The South African Revenue Service (SARS) issued, on 9 May, a private binding ruling (PBR) on the proposed operating model of a trust that is an approved public benefit organisation (PBO).
A BPR is published only with the consent of the applicant to which it has been issued. It is binding between SARS and the applicant only and published for general information. It does not constitute a practice generally prevailing.
In Binding Private Ruling 371 (BPR 371), the applicant was a South African resident trust established by a South African resident company. It was required, by agreement with a third party donor, to make quarterly contributions to assist initiatives in neighbouring communities in certain focus areas, including:
- Socio-economic development
- Enterprise development
- Education and skills development
- Job creation
- Health care
- Safety and security.
The criteria by which beneficiaries were selected were therefore based on proximity and need. The applicant’s funding round started with a request for proposals from the general public made through established community forums. A committee established by the applicant then reviewed the proposals and conducted a detailed evaluation process.
A shortlist of projects was then submitted to the trustees for further deliberation. Projects aligned to the applicant’s objectives and public benefit activities would be selected based on definite and quantifiable public benefit being demonstrated by a funding application.
The proposed transaction involved the funding of four projects: a bakery, vegetable tunnels, a poultry project and a small manufacturing concern. The applicant considered that the proposed transaction would benefit the local community through the creation of employment, the development of skills and the enhancement of local enterprise.
The definition of a PBO and approval requirements set out in section 30 of the Income Tax Act 58 of 1962, operate with section 10(1)(cN) which exempts the receipts and accruals of PBOs from income tax, and section 18A which governs the deductibility of donations to PBOs.
For a PBO to be approved for purposes of section 18A of the Act, it must carry on public benefit activities listed in Part II of the Ninth Schedule to the Act, or it must be a conduit PBO that distributes funds to other PBOs carrying on public benefit activities in Part II of the Ninth Schedule.
SARS determined that the ruling made in connection with the proposed transaction would in comply with paragraph (c)(i) of the definition of a ‘public benefit organisation’ in section 30(1). The BPR is valid for a period of two years.
Only donations made to PBOs approved for purposes of section 18A are deductible by a company. Corporates seeking to achieve ESG and other social objectives through projects implemented by a PBO should be aware that they face a significant administrative burden to establish and obtain PBO status.