CHARITIES: May tax-exempt Public Benefit Organisations rent out their property without having to pay

A number of our clients in the non-profit sector have in recent times made enquiries about the possibility of renting out property owned by their tax-exempt Public Benefit Organisation (“PBO”) in order to obtain extra income and whether such activity would result in them losing their tax-exempt status.

While PBO’s could in the past only engage in Public Benefit Activities (“PBA’s”) and nothing else, amendments to the Income Tax Act make it possible for PBO’s to engage in partial trading activities and keep their PBO status. There are, however, very strict limitations on this and they may be taxed on income derived from such trading activities.

Essentially the business activities and generating of profit must not become the sole object of the PBO, but must only be used to advance the PBA’s that form part of its object (in the case of rental income, for instance, the rental must be utilised to promote the PBA’s that the PBO engages in). There are three types of trading activities that a PBO may engage in:

• Integral and directly related trade, which means:

• The activity must be integral to the approved PBA carried on by the PBO (e.g. if the PBA is education, the trading activity has to have something to do with education);

• Substantially or the whole of the activity must be conducted on a cost recovery basis – this means (if the PBO is selling goods, for example) the goods must not be sold to maximise profits, but rather to recover the direct and indirect reasonable costs;

• The activity must not be seen as being in unfair competition with other taxable entities;

• Occasional trade

• This means the trade activity is done on an infrequent basis and substantially with the assistance of volunteers (i.e. no compensation / reimbursement)

• Other activities that have ministerial approval, which requires approval by way of a notice in the Government Gazette

If a PBO’s trading activities meets the requirements for one of the three categories listed above, income generated will not be taxable. If the above criteria are not met, the income will be taxable, but a deduction (basic exemption) of the greater of 5% of the total receipts and accruals of the PBO for that year or R200 000.00 will be made against the income tax liability.

It is therefore possible to rent out property owned by a PBO without losing the benefit of its tax-exempt status, although such activities should be approached with circumspection and may lead to income tax liability.