It is recognised in the South African Revenue Services' ("SARS") Tax Exemption Guide for Public Benefit Organisations in South Africa ("PBO Guide") that non-profit organisations play a significant role in society by undertaking shared responsibility for the social and developmental needs of the country. This relieves the financial burden that would otherwise fall on the state. It is on this basis that public benefit organisations ("PBOs") are granted preferential tax treatment. PBOs can either carry out public benefit activities ("PBAs") or provide funds to other PBOs that carry out PBAs outlined in the ninth schedule of the Income Tax Act,1962 (the "Act").
Section 30(1) of the Act particularly section 30(1)(c)(i) of the Act requires each activity carried on by a PBO to be for the benefit of or to be widely accessible to the public at large, including any sector thereof (other than small and exclusive groups).
In terms of paragraph 1(p) of Part 1 of the ninth schedule of the Act, PBO's are empowered to engage with the community development for poor and needy persons and anti-poverty initiatives, including, inter alia, the promotion of community-based projects relating to self-help, empowerment, capacity building, skills development and of provision of training, support, or assistance to emerging micro-enterprises to improve capacity to start and manage businesses. However, it was not clear which community-based projects would meet the requirements of section 30(1)(c)(i) and there was uncertainty on this issue for PBOs.
In May 2022, SARS issued Binding Private Ruling ("BPR") 371 where it determined whether the proposed operating model of a PBO was in line with the provisions of section 30(1)(c)(i) of the Act. It should, of course, be noted that any BPR only has binding effect as between SARS and the applicant.
In BPR 371, the applicant [a PBO trust] was required, by agreement with a third-party donor, to make quarterly contributions to socio-economic and enterprise development initiatives in neighbouring communities. The PBO proposed an operating model, where the general public would submit proposals through established community forums and undergo a certain evaluation process. Initiatives aligned with the applicant's objectives and PBAs would then be granted funding.
The proposed transaction in this case involved the funding of four projects namely;
- a bakery;
- vegetable tunnels;
- a poultry project; and
- a small manufacturing concern.
The applicant sustained the view that the projects were to benefit the local community as contributions awarded will result in the creation of employment, skills development, and the enhancement of local enterprise. SARS affirmed the applicant's position and held that the applicant's initiatives being limited to a specific geographical region was consistent with the requirement that a PBO's PBA be carried on for the benefit of, or be widely accessible to, the general public at large, including any sector thereof (other than small and exclusive groups).
On face value, these projects that received funding in BPR 371 do not appear to perform any qualifying altruistic function accessible to members of the general public as required by section 30(1)(c)(i). However, SARS' confirmation reveals that, in certain instances, SARS may adopt a purposive approach to the interpretation of section 30(1)(b)(i) giving recognition to the importance of socio-economic development.
BPR 371 solidified the position that projects, unlike previously, can now be afforded donations/grants by carrying out activities which are in line with that of the PBO. The BPR also shines a light on the fact that there is a route through which PBOs can be utilised to fund non-PBO initiatives as long as there is a PBA, recognised under the ninth schedule, which is being carried out and the requirements of section 30(1) are adhered to by the PBO.
Although the issuing of donations/grants to projects has been clarified, there remains uncertainty concerning provision of loans to projects and/or microenterprises. In terms of paragraph 1(p)(iii), PBOs have been empowered to offer support to microenterprises, however, the required guidance to carry out this PBA is yet to be provided.
The Minister's guidance on the provision of loans to microenterprises by PBOs has the potential to change the economic fabric of South Africa, as the core struggle of emerging microenterprises is resources. The guidance is crucial at this stage on the basis that Paragraph 1(p) serves as an adequate pathway for supporting persons and/or enterprises that can contribute towards the creation of employment, skills development, and the enhancement of local enterprise in the long run.
BPR 371 is of significant importance because it highlights how projects can be used as vehicles through which PBOs can perform the PBAs. It should encourage other PBOs to adopt progressive methods of executing their objects. As the realm of funding of projects has been clarified, we hope to see progress in terms of loans being issued to microenterprises with the potential to bear positive societal effects that mirror PBAs.
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