Page 368 - SAIT Compendium 2016 Volume2

IN 24 (3) Income Tax acT: InTeRPReTaTIon noTes IN 24 (3)
Example 2 – Examples of business undertakings or trading activities of an occasional nature
Activities of an occasional nature may include –
• annual jumble sales at which donated second-hand clothing is sold;
• annual fundraising events such as fêtes, cake sales or the sale of raf e tickets involving prizes that have been donated; • charity golf days involving donated or sponsored prizes;
• a gala dinner held to raise funds; or
• the sale of Christmas cards reconditioned by volunteers.
4.5 Recovery of cost
A business undertaking or trading activity will be regarded as having been carried out on a basis substantially the whole (see 4.7) of which is directed towards the recovery of cost when goods are not sold to maximise pro ts but rather with the intention of recovering direct and reasonable indirect costs. It is not always possible to base trading activities on a 100% cost-recovery basis and it is for this reason that legislation requires that substantially the whole of the trading activity must be based on recovery of cost.
Example 3 – Recovery of cost
Facts:
A PBO carries on a PBA under the heading ‘Education and Development’ and operates a tuck shop which serves and sells refreshments to learners for a consideration which is determined by taking into account the cost of the goods. Assistance in the tuck shop is provided by volunteers. The cost of the goods sold includes the purchase price, costs such as telephone, electricity, repairs and maintenance, stationery, cleaning materials, and an amount for a reserve created for future replacement costs of capital assets such as a refrigerator, microwave, and deepfreeze. As a result of the voluntary assistance, no salaries or wages are incurred and a small pro t may result which is used by the PBO to fund its PBAs.
Result:
The running of the tuck shop is regarded as being carried out or conducted on a basis substantially the whole of which is directed towards the recovery of cost.
4.6 Sole or principal object
The word ‘principal’ is used in conjunction with the word ‘sole’ and the concept means that the sole or predominant object must be the carrying on of one or more PBAs. A PBO cannot have more than one sole or principal object.
4.7 Substantially the whole
In the strict sense the concept of ‘substantially the whole’ is regarded by SARS as 90% or more. In order to overcome certain practical dif culties SARS will, however, accept a percentage of not less than 85%. This percentage may be motivated by taking into account time or cost. See Binding General Ruling No. 20 dated 10 December 2013 which provides clarity on the interpretation of the expression ‘substantially the whole’ which is available on the SARS website.
4.8 Substantially with assistance on a voluntary basis
Any assistance must predominantly be undertaken on a voluntary basis, without compensation.
Example 4 – Sole or principal object
Facts:
An organisation carries on a commercial business activity of a supermarket and is open seven days a week. Some of the stock-in-trade is used to provide free meals to homeless people on a regular basis.
Result:
The organisation’s sole or principal object is not to provide meals to homeless people but to conduct a commercial trading activity.
Example 5 – Substantially the whole of the activity undertaken on a cost-recovery basis
Facts:
A PBO provides literacy and numeracy education to adults. In order to fund the provision of these approved PBAs, the PBO charges tuition fees. The fees are based on the estimated cost to the PBO in providing the tuition which includes the cost of hiring a hall, tuition material and text books. The tuition is provided on a voluntary basis by teachers after hours. The tuition fee is the principal source of income for the PBO.
Result:
Since the tuition fees are determined on a cost-recovery basis and no charge is made for the donated services of the teachers, substantially the whole of the PBAs are regarded as being directed towards the recovery of cost.
Example 6 – Substantially with assistance on a voluntary basis
Facts:
At a school fête each of the 20 classes are assigned to run a stall selling donated goods in order to raise funds. All the stalls are manned by volunteers who include teachers, parents and learners.
Result:
All the assistance given to the school at the fundraising event is provided on a voluntary basis.
360 saIT comPendIum oF Tax LegIsLaTIon VoLume 2