Non-compliance by public benefit organisations
24 August 2020
Original content provided by BDO South Africa
Words were not minced as the finance minister, Tito Mboweni, clamped down on unlawful activities and non-compliance by Public Benefit Organisations(PBOs), with the spotlight firmly on religious bodies. He emphasised in his budget speech that there will be renewed focus on section 30 entities that fail to operate within the laws that afford them tax exemption status.
An organisation that complies with the requirements set out in section 30 of the Income Tax Act and whose sole or main objective is the carrying on of one or more Public Benefit Activities(PBAs), after it has applied for and been approved by the South African Revenue Service (SARS) for exemption may register as a PBO operating under a specialised PBO reference number. This reference must be cited in all its correspondence with SARS.
The Act provides direction on the comprehension and function of section 10(1)(cN), which administers the exemption of the receipts and accruals of a Public Benefit Organisation (PBO). This exemption does not extend to receipts and accruals derived from business undertakings or trading activities outside the scope of what constitutes a PBO and PBA in terms of section 30(3). Amendments made to section 10(1)(cN) in 2006 allow for a partial taxation system. Limited business undertakings or trading activities may therefore be carried on by a PBO, provided that its sole or main objective remains the carrying on of one or more PBAs.
PBOs are required to submit annual IT12EI (Return of income: Exempt organisations) returns to SARS. This allows SARS to monitor the compliance of the organisation in respects of it keeping within the confines of its PBO approval status. Furthermore, the commissioner is then able to determine the potential application of a partial taxation in terms of section 10(1)(cN) on receipts and accruals. The organisation is in addition obligated to regularly update the commissioner on any changes regarding its operational details and activities.
Remaining compliant with the requirements of section 30 and the exemption administrations of section 10(1)(cN) ensures that PBOs remain lawful and tax compliant. Also, compliance allows a PBO to maintain its section 18A certification which provides a 10% deduction to bona fide donors. PBO contraventions and non-compliance may result in all income, accruals and donations received by the PBO being treated as taxable income for tax purposes – effectively forfeiting donors their tax deduction.
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