Compliance for Tax Exempt Institutions

Exempt institutions are required to meet their compliance obligations for other tax products.

Income tax

Tax exempt entities ( trusts, association of persons) have an obligation to register  for income tax regardless of whether they have been formally approved by the Commissioner . NPC’s are automatically registered for income tax upon registration with CIPC.

Please note that if you have not been formally approved by the Commissioner, you are not a tax exempt entity regardless of the formation of the entity.

A Tax Exempt Institution must submit income tax returns even if its approval or exemption results in no tax liability. For example, the income tax return enables the Commissioner to annually assess whether the PBO is operating within the prescribed limits of its approval and to determine whether the partial taxation principles have been applied to receipts and accruals derived from a business undertaking or trading activity which does not qualify for exemption

Employees tax

Tax exempt entities will have an obligation to register as employers with SARS where any of their employees are liable for normal tax. In order to determine whether employees are liable for “normal tax”, the employer will have to determine whether the amounts paid to employees are in excess of the tax thresholds or not. The employer in this case will consider cash salary and benefits in kind ( if applicable) to make this determination. Individuals who receive remuneration in excess of a specific amount (known as a tax threshold) are liable for income tax. The tax threshold amount is available here

The employers tax and registration obligations to staff members will depends on the size, nature, and level of remuneration.

Employees earning above the threshold amounts

If any employees earn remuneration in excess of the amounts as per the tax table, the tax exempt entity must register for employees tax . Employees’ tax registration will also include UIF payments and Skills Development Levies (SDL) in some instances.

If a tax exempt entity has employees, which are contracted on a part-time ,temporary or casual basis and are paid amounts in excess of those set out in the tax tables , employees tax will be required to be deducted from their remuneration.

Employees earning less than the threshold amounts

If employees (whether full-time, part-time or, contractors) employed by the tax exempt entity are paid less than the tax thresholds, the employer will not have an obligation to register as an employer for purposes of employees tax ( PAYE). The employer will have UIF obligations and need to register with the Department of Labour (DoL) for unemployment insurance and ensure that necessary payments are made. A tax exempt entity that falls under this category can get more information here

Employees tax treatment of benefits in kind provided to employees

The granting of fringe benefits to employees attracts employees tax. The method in which benefits in kind such as the private use of a motor vehicle provided by an employee or right to use residential accommodation of an employee is a fringe benefit. Examples of fringe benefits for Tax exempt Institutions include the private use of a vehicle belonging to a church by any of its employees or office bearers (e.g. a pastor) or the provision of free or cheap accommodation in a property belonging to that church.

The link provided below refers to the Guide which deals extensively with the employees tax treatment of benefits in kind.

Helpful resource: PAYE-GEN-01-G02 – Guide for Employers in respect of Fringe Benefits – External Guide

Allowances paid to employees

If employees of tax exempt entities are paid various allowance such as telephone, fixed travel allowance ; reimbursee travel allowance, subsistence allowance. These types of allowances have a bearing on the monthly employees tax and the link to the guide on allowance which is provided below must be consulted to understand the employees tax implication.

Helpful resourcePAYE-GEN-01-G03 – Guide for Employers in respect of Allowances – External Guide

To read about other PAYE related matter, please click here

UIF

Tax exempt entities paying remuneration to its employees will also be liable for UIF contributions unless it qualifies for certain exemptions.

Helpful resource:  UIF-GEN-01-G01 – Guide for Employers in respect of the Unemployment Insurance Fund – External Guide

To read about other UIF related matter, please click here

Skills Development Levies

The skills development levy (SDL) is a compulsory levy to fund education and training under the Skills Development Levies Act 9 of 1999. SARS administers the collection of this levy that is levied based broadly on 1% of the payroll of employers. Employers providing training to employees may receive grants from the relevant Sector Education and Training Authority (SETA).

Noteworthy to the Segment is that some employers are exempt from payment of the SDL levy:

  1. any public benefit organisation contemplated in section 10 (1)(cN) of the Income Tax Act, which—
    1. solely carries on any public benefit activity contemplated in paragraphs 1, 2 (a), (b), (c) and (d) and 5 of Part I of the Ninth Schedule to that Act; or
    2. solely provides funds to public benefit organisations contemplated in subparagraph (i); or
  2. any national or provincial public entity, if 80 per cent or more of its expenditure is defrayed directly or indirectly from funds voted by Parliament;
  3. any employer where section 3 (1) (a) or (b) applies and during any month, there are reasonable grounds for believing that the total amount of remuneration, as determined in accordance with section 3 (4), paid or payable by that employer to all its employees during the following 12 month period will not exceed R500 000;

Helpful resource: SDL-GEN-01-G01 – Guide for Employers in respect of Skills Development Levy – External Guide

To read about other SDL related matter, please click here

Employment tax incentive

The ETI is an incentive aimed at encouraging employers to hire young work seekers. It was implemented with effect from 1 January 2014 and allows the employers to reduce their monthly employees tax liability.

To read about other ETI related matter, please click here

VAT

This section will assist in understanding the VAT implications for Tax Exempt Institutions.

To read about other VAT related matters, please click here

 Compulsory Registration 

It is mandatory for a business to register for VAT if the total value of taxable supplies made in any consecutive twelve month period exceeded or is likely to exceed R1 million. The business must Register for VAT on eFiling or complete a VAT 101 – Application for Registration form and submit it to the local SARS branch within 21 days from date of exceeding R1 million.

For a definition on taxable supplies and the applicable exemptions please click here.

Voluntary Registration 

Tax exempt entities may choose to register voluntarily for VAT if the value of taxable supplies made or to be made is less than R1 million but has exceeded R50 000 in the past period of 12 months.     

Classification as a Welfare Organisation under the VAT Act

An approved PBO may be classified as a welfare organisation under the VAT Act. The classification as a welfare organisation includes the PBO in the VAT dispensation without having to meet the normal registration requirements. Once classified as a welfare organisation under the VAT Act, the PBO will be able to claim input tax even though there was no output tax.

A separate letter confirming that the PBO qualifies as a welfare organisation in terms of the VAT Act will be issued.

Helpful Resource: VAT 414 Guide Welfare organisation and Associations Not for gains-not-for-gain-and-welfare-organisations

PBO’s that are not classified as a welfare organisation may have to register for VAT if they have taxable supplies which meets the VAT registration requirements. 

Classification as a Public Authority under the VAT Act

Statutory bodies (government institutions) are regarded as a public authority under the VAT Act.  This means that they don’t register and file VAT 201 returns. For the purposes of VAT, a public authority means:

  • any department or division of the public service as listed in Schedule 1,2 or 3 of the Public Service Act,1994 ( Act No, 103 of 1994);
  • any public entity listed in Part A or C of the Schedule to the Public Finance Management Act, 1999 ( Act No 1 of 1999), or
  • any other public entity designated by the Minister for the purposes of this Act to be a public authority

Helpful Resource: Interpretation Note 39 deals extensively with the VAT implications of statutory bodies. 

Taxable supplies and applicable exemptions

The term “taxable supplies” means any supply of goods or services which is chargeable with tax , including tax chargeable at the rate of zero per cent. This means that for purpose of determining the R 1 million threshold,  tax exempt entities must ensure that amounts derived from the some of the following services are excluded in the R 1 million threshold :

  • the supply of any financial services, but excluding the supply of financial services which, but for this paragraph, would be charged with tax at the rate of zero per cent under section 11;
  • the supply by any association not for gain of any donated goods or services or any other goods made or manufactured by such association if at least 80 per cent of the value of the materials used in making or manufacturing such other goods consists of donated goods;
  • the supply of any goods or services by a bargaining council that is established in terms of section 27of the Labour Relations Act, 1995 (Act No. 66 of 1995), to any of its members ;
  • the service of caring for children by a creché or an after-school care centre;
  • the supply of any goods or services by an employee organization to any of its members to the extent that the consideration for such supply consists of membership contributions;
  • the supply of educational services-
  • provided by the State or a school registered under the South African Schools Act, 1996 (Act No. 84 of 1996), or a public college or private college established, declared, or registered as such under the Further Education and Training Colleges Act, 2006
  • by an institution that provides higher education on a full time, part-time or distance basis and which is established or deemed to be established as a public higher education institution under the Higher Education Act, 1997 (Act No. 101 of 1997), or is declared as a public higher education institution under that Act, or is registered or conditionally registered as a private higher education institution under that Act;
  • by any public benefit organisation contained in section 30 (1) of the Income Tax Act that has been approved by the Commissioner in terms of section 30 (3) of that Act and which has been formed for
    • Adult basic education and training including literacy and numeracy education, registered under the Adult Basic Education and Training Act, 2000 (Act No. 52 of 2000), vocational training or technical education;
    • education and training of religious or social workers;
    • training or education of persons with a permanent physical or mental impairment;
    • provision of bridging courses to enable indigent persons to enter a higher education institution
  • the supply of any services to any of its members in the course of the management of any association of persons (other than a company registered or deemed to be registered under the Companies Act, 2008 (Act No. 71 of 2008), any co-operative, close corporation or trust, but including a non-profit company as defined in section 1 of the Companies Act, 2008 (Act No. 71 of 2008)) where the Commissioner is satisfied that, subject to such conditions as he or she may deem necessary, such association of persons—
  • has been formed solely for purposes of managing the collective interests of residential property use or ownership of all its members, which includes expenditure applicable to the common immovable property of such members and the collection of levies for which such members are liable; and
  • is not permitted to distribute any of its funds to any person other than a similar association of persons,

where the cost of supplying such services is met out of contributions levied by such body corporate, share block company or under such housing development scheme or association, as the case may be: Provided that this paragraph shall not apply or shall apply to a limited extent where such body corporate, share block company, scheme or association applies in writing to the Commissioner, and the Commissioner, having regard to the circumstances of the case, directs with effect from a future date that the provisions of this paragraph shall not apply to that body corporate, share block company, scheme or association or that the provisions of this paragraph shall apply only to a limited extent specified by him: Provided further that this paragraph shall not apply to the services supplied by any body corporate, share block company, scheme or association which manages a property time-sharing scheme as defined in section 1 of the Property Time-sharing Control Act, 1983.

Note that this is not a complete list of the exempt supplies as set out in section 12 of the VAT Act.

Helpful Hint: any Public Benefit Organisation which conducts the above activities which are regarded as exempt supplies for VAT purposes, will not qualify as a Welfare Organisation in relation to those activities.

To read about other VAT related matter, please click here

Transfer Duty

Transfer duty is levied on a sliding scale on the value of any property acquired by any person under a transaction or in any other manner. The person acquiring the property (the transferee) is normally the person who is liable for the payment of transfer duty.

All the exemptions from transfer duty are contained in section 9 of the Transfer Duty Act.

The exemptions in section 9(1)(c) and section 9(1A) of the Transfer Duty Act apply to PBOs and institutions, boards or bodies meeting the necessary requirements

In order to qualify for exemption from the payment of transfer duty under section 9(1)(c) of the Transfer Duty Act, the whole property, or substantially the whole of the property acquired by a PBO or an institution, board or body must be used for purposes of carrying on a PBA.

INTERPRETATION NOTE: 22 on this issue and to linked when published

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