Analysis: Securing tax exemption for the income of a public school and the tax deductibility of donations to the school: Navigating the maze of South Africa’s Income Tax Act
| Jurisdiction | South Africa |
| Pages | 498-514 |
| Published date | 25 May 2019 |
| Author | R C Williams |
| Date | 25 May 2019 |
SECURING TAX EXEMPTION FOR THE
INCOME OF A PUBLIC SCHOOL AND THE
TAX DEDUCTIBILITY OF DONATIONS TO
THE SCHOOL: NAVIGATING THE MAZE OF
SOUTH AFRICA’S INCOME TAX ACT
R C WILLIAMS
Professor, School of Law, University of KwaZulu-Natal, Pietermaritzburg
I INTRODUCTION
Most income tax systems recognise that certain income should be
exempt from tax, for example, income earned by what may loosely
be called ‘charitable’ undertakings and used to finance their activities.
Naturally, tax legislation in this regard has to be tightly drafted so as to
ensure that only bona fide charities qualify for tax exemption, and that
charities do not exploit their tax-exempt status to engage in extraneous
commercial activities and thereby earn undeserved tax-free income. Tax
legislation also tries to thwart attempts by commercial entities to
disguise themselves as charities and thereby gain tax exemption for their
income. Tax-avoidance stratagems involving tax-exempt charities affect
revenue collection by the fiscus.
Most income tax systems also recognise that, as a matter of policy,
donations to charities should be tax deductible, at least up to a defined
threshold. Again, the tax legislation has to be tightly drafted in this
regard to ensure that only donations to bona fide charities, to be used for
charitable purposes, qualify as a tax deduction.
Consequently, anti-avoidance provisions — which are notorious for
being complex and impossible for anyone other than a tax expert to
interpret — have to be woven into legislation that grants tax exemption
to charities and allows for donations to such organisations to be
deductible.
The unfortunate result is that many bona fide charities — typically
cash-strapped and with their financial viability dependent on their
not being taxed on such income as they are able to generate and on their
being able to hold out to prospective donors the lure of a tax deduction
— find that their tax-exempt status is fragile and enmeshed in complex
tax legislation. Many charities have to spend significant amounts of their
limited financial resources in engaging the services of tax experts to help
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(2014) 26 SA Merc LJ 498
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them navigate the legislative maze so that they gain tax exemption and
do not later forfeit it through inadvertent non-compliance.
II A SYSTEM FOR UPFRONT APPROVAL OF TAX
EXEMPTION IS PREFERABLE
The tax legislation of some countries leaves it to each charity to make up
its tax returns, year by year, on the basis of its claim to tax exemption.
The charities then live in perpetual anxiety that the tax authorities may
suddenly reject their claim to tax exemption — and perhaps retrospec-
tively amend prior years’ tax assessments to impose an arrear tax liability
— in which event, prolonged and expensive litigation with those
authorities may ensue which may well jeopardise the continued exist-
ence of the charity.
By comparison, the legislative framework constructed by the drafters
of South Africa’s Income Tax Act 58 of 1962 (‘the Income Tax Act’ or
simply ‘the Act’) holds a signal advantage to entities seeking tax
exemption.
Organisations wishing to secure tax exemption for their income, and
believing that they satisfy the criteria laid down in the Act, can apply (in
terms of the statutory provisions discussed later in this analysis) to the
South African Revenue Service (SARS) for approval. If SARS determines
that the organisation satisfies the statutory requirements, then
the Income Tax Act empowers SARS to approve the application. If the
Commissioner for SARS turns down the application, the organisation
has a right to challenge that decision in terms of and on the grounds
provided for in the Promotion of Administrative Justice Act 3 of 2000.
In this way, the issue of whether the organisation’s income qualifies
for tax exemption is decided up front. Provided the organisation abides
by its ongoing compliance obligations under the Income Tax Act, the tax
exemption is certain and secure.
If SARS refuses to approve the application, it will provide reasons for
its decision. The organisation can then, as was noted above, challenge
SARS’s decision in terms of the Promotion of Administrative Justice Act.
Alternatively, the organisation can amend its constitution or take
whatever other steps are required, and re-apply for approval.
This process of upfront approval is far preferable to tax systems in
other jurisdictions in which charities and similar organisations live
under a perpetual sword of Damocles in which their entitlement to tax
exemption remains uncertain and untested until a dispute with the
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