The tax implications of profit share accrual for public benefit organisations in South Africa

Abstract

Section 10(1)(cN) of the Income Tax Act 58 of 1962 (the Act) in South Africa makes provision for approved Public Benefit Organisations (PBOs) in South Africa to enjoy preferential tax treatment. An organisation is approved as a PBO according to the requisites in section 30 of the Act. Accordingly, approved PBOs enjoy partial exemption from Capital Gains Tax (CGT). Income generated from trading activities must meet specific criteria to enjoy preferential tax treatment. One of the restrictions of this section is that an approved PBO may never have as its sole or primary object the operation of a commercial business to fund their public benefit activity. The South African non-profit sector continues to struggle financially, despite the progressive development of the tax legislation since 2000. The South African Revenue Service (SARS) believes that changes made at the commencement of 2000 to the Act that applies to approved PBO’s, are sufficient to strengthen the financial resources of the non-profit sector. However, the Legal Resources Centre believes that the changes made to the Act imbed a dependence on sporadic donor funding. After 1994, several nonprofit organisations that offered much needed socio-economic services to various South African communities, announced that they were struggling financially. Rape Crisis Cape Town was established in Cape Town in 1976 to help survivors of rape and sexual violence. In 1987, the Institute for Democracy in South Africa (IDASA) was set up to monitor the quality of democracy and hold the decision-makers accountable in Southern Africa. Both organisations made public announcements that they were struggling financially, and since then, IDASA has closed its operations in South Africa, and Rape Crisis Cape Town continues to struggle financially. South Africa’s non-profit sector finds its origin in the UK. The UK has implemented and changed its income tax legislation over a more extended period than South Africa. This research undertakes a comparative study between South Africa’s PBOs and registered Charities in the United Kingdom, emphasising England and Wales. It critically analyses the similarities and differences between PBOs and Charities with a specific focus on business undertakings and trading activities to increase the finances of the non-profit sector. One of the shortfalls of the study is that South Africa has a limited number of decided cases and research articles assessing this topic. This study highlights the complementary link between profit share accrual of PBOs and the basic requirements, conditions, and nature of these entities to address the social and economic challenges highlighted in the National Plan. There is not enough existing case law in which the courts adequately define concepts like “income”, “expenditure”, “surplus”, “profit” and “accrual” for PBOs. The study concludes by discussing the lessons learned from Charities in England and Wales, and it makes recommendations to the South African government for future implementation.