal tax payable a rebate of R10 800. This discriminates against denominations which have opted for a group PBO registration, illustrated by this example:
Assume a denomination has 100 individual congregations each earning "unrelated" trading taxable income (from renting manses) of R37 200 pa. This denomination opts for a single group PBO registration. The total group unrelated trading taxable income is R3 720 000 at an assumed tax rate of 29% = R1 078 800 less a rebate of R10 800 means net tax payable of R1 068 000.
Alternatively if each congregation were to register separately as a PBO each would have unrelated trade of R37 200 at the assumed tax rate of 29% = R10 788 less the rebate of R10 800 means no tax payable.
This scenario is obviously unacceptable and unfair, and, we suspect, unintentional. Whilst SARS acknowledge this apparent unfairness they have as yet not been forthcoming with a solution for the unique circumstances of a Group registration.
If this scenario is not addressed it would impede the mission of the MCSA. One of the real dangers alluded to above being that Circuits/Societies would be compelled to avoid tax by selling their manse, which will have very serious consequences for the sustainability of such Circuits/Societies.
6 CAPITAL GAINS TAX
A further, we believe unintended, consequence is that where any building becomes subject to partial taxation because it is used for unrelated trading, such building automatically becomes subject to CGT in terms of the Act. This also will have major implications for the MCSA in that such buildings will have to be valued in terms of complex legislation and the payment of CGT will have to be made when they are sold.
The Bishops
The Methodist Church of Southern Africa
13th October 2005