Page 367 - SAIT Compendium 2016 Volume2

IN 24 (3) Income Tax acT: InTeRPReTaTIon noTes IN 24 (3)
2. Background
New legislation was introduced in 2000, which came into operation on 15 July 2001, to provide for the exemption from income tax of the receipts and accruals of PBOs carrying on PBAs. The legislation contained strict provisions which prohibited PBOs from carrying on trading or business activities outside narrowly de ned rules in section 30. A PBO that did not comply with these rules lost its exempt status and became a taxable entity. This had harsh consequences for PBOs and the legislation was amended in 2006 to allow for a partial taxation system for PBOs (see Issue 2 of this Note, available on the SARS website www.sars.gov.za under Legal & Policy / Archive / Interpretation Notes). A PBO may now carry on limited trading or business activities provided its sole or principal object remains the carrying on of approved PBAs. Partial taxation came into operation on 1 April 2006 and applies to a PBO from its rst year of assessment commencing on or after that date.
3. The law
Section 10(1)(cN)
10. Exemptions.—(1) There shall be exempt from normal tax—
(cN)the receipts and accruals of any public bene t organisation approved by the Commissioner in terms of section
30(3), to the extent that the receipts and accruals are derived—
(i) otherwise than from any business undertaking or trading activity; or
(ii) from any business undertaking or trading activity— (aa) if the undertaking or activity—
(A) is integral and directly related to the sole or principal object of that public bene t organisation as contemplated in paragraph (b) of the de nition of ‘public bene t organisation’ in section 30;
(B) is carried out or conducted on a basis substantially the whole of which is directed towards the
recovery of cost; and
(C) does not result in unfair competition in relation to taxable entities;
(bb) if the undertaking or activity is of an occasional nature and undertaken substantially with assistance on a voluntary basis without compensation;
(cc) if the undertaking or activity is approved by the Minister by notice in the Gazette, having regard to— (A) the scope and benevolent nature of the undertaking or activity;
(B) the direct connection and interrelationship of the undertaking or activity with the sole or principal
object of the public bene t organisation;
(C) the pro tability of the undertaking or activity; and
(D) the level of economic distortion that may be caused by the tax exempt status of the public bene t
organisation carrying out the undertaking or activity; or
(dd) other than an undertaking or activity in respect of which item (aa), (bb) or (cc) applies and do not exceed
the greater of—
(i) 5 per cent of the total receipts and accruals of that public bene t organisation during the relevant
year of assessment; or
(ii) R200 000;
4. General meaning of certain terminology in the context of section 10(1)(cN)
4.1 Basic exemption
The amount which is determined as a threshold is applied to the total receipts and accruals derived from a business undertaking or trading activity not qualifying for a speci c exemption (see 6.1, 6.2 and 6.3). The basic exemption is calculated as an amount equal to the greater of 5% of the total receipts and accruals of the PBO during the relevant year of assessment or R200 000 (see 6.4 and Example 12).
4.2 Business undertaking
The term ‘business’ is not de ned in the Act. Based on case law, it is generally accepted to include anything which occupies the time, attention and labours of a person for pro t. There are no hard and fast rules in determining what constitutes business. However, in determining whether a business undertaking is being carried on a number of factors may be taken into account such as the intention, motive, frequency and nature of the activity.
The passive investment of surplus funds in shares or an investment in a nancial institution is not normally regarded as a business undertaking or trading activity. However, the advancing of interest-bearing loans at market-related rates by a money lender would be regarded as a business undertaking.
4.3 Integral and directly related
The business undertaking or trading activity must be integral and directly related to the approved PBA carried on by the PBO.
4.4 Occasional nature
An undertaking or activity of an occasional nature is one conducted on an irregular, infrequent basis or as a special event.
saIT comPendIum oF Tax LegIsLaTIon VoLume 2 359
Example 1 – Integral and directly related
Facts:
A PBO conducts a PBA of providing healthcare services at no charge to poor and needy persons. In addition to providing a medical consultation service, the PBO also provides medication at cost.
Result:
The provision of medication at cost is regarded as integral and directly related to the activity of providing healthcare services to poor and needy persons.