CHARITIES: PBO’s beware – new SARS ruling on taxation of business activities

Regular readers of our newsletter will recall that we dealt with the tax implications of income generated by tax-exempt Public Benefit Organisations (“PBO’s”) through non-charitable activities, such as renting out property owned by them. Where it was in the past possible to do so without incurring any tax liability, subject to certain threshold requirements, a new binding ruling passed by the SARS on 10 December 2013 has now somewhat changed this situation.

SARS’ Binding General Ruling 20 provides a binding interpretation on the concept of “substantially the whole” which is part of the tax-exemption requirement relating to business activities by PBO’s. The applicable section of the Income Tax Act states that a PBO may engage in business activities without incurring tax liability if such activities are “carried out…on a basis substantially the whole of which is directed towards the recovery of cost.” In other words, business activities by PBO’s should substantially be aimed at covering costs rather than generating profit. The ruling also affects transfer duty on the acquisition of property by PBO’s, which are exempt from transfer duty where “the whole, or substantially the whole [of the property] will be used for the purposes of one or more public benefit activity carried on by such [PBO].” Under the new ruling, SARS will, with effect from 10 December 2013, interpret “substantially the whole” to mean at least 90%, although it will give PBO’s some leeway and accept a minimum of 85%. No guidance is provided on how these percentages are to be calculated – the ruling merely states that “a method appropriate in the circumstances” must be used.

The ruling is quite problematic. Take for example a PBO that buys a property of which 30% will be used for parking, which is not a recognised public benefit activity. Does this mean that the PBO will have to pay transfer duty? What if the PBO’s use of the property changes at a future date and they go down from 100% to 50%? Will they then have to retrospectively pay transfer duty? Arguably the situation is somewhat simpler when applied to business activities, where one can at least track the allocation of income generated and compare it to cost recovery, provided that proper records are kept. PBO’s with income generating business activities will from now on have to very carefully monitor the allocation of such income to ensure compliance with the new ruling.

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