SARS Interpretation Note 125: Associations: Funding requirement - IN 125. Associations: Funding requirement

SARS Interpretation Note 125: Associations: Funding requirement (source: https://www.sars.gov.za/legal-in-125-associations-funding-requirement/) INTERPRETATION NOTE 125 DATE: 14 November 2022 ACT : INCOME TAX ACT 58 OF 1962 SECTION : SECTION 30B(2)(b)(ix) SUBJECT : ASSOCIATIONS: FUNDING REQUIREMENT Contents Preamble ................................................................................................................................. 2 1. Purpose ....................................................................................................................... 2 2. Background ................................................................................................................. 3 3. General description of certain terminology in the context of section 30B(1) ............... 3 4. The law ........................................................................................................................ 4 5. Application of the law .................................................................................................. 5 5.1 Meaning of “funding” ................................................................................................... 6 5.2 Prescribed sources of funding ..................................................................................... 7 5.2.1 Funding derived from annual or other long-term members ......................................... 8 5.2.2 Funding derived from an appropriation by government ............................................ 11 5.3 Funding derived from sources other than from members or an appropriation by government ............................................................................................................... 12 5.4 Substantially the whole of an entity’s funding ........................................................... 13 6. Withdrawal of approval .............................................................................................. 15 7. Receipts and accruals exempt from income tax........................................................ 16 8. Objection and appeal ................................................................................................ 16 9. Record-keeping ......................................................................................................... 17 10. Conclusion ................................................................................................................ 18 Annexure A – The law ................................................................................................................. 19 Annexure B – Calculation of “substantially the whole” of the “funding” requirement ................... 22 Preamble In this Note unless the context indicates otherwise – • “Commissioner” means the Commissioner for the South African Revenue Service appointed under section 6 of the South African Revenue Service Act 34 of 1997, or the Acting Commissioner designated under section 7 of that Act; • “Companies Act” means the Companies Act 71 of 2008; • “entity” means an “entity” listed in paragraphs (a) and (b) of the definition of “entity” in section 30B(1), namely, any mutual loan association, fidelity or indemnity fund, trade union, chamber of commerce or industry (or an association of such chambers), local publicity association, or professional body (see 3) approved by the Commissioner under section 30B(2); • “founding document” means the written instrument such as the constitution or memorandum of incorporation under which an entity is established and governed; • “government” means the government of South Africa in the national, provincial or local sphere contemplated in section 10(1)(a); • “mutual loan association” means an “entity” referred to in paragraph (a) of the definition of “entity” and defined in section 30B(1) as an association of which the sole or principal object is to function as a voluntary savings association where participants make regular contributions into a common pool managed by the members for the mutual financial benefit of those members; • “NPC” means a non-profit company as defined in the Companies Act; • “prescribed requirements” mean the formal conditions and requirements set out in section 30B(2)(b), which an entity must provide for in its founding document and comply with in order to qualify for approval as an entity; • “section” means a section of the Act; • “TA Act” means the Tax Administration Act 28 of 2011; • “the Act” means the Income Tax Act 58 of 1962; • “the Constitution” means the Constitution of the Republic of South Africa, 1996; and • any other word or expression bears the meaning ascribed to it in the Act. All guides, interpretation notes, rulings and forms referred to in this Note are available issue of these documents should be consulted. 1. Purpose This Note provides guidance on the interpretation and application of the “funding” requirement contemplated in section 30B(2)(b)(ix), requiring that substantially the whole of an entity’s funding must be derived from its annual or other long-term members or from an appropriation by the government. This Note considers only the “funding” requirement and does not consider any of the other requirements required for approval under section 30B(2) for purposes of the exemption from income tax under section 10(1)(d)(iii) or (iv). 2. Background The entities referred to in section 30B 1 fall outside the scope and income tax rules for public benefit organisations (PBOs) 2 and recreational clubs. 3 The definition of “entity” in section 30B(1) provides for two distinct categories of entities, comprising – 4 • mutual loan associations, fidelity or indemnity funds, trade unions, chambers of commerce or industry and local publicity associations; 5 and • professional bodies (see 3). 6 The respective entities are diverse in nature but have in common that they usually do not have a profit motive nor do they provide any monetary gain or material advantage for their individual members. 7 The entities are membership based and exist for the benefit of their members. Although these entities are established to conduct their activities with and for the benefit of their members, they are not prohibited from dealing with non-members within prescribed parameters (see 5.4). The approval under section 30B(2) is limited to those entities that can demonstrate that substantially the whole (see 5.4) of their funding (see 5.1) is derived from their annual or other long-term members (see 5.2.1) or from an appropriation by the government (see 5.2.2). Entities approved by the Commissioner under section 30B currently have the advantage of an absolute exemption on their receipts and accruals under section 10(1)(d)(iii) and (iv) (see 7). 3. General description of certain terminology in the context of section 30B(1) The entities listed in the definition of “entity” in section 30B(1) are not defined in the Act, with the exception of a mutual loan association (see Preamble). Based on literature reviewed which, amongst other things, includes research documents, reports and other web sources the following entities can generally be described as follows: • “Chamber of commerce or industry (or an association of such chambers)” means an “entity” referred to in paragraph (a) of the definition of “entity” in section 30B(1), which has as its sole or principal object the promotion, regulation and protection of the interests of the local business community and whose members comprise local business persons. Section 30B was inserted by section 55(1) of the Taxation Laws Amendment Act 7 of 2010 with effect from 2 November 2010, the date of promulgation of that Act. Section 30 provides for the approval of an organisation as a PBO. For commentary, see the Tax Exemption Guide for Public Benefit Organisations in South Africa. Section 30A provides for the approval of an organisation as a recreational club. For commentary, see Tax Exemption Guide for Recreational Clubs. See the Explanatory Memorandum on the Taxation Laws Amendment Bill, 2010, in paragraph 3.4. Paragraph (a) of the definition of “entity” in section 30B(1). Paragraph (b) of the definition of “entity” in section 30B(1). Section 30B(2)(b)(v). • “Fidelity or indemnity fund” means an “entity” referred to in paragraph (a) of the definition of “entity” in section 30B(1), which has as its sole or principal object to indemnify or compensate any third party that suffers a loss or damages in consequence of any act or omission of a member of that fund in the rendering of a particular service by that member to that third party. • “Local publicity association” means an “entity” referred to in paragraph (a) of the definition of “entity” in section 30B(1), which has as its sole or principal object to advertise and promote a particular local city, town, district or area to attract trade, tourism, visitors or industry. • “Trade union” means an “entity” referred to in paragraph (a) of the definition of “entity” in section 30B(1), which functions as a representative body of workers in a certain sector, industry or commerce whose sole or principal object is to promote, protect and advance workers’ interests, rights and working conditions in the workplace whether individually or collectively. 8 • “Any NPC, society 9 or other association of persons 10 established to promote the common interests of persons, being members of such NPC, society or association of persons, carrying on any particular kind of business, profession or occupation” means an “entity” referred to in paragraph (b) of the definition of “entity” in section 30B(1), which is normally a representative or regulatory body of members of a particular kind of business, profession or occupation, for example, a body for accountants, architects, engineers, lawyers, medical practitioners or scientists. Such a representative or regulatory body sets professional standards and qualifications for that particular business, profession or occupation, encourages sustainability, promotes the protection of the public from malpractice relating to the professional duties and responsibilities of representative or regulatory bodies and their members, encourages international leading practice, and raises the esteem for all businesses, professions or occupations in South Africa. 11 These representative or regulatory bodies are referred to in this Note as professional bodies. 4. The law The relevant sections of the Act are quoted in Annexure A. Trade unions may voluntarily register with the Department of Labour under section 95(7) of the Labour Relations Act 66 of 1995. The word “society” is described in The Free Dictionary as “a group of people broadly distinguished from other groups by mutual interests, participation in characteristic relationships, shared institutions, and a common culture” and “an organisation or association of persons engaged in a common profession, activity or interest”. See www.thefreedictionary.com/society [Accessed 14 November 2022]. An association of persons is generally established or formed by adopting a legal founding document. See GJ Pienaar “Formation” 2 (Third Edition Volume) LAWSA [online] (My LexisNexis: 28 February 2015) in paragraph 155. The National Qualifications Framework Act 67 of 2008 requires the South African Qualifications Authority (SAQA) to recognise professional bodies and register their professional designations on the national qualifications framework, which is a comprehensive system approved by the Minister of Higher Education and Training for the classification, registration, publication and articulation of quality-assured national qualifications. 5. Application of the law An association that falls within the ambit of the definition of “entity” in section 30B(1)(a) or (b) will only be considered by the Commissioner for approval under section 30B(2). Section 30B(2) prescribes that – • the entity must submit to the Commissioner a copy of its founding document; 12 and • the founding document must provide for all the following prescribed requirements: 13  The entity must have a committee, board of management or similar governing body consisting of at least three persons, who are not connected persons 14 in relation to each other, to accept the fiduciary responsibility 15 of that entity.  No single person may directly or indirectly control the decision-making powers relating to that entity.  The entity may not directly or indirectly distribute any of its funds or assets to any person other than in the course of furthering its objectives (see 3).  The entity is required to use substantially the whole of its funds for the sole or principal object (see 3) for which it has been established.  No member may directly or indirectly have any personal or private interest in that entity.  Substantially the whole of the activities of the entity must be directed to the furtherance of its sole or principal object (see 3) and not for the specific benefit of an individual member or minority group.  The entity may not have a share or other interest in any business, profession or occupation, which is carried on by its members (see 5.2.1).  Substantially the whole of the entity’s funding must be derived from its annual or other long-term members or from an appropriation by the South African government in the national, provincial or local sphere.  The entity must not pay to any employee, office bearer, member or other person any remuneration, as defined in the Fourth Schedule to the Act, which is excessive, having regard to what is generally considered reasonable in the sector and in relation to the service rendered. Section 30B(2)(a). Section 30B(2)(b)(i) to (xiii). The term “connected person” is defined in section 1(1). For commentary, see Interpretation Note 67 “Connected Persons”. For commentary on the basic principles relating to persons accepting fiduciary responsibility, see the Tax Exemption Guide for Public Benefit Organisations or the Tax Exemption Guide for Recreational Clubs.  The entity must as part of its dissolution transfer its assets to another entity approved by the Commissioner under section 30B; a PBO approved by the Commissioner under section 30; an institution, board or body, which is exempt from tax under section 10(1)(cA)(i); or the South African government in the national, provincial or local sphere.  The persons accepting fiduciary responsibility will submit any amendment of the founding document of the entity to the Commissioner within 30 days of its amendment.  The entity will comply with such reporting requirements as may be determined by the Commissioner from time to time.  The entity is not knowingly and will not knowingly become a party to, and does not knowingly and will not knowingly permit itself to be used as part of, an impermissible avoidance arrangement contemplated in Part IIA of Chapter III, or a transaction, operation or scheme contemplated in section 103(5). The above prescribed requirements must be included in the founding document in order for an entity to be approved by the Commissioner, and to retain such approval for its receipts and accruals to qualify for exemption from income tax under section 10(1)(d)(iii) or (iv) (see 7). If the founding document of an entity does not provide for the prescribed requirements, the entity will be deemed to comply if the person who has accepted fiduciary responsibility for the funds and assets of the entity, furnishes the Commissioner with a written undertaking 16 that the entity will be administered in compliance with the prescribed requirements. 17 5.1 Meaning of “funding” The word “funding” is not defined in the Act. The method of attributing meaning to the words used in legislation involves, as a point of departure, examining the language of the provision at issue, the language and design of the statute as a whole and its statutory purpose. 18 In C: SARS v Dunblane (Transkei) (Pty) Ltd 19 the court held that words in a section of an Act of Parliament must not be looked at in isolation but in the context in which they are found, both in the immediate context of the sub-section in which they occur and in the general context of the Act. The word “fund” is described in the Dictionary.com as – 20 “funds, money immediately available; pecuniary resources”. The Business Encyclopedia explains “funding” as follows: 21 “The term funding refers simply to money the organization designates (budgets) for specific purposes, such as capital spending or an organization's operating budget.” A specimen written undertaking form EI 2A is available to assist persons accepting fiduciary responsibility to administer an entity in accordance with the prescribed requirements. Section 30B(4). See Chetty t/a Nationwide Electrical v Hart & another 2015 (6) SA 424 (SCA), 4 All SA 401. 2002 (1) SA 38 (SCA), 64 SATC 51 at 57. www.dictionary.com/browse/funding [Accessed 14 November 2022]. www.business-case-analysis.com/funds-funding.html [Accessed 14 November 2022]. The word “funding” is described in The Free Dictionary as follows: 22 “Funding is the act of providing financial resources, usually in the form of money, or other values such as effort or time, to finance a need, program, and project, usually by an organisation or government. Generally, this word is used when a firm uses its internal reserves to satisfy its necessity for cash, while the term financing is used when the firm acquires capital from external sources. Sources of funding include credit, venture capital, donations, grants, savings, subsidies and taxes. Funds can be allocated for either short-term or long-term purposes.” Having regard to the above, the word “funding” in section 30B(2)(b)(ix) refers to the monetary resources an entity requires to finance its activities in the furtherance of its sole or principal object (see 3) for which it has been established 23 as set out in its founding document and under which it has obtained approval from the Commissioner. The word “funding” is a broader concept than income and is not interpreted to mean gross income. 24 Having regard to the language of the provision itself, read in context and having regard to the purpose of the provision, “funding” envisaged under section 30B(2)(b)(ix) refers to all the sources of funding derived by an entity including, for example, donations and grants received (see 5.2.1). For purposes of section 30B borrowed funds (loan funding) obtained by an entity from external sources such as a bank is not included in the ambit of the meaning of “funding”. Loan funding is generally subject to the unconditional obligation to repay it within a certain prescribed period. 5.2 Prescribed sources of funding Section 30B(2)(b)(ix) prescribes that substantially the whole (see 5.4) of an entity’s funding must be derived from – • its annual members or other long-term members (see 5.2.1); or • an appropriation by the government (see 5.2.2). Having regard to the language of the provision itself, read in context and having regard to the purpose of the provision and the background to the preparation and production thereof 25 the funding that is “derived” must have a direct connection with its members or an appropriation by the government. The use of the disjunctive word “or” means that substantially the whole (see 5.4) of an entity’s funding must be received or obtained from either one or a combination of the prescribed specified sources of funding (see Example 3). https://encyclopedia.thefreedictionary.com/funding [Accessed 14 November 2022]. An entity is required under section 30B(2)(b)(iv) to use substantially the whole of its funds for the sole or principal object for which the entity has been established. The term “gross income” is defined in section 1(1). Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA 593 (SCA). 5.2.1 Funding derived from annual or other long-term members The relief under section 10(1)(d)(iii) and (iv) is aimed at entities having members and which derive substantially the whole of their funding from either their annual or other long-term members. The Act does not define “member” with the exception of defining the term “member” for purposes only of a fidelity or indemnity fund. 26 This definition also does not define a member as such but merely states that a member includes a contributor to that fund. The word “member” is described in the Oxford Dictionary, Thesaurus and Wordpower Guide as – 27 “a person or organisation belonging to a group or society”. For purposes of the “funding” requirement, a member is not limited to only a natural person but may also include a juristic person, which is a legal entity separate and distinct from its members such as a company or close corporation. 28 Section 30B does not prescribe a minimum or maximum number of members that should belong to an entity since this may prejudice smaller entities. Section 30B also does not prescribe a minimum membership period but does require that an entity must at least have annual or other long-term members. The word “annual” is described in the Oxford Dictionary, Thesaurus and Wordpower Guide as – 29 “occurring or recurring once in each year; continuing for the period of a year”. The word “annual” referred to in the “funding” requirement therefore means lasting for a year, that is, a period of 12 months. The annual period is not required to coincide with a calendar year, the financial year or year of assessment of an entity. If a member signs up for an annual membership during a year, that membership fee is regarded as derived from an annual member and will be included in the “substantially the whole” (see 5.4) calculation even though it is not in relation to a period of 12 months. The same principal applies should a member terminate membership of an entity during a year. The word “long-term” is described in the Lexico.com as – 30 “occurring over or relating to a long period of time”. Since section 30B distinguishes between annual and long-term members, it can be inferred that long-term membership must run for a period longer than a year and that membership in general must not run for a period of less than 12 months. Section 30B(1). M Wait, S Hawker and C Soanes Oxford Dictionary, Thesaurus and Wordpower Guide (2001) Oxford University Press. The definition of “person” does not exclude companies, other incorporated entities, associations of persons, or statutory bodies. Also see, definition of “person” in section 2 of the Interpretation Act 33 of 1957. M Wait, S Hawker and C Soanes Oxford Dictionary, Thesaurus and Wordpower Guide (2001) Oxford University Press. www.lexico.com/definition/long-term [Accessed 14 November 2022]. The BusinessDictionary.com describes “membership” as follows: 31 “Belonging, either individually or collectively, to a group. Some memberships may require a fee to join or participate while some do not. Others, as in the case of MENSA, have specific skill requirements that must be reached prior to be accepted into the group. Special privileges or benefits are entitled to members although not all members may have the same rights and privileges. For example, a leader might have special rights that allow the individual to preside over meetings or create rules and guidelines for the group.” An entity incorporated as an NPC electing to have members must set out in its memorandum of incorporation the – 32 • qualifications for membership; • process for applying for membership; • cost of membership in any class; • rights and obligations of membership in any class; and • grounds on which the membership may be suspended or terminated. The membership of associations is explained by LAWSA as follows: 33 “The rules of an association determine in the first instance which persons are eligible for membership of the association, . . . . The rules of an association will usually set out the procedure which must be followed before prospective members are admitted. This could take the form of a written application coupled with formal notification of acceptance from the management committee, the payment of the prescribed membership fee and the placing of a new member’s name on the membership list. The rights and duties which stem from membership depend on the provisions of the constitution. Generally speaking, members are, inter alia, entitled to enjoy the amenities and other privileges provided by the organisation. In turn, they must pay entrance and subscription fees or levies which may be called for under the constitution.” (Footnotes omitted.) It is clear from the above that an entity irrespective of whether it is constituted as an NPC, association of persons or society should set out the requirements and conditions for that entity’s membership in its founding document. The validity of membership of an entity is therefore evidenced by the presence of formal procedures for membership eligibility, acceptance and admittance as well as membership rights obtained after being accepted as a member. A non-member is therefore a person or organisation, which has not officially joined an entity. 34 www.businessdictionary.com/definition/membership.html [Accessed 14 November 2022]. See item 4 of Schedule 1 to the Companies Act. GJ Pienaar ”Associations” 2 (Third Edition Volume) LAWSA [online] (My LexisNexis: 28 February 2015) in paragraphs 162 to 164. See the description of the word “non-member” in the Cambridge English Dictionary available online at https://dictionary.cambridge.org/dictionary/english/non-member [Accessed 14 November 2022]. Membership is usually granted if the particular qualifying criteria and requirements relating to membership of a particular entity as set out in their founding documents are complied with (see Example 4 in Annexure B). The qualifying criteria and requirements as well as the membership categories a member may qualify for will differ from entity to entity. The personal particulars of qualifying members together with their privileges and rights are generally recorded in a membership register of an entity. A member may or may not be required to pay a registration, joining or entrance fee, a membership fee, or a subscription to belong to an entity. The membership fees or subscriptions applicable to a particular membership category may vary from entity to entity (see Example 4 in Annexure B). In order to obtain the right to access various activities 35 provided by an entity or to enjoy various benefits associated with the membership of a particular entity a member may or may not be required to pay a fee in addition to the membership fee or subscription for such activities or benefits. For example – • a local businessperson may become a member of a local publicity association to enjoy the benefit of being listed on the local business directory available on the internet, enabling access to advertising opportunities, and to establish and maintain contacts through networking opportunities beneficial to that businessperson; • a local businessperson may become a member of a chamber of commerce or industry to obtain business, trade, legal, labour and taxation information, advice and assistance, and network with other local business stakeholders and foreign delegates and dignitaries to enhance the person’s business performance and profile; • an employee may become a member of a trade union to gain access to legal advice and assistance should a dispute arise with that member’s employer; or • a professional person may become a member of a professional body to participate in seminars, webinars, workshops and other training activities, which may include Continuous Professional Development packages, aimed at enhancing the particular skills and expertise required in that particular profession or industry thus ensuring development and enabling the person to remain up-to-date with policies and practices within that particular profession or industry. A professional person may also become a member of a professional body to obtain professional indemnity insurance to protect the member against any potential claims by clients deeming work produced or professional advice provided by that member as being in adequate. Any funding derived by an entity from its members will meet the “funding” requirement provided it aligns with the entity’s funding model. This does not limit funding derived by an entity to only membership fees or subscriptions and may therefore include, for example, donations, rental income, conference or examination fees from members (see Annexure B). An entity must under section 30B(2)(b)(vi) direct substantially the whole of its activities to the furtherance of its sole or principal object and not for the specific benefit of an individual member or minority group. 5.2.2 Funding derived from an appropriation by government Government is understood as the governing body of a state 36 and is the exclusive power in which the administration of a state is vested. The government is according to the Constitution 37 constituted as national, 38 provincial 39 and local 40 spheres of government, 41 which are distinctive, interdependent and interrelated. The different levels of government therefore all have legislative and executive authority in their own spheres. The Constitutional Court held in Minister of Defence and Military Veterans v Thomas 42 that within its constitutional sphere of competence each sphere of government reigns supreme. The national sphere of government is the central government administration and consists of the national parliament and the different state departments as determined by the President. 43 The provincial sphere of government consists of the nine provincial legislatures and the respective provincial departments. 44 The local sphere of government consists of municipalities. 45 Entities granted approval by the Commissioner under section 30B(2) are placed in a favourable position because their receipts and accruals are exempt under section 10(1)(d)(iii) or (iv) (see 7). The courts have tended to reject a construction of a statutory provision, which implies the extension of a class privilege and to interpret it strictly. 46 It is for this reason that the word “government” referred to in section 30B(2)(b)(ix) must be interpreted strictly so as not to include any other state entities, for example, entities established as agents of the government or organs of state. 47 This is supported by section 10(1)(a), which clearly separates the three spheres of government from their controlled agencies and other independent bodies. The word “appropriation” referred to in the “funding” requirement is not defined in the Act. It is described in the Dictionary.com as – 48 “1 the act of appropriating. 2 anything appropriated for a special purpose, especially money. 3 an act of a legislature authorizing money to be paid from the treasury for a specified use”. www.lexico.com/en/definition/government [Accessed 14 November 2022]. Section 40(1) of the Constitution. Chapter 5 of the Constitution. Chapter 6 of the Constitution. Chapter 7 of the Constitution. The receipts and accruals of the government are exempt from income tax under section 10(1)(a). 2016 (1) SA 103 (CC). For a list of National Departments, see Schedule 1 to the Public Service Act 103 of 1994. For a list of Provincial Departments, see Schedule 2 to the Public Service Act 103 of 1994. The Local Government: Municipal Structures Act 117 of 1998 regulates the establishment of municipalities. This rule was laid down in Ernst v CIR 1954 (1) SA 318 (A), 19 SATC 1 and approved in CIR v D & N Promotions (Pty) Ltd 1995 (2) SA 296 (A), 57 SATC 178 at 182 and Western Platinum Ltd v C: SARS [2004] 4 All SA 611 (SCA), 67 SATC 1 at 6. See paragraph (b) of the definition of “organ of state” in section 239 of the Constitution. www.dictionary.com/browse/appropriation [Accessed 14 November 2022]. Any funds specifically allocated to an entity by any sphere of government will be regarded as an appropriation by the government as contemplated in the “funding” requirement. Example 1 – Funding derived by an entity, which is not from an appropriation by the government Facts: A professional body provides educational activities to future recruits, which is partially funded by FASSET, which is the sector education and training authority (SETA) established by the Minister of Higher Education and Training under the Skills Development Act 97 of 1998 for the finance, accounting, management consulting and other financial services sector. Typically 90% of the professional body’s funding is derived from FASSET to cover the costs relating to training, exams, transcripts and overall related administration. Result: FASSET is not within the national, provincial or local sphere of government. FASSET is regarded as an institution, board or body established under the Skills Development Act, 1998, as contemplated in section 10(1)(cA)(i). The professional body therefore does not meet the funding requirement of section 30B(2)(b)(ix) since substantially the whole of its funding is not derived from an appropriation by government. 5.3 Funding derived from sources other than from members or an appropriation by government This Note does not consider in detail all the sources of funding which an entity may derive. Other sources of funding, which is not from that entity’s annual or long-term members or from an appropriation by the government may include funding derived, for example, from non-members, foreign capital grants, foreign donor funding, donations, investment income (see Examples 2, 4 and 5). The facts and circumstances of each case will determine whether substantially the whole of an entity’s funding was derived directly from the prescribed sources of funding (see 5.2). 49 The entity bears the onus to prove 50 that the funding was derived directly from the prescribed sources of funding. Employers sometimes pay an employee’s annual membership fee to a professional body, especially if such membership is a prerequisite of the employee’s employment, such as a medical practitioner’s membership of the Health Professions Council of South Africa. In such an instance, the entity’s funding is derived from the member notwithstanding payment by the employer. Investment income or interest derived from the investment of funds is regarded as funding not derived directly from the prescribed sources of funding. Western Platinum Ltd v C: SARS [2004] 4 All SA 611 (SCA), 67 SATC 1 at 9. Section 102 of the TA Act. The sum of all the other sources of funding, excluding funding derived directly from the prescribed sources of funding, may not exceed 15% of the total funding derived by an entity (see 5.4). 5.4 Substantially the whole of an entity’s funding The expression “substantially the whole” is not defined in the Act. In Binding General Ruling (Income Tax) 20 “Interpretation of the Expression ‘Substantially the Whole’ ” it is stated that in the strict sense the expression “substantially the whole” is regarded by SARS to mean 90% or more. 51 However, since the entities contemplated in section 30B operate in an uncertain environment making proper planning difficult, SARS will accept a percentage of not less than 85%. This interpretation is to ensure that entities approved by the Commissioner do not enjoy an unfair advantage over other taxable entities conducting similar income-generating activities and to permit small-scale self-sustainability. The total funding of an entity, that is, the total of all income irrespective of whether such income is of a revenue or capital nature received by or accrued to an entity for a particular year of assessment 52 before the deduction of any expenses or allowable deductions must be used to calculate whether an entity complies with the “substantially the whole” of the “funding” requirement. See Annexure B for examples providing a step-by-step approach for calculating “substantially the whole” of an entity’s funding to determine compliance with the “funding” requirement. Example 2 – “Substantially the whole” of an entity’s funding An entity, which derives – • 55% of its funding from foreign capital grants, will not meet the “substantially the whole” of the “funding requirement; • 30% of its funding from donations from non-members, will not meet the “substantially the whole” of the “funding requirement; • 35% of its funding from levies imposed from non-members, will not meet the “substantially the whole” of the “funding requirement; • 65% of its funding from membership fees and 20% of its funding from foreign donor funding, will not meet the “substantially the whole” of the “funding requirement; and • 45% of its funding from membership fees, 20% of its funding from rental income from its members, 15% from the use of a canteen by its members and 5% of its funding from donations from its members, will meet the “substantially the whole” of the “funding” requirement. For commentary, see Interpretation Note 102 “Classification of Risk Policy and the Once-off Election to Transfer Certain Policies or Classes of Policies Issued Before 2016 to the Risk Policy Fund.” The term “year of assessment” is defined in section 1(1). See Interpretation Note 90 “Year of Assessment of a Company: Accounts Accepted to a Date Other Than the Last Day of a Company’s Financial Year” and Interpretation Note 19 “Year of Assessment of Natural Persons and Trusts: Accounts Accepted to a Date Other Than the Last Day of February”. An entity will meet the “funding” requirement even though substantially the whole of its funding is not derived from its annual or other long-term members, but substantially the whole is derived from an appropriation by the government. The “funding” requirement will also be met if at least 85% of an entity’s funding is derived from a combination of its annual or long-term members and from an appropriation by the government. Example 3 – Funding derived by an entity from a combination of an appropriation by the local sphere of government and from its members Facts: A local publicity association has been formed to promote, advertise and develop a small town in the Eastern Cape to attract trade, tourism, and commerce or industry within that particular town. Municipality X has an interest in attracting investment to the town that is under its jurisdiction. Furthermore, Municipality X has a responsibility to support the growth of local enterprises through small business coalitions and also to develop and attract tourism to that particular town. Municipality X has made funds available to the local publicity association to achieve these objectives. The local publicity association used the funds to develop a website, brochure and a guide listing and advertising the local businesses, artists and crafters as well as promoting the local attractions in the area such as the wildlife, birds, plants and the Karoo landscape in general as well as the local attractions and museums. The local publicity association derives 95% of its funding from the municipality and 5% from contributions from its annual or other long-term members comprising interested individuals and businesses who have a direct interest in the town. Result: The local publicity association qualifies as an “entity” under paragraph (a) of the definition of that term in section 30B(1). It will meet the “funding” requirement under section 30B(2)(b)(ix), since substantially the whole of its funding is derived from a combination of an appropriation from the local sphere of government (95%) and from its members (5%). An entity, not complying with the “substantially the whole” of the “funding” requirement, will not be approved by the Commissioner under section 30B(2). Such an entity will be a taxable entity and will be subject to income tax as a normal taxpayer. An entity previously approved by the Commissioner, which contravenes the “substantially the whole” of the “funding” requirement will be subject to non-compliance penalties (see 6 and Example 5 in Annexure B). 6. Withdrawal of approval The Commissioner may withdraw the approval of an entity if that entity has, in any year of assessment in any material respect or on a continuous or repetitive basis, failed to comply with section 30B or with its founding document as it relates to that section. 53 The Act does not specify what constitutes a “material, continuous, or repetitive” failure by an entity. The CollinsDictionary.com provides the following descriptions: • “Material” is “material evidence or information is directly relevant and important in a legal or academic argument.” 54 • “Continuous“ is “a continuous process or event continues for a period of time without stopping.” 55 • “Repetition” is “a thing, word, action, etc. that is repeated.” 56 A failure by an entity to comply with section 30B in any material respect may therefore include a significant, relevant, and important failure. A failure on a continuous basis may be prolonged without interruption, while a failure on a repetitive basis may be done many times in the same manner by the entity, implying that non-compliance on a continuous or repetitive basis may span more than one year of assessment. The Commissioner may withdraw the approval in any of the above circumstances but must consider each case on its own facts and circumstances. Notice must be given to the transgressing entity of the intention to withdraw the approval and also specify a period determined by the Commissioner within which corrective steps must be taken. An entity must be provided with a reasonable opportunity to rectify the non-compliance identified by the Commissioner. The correction must, however, be done not later than the year of assessment following the year of assessment in which the Commissioner identified and issued the notice of intention to withdraw the approval. If no corrective steps are taken by the entity within the period stated in the notice, the approval will be withdrawn from the beginning of the year of assessment in which the non-compliance or failure by the entity identified by the Commissioner occurred. 57 The Commissioner, however, may not withdraw approval of years of assessment that have prescribed. 58 The decision to withdraw the approval is subject to objection and appeal (see 8). On withdrawal of its approval, the affected entity must transfer or take reasonable steps to transfer its remaining assets within six months or a longer period allowed by the Commissioner to specified entities. 59 Failure to do so will result in the inclusion of an amount in its taxable income. 60 A detailed discussion of the consequences of the withdrawal of an entity’s approval does not form part of the scope of this Note. 61 Section 30B(5). www.collinsdictionary.com/dictionary/english/material [Accessed 14 November 2022]. www.collinsdictionary.com/dictionary/english/continuous [Accessed 14 November 2022]. www.collinsdictionary.com/dictionary/english/repetition [Accessed 14 November 2022]. Section 30B(6). Section 99 of the TA Act. Section 30B(7). Section 30B(9). For commentary on the basic principles of the withdrawal of approval, see the Tax Exemption Guide for Public Benefit Organisations in South Africa or the Tax Exemption Guide for Recreational Clubs. 7. Receipts and accruals exempt from income tax The receipts and accruals of any entity approved by the Commissioner under section 30B are exempt from the payment of income tax under section 10(1)(d)(iii) or (iv), respectively. The exemption granted under section 10(1)(d)(iii) and (iv) is an absolute exemption. All receipts and accruals falling within gross income, 62 being the total amount, in cash or otherwise, received by or accrued to or in favour of an entity, will be exempt from income tax under section 10(1)(d)(iii) and (iv). An amount will be “received” by a person as envisaged in the Act only if the person receives it on his or her own behalf and for his or her own benefit. 63 An amount “accrues” to a person when the person is entitled to it and when the person’s right to the amount is unconditional. 64 An amount is included in a person’s gross income in the year of assessment in, which that person receives it or the year of assessment in, which it accrues to that person, whichever comes first. 65 Receipts or accruals of a capital nature that are not specifically included in gross income would not be included in the receipts and accruals referred to in the opening words of section 10(1)(d), since they do not require exemption. Receipts or accruals of a capital nature are taken into account in determining a taxable capital gain, which is included directly in paragraph (b) of the definition of “taxable income” in section 1(1). While a taxable capital gain is potentially subject to income tax, the exemptions in section 10 do not apply to it because a taxable capital gain is included directly in taxable income and does not comprise “income” (gross income less exempt income). 66 Any capital gain or capital loss determined on an asset donated or bequeathed to a professional body exempt under section 10(1)(d)(iv) must be disregarded by the donor. 67 A person must disregard any capital gain or capital loss on the disposal of an asset when any amount constituting gross income of whatever nature would be exempt from tax under section 10(1)(d) were it to be received by or to accrue to that person. 68 8. Objection and appeal Any decision of SARS in the exercise of its discretion under section 30B is subject to objection and appeal in accordance with Chapter 9 of the TA Act. 69 An entity may object within 30 days from the date of a decision by the Commissioner under section 30B, for example, not to approve an entity. The objection must be made on the prescribed form and specify in detail the grounds on which it is made. 70 SARS will consider the objection and may disallow the objection or allow the objection completely or in part. Section 1(1). Geldenhuys v CIR 1974 (3) SA 256 (C), 14 SATC 419. Lategan v CIR 1926 CPD 203, 2 SATC 16; Ochberg v CIR 1933 CPD 256, 6 SATC 1. SIR v Silverglen Investments (Pty) Ltd 1969 (1) SA 365 (A), 30 SATC 199. For commentary, see Comprehensive Guide to Capital Gains Tax. Paragraph 62(c) of the Eighth Schedule to the Act. Paragraph 63 of the Eighth Schedule to the Act. Section 3(4)(b). The rules for objections and appeals are formulated under section 103 of the TA Act and published in Government Notice 550 in Government Gazette 37819 of 11 July 2014. For commentary, see the Dispute Resolution Guide: Guide on the Rules Promulgated in terms of Section 103 of the Tax Administration Act, 2011 and Alternative Dispute Resolution: Quick Guide. If on disallowance of the objection the entity is dissatisfied with the decision by SARS, it may appeal against the disallowance. Such appeal must be in writing and lodged with SARS within the prescribed period. 9. Record-keeping An entity must adhere to all applicable compliance obligations under the TA Act, for example, record-keeping, returns, assessments, dispute resolution (see 8), interest, refunds and anti-avoidance. All entities are required to keep records for five years 71 from the date of the submission of a return 72 under the TA Act. A person must keep the records, books of account or documents that – 73 • enable the person to observe the requirements of a tax Act; • are specifically required under a tax Act or by the Commissioner by public notice; and • enable SARS to be satisfied that the person has observed these requirements. The records must be kept or retained in – 74 • their original form in an orderly fashion and in a safe place; • the form, including electronic form, 75 as may be prescribed by the Commissioner in a public notice; 76 or • a form specifically authorised by a senior SARS official. These records should be available for inspection purposes by a SARS official to verify compliance with the requirements as explained above, or for purposes of an inspection, audit or investigation. 77 Records that are relevant to an audit, investigation, an objection, or appeal must be retained until the audit or investigation is concluded or until the assessment or the decision becomes final in the event of an objection or appeal (in case the five-year retention period is exceeded). 78 Books of account should at least be compiled in a manner that indicates compliance with the “funding” and spending requirements of section 30B. Section 29(3) of the TA Act. The term “return” is defined in section 1 of the TA Act and includes any form, declaration, document or other manner of submitting information to SARS that incorporates a self-assessment or is the basis on which an assessment is to be made by SARS. Section 29(1) of the TA Act. Section 30(1) of the TA Act. For commentary, see the Electronic Communications Guide. See Government Notice 787 in Government Gazette 35733 of 1 October 2012. Section 31 of the TA Act. Section 32 of the TA Act. An entity is not exempted from the obligation to deduct or withhold employees’ tax if the entity qualifies as an employer. 79 The entity must register as an employer for employees’ tax purposes within 21 business days of becoming an employer and submit monthly EMP201s. 10. Conclusion In order to be granted approval under section 30B(2), an entity must satisfy the Commissioner that it falls within the definition of “entity” in section 30B(1) and meets all the prescribed requirements, which include, that substantially the whole of its funding is derived from its annual or other long-term members or from an appropriation by the government, are met. An entity bears the onus of proving 80 that it complies with the requirements relative to the approval as highlighted in this Note and must retain the necessary evidence to support the view taken. 81 The burden may be discharged by way of supporting evidence submitted by the entity. It is a factual enquiry whether an entity complies with the “funding” requirement and since the facts and circumstances pertaining to each entity differ, each case will be considered on its own merits. Leveraged Legal Products SOUTH AFRICAN REVENUE SERVICE See definition of “employer” in paragraph 1 of the Fourth Schedule to the Act. Section 102 of the TA Act. Section 29 of that Act. Annexure A – The law Section 10(1)(d)(iii) and (iv) 10. Exemptions.—(1) There shall be exempt from normal tax— (d) the receipts and accruals of any— (i) . . . . . . (ii) . . . . . . (iii) mutual loan association, fidelity or indemnity fund, trade union, chamber of commerce or industries (or an association of such chambers) or local publicity association approved by the Commissioner in terms of section 30B; or (iv) company, society or other association of persons established to— (aa) ...... (bb) promote the common interests of persons (being members of such company, society or association of persons) carrying on any particular kind of business, profession or occupation, approved by the Commissioner in terms of section 30B; Section 30B 30B. Associations.—(1) For the purposes of this section— “entity” means— (a) any mutual loan association, fidelity or indemnity fund, trade union, chamber of commerce or industry (or an association of such chambers) or local publicity association; or (b) any— (i) non-profit company as defined in section 1 of the Companies Act; (ii) society; or (iii) other association of persons, established to promote the common interests of persons (being members of the company, society or association of persons) carrying on any particular kind of business, profession or occupation, approved by the Commissioner in accordance with subsection (2); “member” in the case of a fidelity or indemnity fund includes a contributor to that fund; “mutual loan association” means an association of which the sole or principal object is to function as a voluntary savings association where participants make regular contributions into a common pool managed by the members for the mutual financial benefit of those members. (2) Subject to subsections (3) and (4), the Commissioner must approve an entity for the purposes of section 10(1)(d)(iii) or (iv) if— (a) that entity has submitted to the Commissioner a copy of the constitution or written instrument under which it has been established; (b) the constitution or written instrument contemplated in paragraph (a) provides that— (i) the entity must have a committee, board of management or similar governing body consisting of at least three persons, who are not connected persons in relation to each other, to accept the fiduciary responsibility of that entity; (ii) no single person may directly or indirectly control the decision-making powers relating to that entity; (iii) the entity may not directly or indirectly distribute any of its funds or assets to any person other than in the course of furthering its objectives; (iv) the entity is required to utilise substantially the whole of its funds for the sole or principal object for which it has been established; (v) no member may directly or indirectly have any personal or private interest in that entity; (vi) substantially the whole of the activities of the entity must be directed to the furtherance of its sole or principal object and not for the specific benefit of an individual member or minority group; (vii) the entity may not have a share or other interest in any business, profession or occupation which is carried on by its members; (viii) the entity must not pay to any employee, office bearer, member or other person any remuneration, as defined in the Fourth Schedule, which is excessive, having regard to what is generally considered reasonable in the sector and in relation to the service rendered; (ix) substantially the whole of the entity’s funding must be derived from its annual or other long-term members or from an appropriation by the government of the Republic in the national, provincial or local sphere; (x) the entity must as part of its dissolution transfer its assets to— (aa) another entity approved by the Commissioner in terms of this section; (bb) a public benefit organisation approved in terms of section 30; (cc) an institution, board or body which is exempt from tax under section 10(1)(cA)(i); or (dd) the government of the Republic in the national, provincial or local sphere; (xi) the persons contemplated in paragraph (b)(i) will submit any amendment of the constitution or written instrument of the entity to the Commissioner within 30 days of its amendment; (xii) the entity will comply with such reporting requirements as may be determined by the Commissioner from time to time; and (xiii) the entity is not knowingly and will not knowingly become a party to, and does not knowingly and will not knowingly permit itself to be used as part of, an impermissible avoidance arrangement contemplated in Part IIA of Chapter III, or a transaction, operation or scheme contemplated in section 103(5). (3) The requirements contained in subsection (2)(b)(iii) and (v) do not apply in respect of a mutual loan association. (4) Where the constitution or written instrument of an entity does not comply with subsection (2)(b), the Commissioner may deem it to so comply if the person who has accepted fiduciary responsibility for the funds and assets of that entity furnishes the Commissioner with a written undertaking that the entity will be administered in compliance with that subsection. (5) Where the Commissioner is— (a) satisfied that any entity approved in terms of subsection (2) has during any year of assessment in any material respect; or (b) during any year of assessment satisfied that any such entity has on a continuous or repetitive basis, failed to comply with this section, or the constitution or written instrument under which it was established to the extent that it relates to this section, the Commissioner must notify the entity that he or she intends to withdraw approval of the entity if corrective steps are not taken by the entity within the period stated in the notice. (6) If no corrective steps are taken by the entity contemplated in subsection (5), the Commissioner must withdraw approval of that entity with effect from the commencement of the year of assessment contemplated in subsection (5). (7) If the Commissioner has withdrawn the approval of an entity as contemplated in subsection (6) the entity must within six months after the date of the withdrawal of approval (or such longer period as the Commissioner may allow) transfer, or take reasonable steps to transfer, its remaining assets to any entity, public benefit organisation, institution, board or body or the government of the Republic, contemplated in subsection (2)(b)(x). (8) If an entity is wound up or liquidated, the entity must, as part of the winding-up or liquidation, transfer its assets remaining after the satisfaction of its liabilities to any entity, public benefit organisation, institution, board or body or the government of the Republic, contemplated in subsection (2)(b)(x). (9) If an entity fails to transfer, or to take reasonable steps to transfer, its assets as contemplated in subsection (7) or (8), an amount equal to the market value of those assets which have not been transferred less an amount equal to the bona fide liabilities of that entity must for the purposes of this Act be deemed to be an amount of taxable income which accrued to that entity during the year of assessment in which the withdrawal of approval in terms of subsection (6) or the winding-up or liquidation contemplated in subsection (8) took place. (10) Any person who is in a fiduciary capacity responsible for the management or control of the income and assets of any approved association and who intentionally fails to comply with any provision of this section or of the constitution, or other written instrument under which such association is established to the extent that it relates to the provisions of this section, shall be guilty of an offence and liable on conviction to a fine or to imprisonment for a period not exceeding 24 months. Annexure B – Calculation of “substantially the whole” of the “funding” requirement The following examples provide a step-by-step approach to calculate “substantially the whole” to determine compliance with the “funding” requirement. Example 4 – Calculation to determine whether “substantially the whole” of the entity’s funding is derived from the prescribed sources of funding Facts: According to its founding document, ABC’s object is to promote the interests of its members who are engineers. This object is achieved by providing research affecting the engineering profession, publishing journals, books, pamphlets or other publications, providing learning including examinations, regular conferences and workshops and other professional development, promoting and ensuring a high standard of professional behaviour by members in order to preserve and maintain the integrity and status of the profession. Membership of ABC is open to all individuals and bodies that have an interest in the goals of ABC. The Executive Committee of ABC considers applications for membership. Membership lasts from 1 January to 31 December. Membership is automatically renewed by payment of membership fees before 31 March of each year except for student membership, which is granted on an annual basis (proof of student registration is a requirement for annual membership). ABC has the following five membership categories: 1. Honorary membership ABC’s Executive Committee may bestow such membership on a person who in its opinion has made a valuable contribution to the advancement of engineering. A member will retain such membership for life. Membership fees will be 50% of the annual ordinary membership fee. 2. Ordinary membership Any individual who has an interest in the mission and goals of ABC. 3. Affiliated membership Open to companies, societies or other organisations having an interest in the aims of ABC. 4. Senior membership Any member who has reached the age of 65 and who was a member for 10 years before turning 65 may apply for senior membership of the entity. 5. Student membership A person will qualify for student membership only if the person is a full-time registered engineering student up to and including Masters Studies at a South African higher educational institution. Doctoral students will be registered as ordinary members. The membership fees for the relevant membership categories are as follows: R Honorary member 1 150 Ordinary member 2 300 Affiliate member 4 600 Senior member 600 Student member 200 The current membership of ABC and membership fees derived from its annual or other long- term members amounting to R1 567 200 is constituted as follows: R 350 Student members 70 000 Total membership fees derived from annual members 70 000 28 Honorary members 32 200 320 Ordinary members 736 000 150 Affiliate members 690 000 65 Senior members 39 000 Total membership fees derived from other long-term members 1 497 200 The total amount received or accrued for the year of assessment is R3 217 200 and comprises the following: R Membership fees 1 567 200 Seminars and courses 700 000 Registration and entrance fees 200 000 Training and examination fees 350 000 Total funding derived from prescribed sources of funding 2 817 200 Investment income 300 000 Seminar and course fees derived from non-members 100 000 Total funding derived from sources other than from members 400 000 ABC applied to the Commissioner for approval under section 30B(2) for its receipts and accruals to be exempt from income tax under section 10(1)(d)(iv). Result: Total funding derived from prescribed sources of funding / Total funding × 100% must not be less than 85%. R2 817 200 / R3 217 200 × 100% = 88% ABC derives 88% of its funding from the prescribed sources of funding. ABC therefore complies with the “substantially the whole” of the “funding” requirement under section 30B(2)(b)(ix) for this particular year of assessment. The Commissioner may approve ABC under section 30B(2) for purposes of section 10(1)(d)(iv) if all the prescribed requirements have been met. ABC will enjoy preferential tax treatment only if it continues to comply with the prescribed requirements. Example 5 – Calculation to determine whether “substantially the whole” of the entity’s funding is derived from the prescribed sources of funding Facts: XYZ is an employee organisation registered as a trade union under the Labour Relations Act 66 of 1995. The aims and objects of XYZ include, among other things, to promote the interests of its members, to improve wage and workplace conditions, to contest arbitrary and unfair dismissal of its members, and to provide legal assistance in matters relating to members’ employment. XYZ has been approved by the Commissioner under section 30B(2), as XYZ is a trade union and qualifies as an “entity” under paragraph (a) of the definition of “entity” in section 30B(1). The receipts and accruals of XYZ are therefore exempt from income tax under section 10(1)(d)(iii). The following receipts and accruals are reflected for a year of assessment: R R Annual members 20 000 000 Other long-term members 100 000 000 Total membership fees 120 000 000 Agency fees (see Note 1) 30 000 000 Commission received (see Note 2) 10 000 000 Rental income (see Note 3) 15 000 000 Sale of branded merchandise to members 3 000 000 Donations received from members 800 000 Investment income 400 000 Advertisements 200 000 Total receipts and accruals 179 400 000 Notes: 1. An agency shop agreement with the employer has been concluded. Agency fees are therefore deducted by the employer from the wages of employees who are non-members of XYZ. 2. XYZ, in addition to its core business as a trade union as set out in its founding document, also offers its members a range of benefits through various service providers at discounted rates. Such benefits include, for example, insurance products, funeral schemes and services, personal loans, financing for studies and healthcare-related products. XYZ receives commission from the various service providers when members invest in or purchase such any such services or products. 3. Rental income is derived from the letting of various holiday apartments to members. Result: Step 1: Identify receipts and accruals derived from prescribed sources of funding R Membership fees 120 000 000 Rental income (see Note 3) 15 000 000 Sale of branded merchandise to members 3 000 000 Donations received from members 400 000 Total receipts and accruals from members 138 400 000 Step 2: Calculate whether substantially the whole of XYZ’s funding is derived from the prescribed sources of funding Total funding derived from prescribed sources of funding / Total funding × 100% must not be less than 85%. R138 400 000 / R179 400 000 × 100% = 77% XYZ derives 77% of its funding from the prescribed sources of funding, which is less than the required 85% of the “substantially the whole” of the “funding” requirement. XYZ therefore does not comply with the “substantially the whole” of the “funding” requirement for this particular year of assessment.

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