Draft bill cuts dis­tri­bu­tion thresh­old of pub­lic ben­e­fit or­gan­i­sa­tions

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - NI­COLE PAULSEN & GIGI NYANIN

ON JULY 17 the Na­tional Trea­sury re­leased the draft Tax­a­tion Laws Amend­ment Bill which aims to give ef­fect to the var­i­ous tax pro­pos­als which were an­nounced in the 2014 bud­get.

One of the pro­pos­als re­lates to the con­trol mea­sures and, more specif­i­cally, the dis­tri­bu­tion re­quire­ment pre­scribed for a de­fined con­duit pub­lic ben­e­fit or­gan­i­sa­tion (PBO).

PBOs play an im­por­tant role in so­ci­ety as they re­lieve the fi­nan­cial bur­den on the state in re­spect of un­der­tak­ing pub­lic ben­e­fit ac­tiv­i­ties. Tax ex­emp­tions and de­duc­tions are there­fore avail­able to as­sist PBOs in achiev­ing their ob­jec­tives.

In ad­di­tion to the gen­eral tax ex­emp­tion that ap­plies to PBOs, s18A of the In­come Tax Act, No 58 of 1962 pro­vides for a de­duc­tion from the tax­able in­come of any tax­payer an amount of any do­na­tion made by that tax­payer to de­fined PBOs and cer­tain other or­gan­i­sa­tions car­ry­ing on ac­tiv­i­ties listed in Part II of the Ninth Sched­ule to the act. This in­cen­tive is granted by the govern­ment to en­cour­age do­na­tions to or­gan­i­sa­tions in­volved in pub­lic ben­e­fit ac­tiv­i­ties.

A con­duit PBO is a PBO ap­proved in terms of s30 of the act which pro­vides funds or as­sets to other PBOs or en­ti­ties con­duct­ing pub­lic ben­e­fit ac­tiv­i­ties as con­tem­plated in Part I and Part II of the Ninth Sched­ule to the act.

Con­duit PBOs are also en­ti­tled to is­sue re­ceipts for the de­duc­tion of do­na­tions in terms of s18A of the act, pro­vided that they dis­trib­ute at least 75% of do­na­tions re­ceived to other ap­proved PBOs and qual­i­fy­ing statu­tory bod­ies within 12 months of the end of the year of as­sess­ment in which the do­na­tion was re­ceived.

Ac­cord­ing to the Trea­sury, the pur­pose of the 75% dis­tri­bu­tion re­quire­ment is to pre­vent con­duit PBOs from amass­ing large re­serves, and to align the tim­ing in re­spect of when the donor claims a de­duc­tion and when the funds are pushed back into the econ­omy (and pre­sum­ably be­comes gross in­come again).

How­ever, the 75% dis­tri­bu­tion rule can ac­tu­ally ham­per the ef­fec­tive­ness and sus­tain­abil­ity of con­duit PBOs. Recog­nis­ing this, it was pro­posed in the 2014 bud­get that the dis­tri­bu­tion re­quire­ment would be re­laxed.

In terms of the draft bill the 75% thresh­old would be re­duced to 50%. In ad­di­tion, con­duit PBOs will be al­lowed to earn pas­sive in­come.

How­ever, cer­tain con­di­tions will ap­ply in re­spect of the use of undis­tributed funds, namely that 100% of re­turns on in­vest­ments made by the con­duit PBO must be dis­trib­uted af­ter five years from the date of the amend­ment, and ev­ery suc­ceed­ing five year in­ter­val there­after.

Re­stric­tions will also ap­ply in re­spect of in­vest­ing undis­tributed funds. Specif­i­cally, in­vest­ments will be lim­ited to cer­tain fi­nan­cial in­sti­tu­tions and spec­u­la­tive and/or illiq­uid in­vest­ments will not be al­lowed.

Con­duit PBOs should take note that they will have to amend their found­ing doc­u­ments in order to re­flect these new con­di­tions.

It is pro­posed that the amend­ments come into op­er­a­tion from March 1 next year.

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