Fiscal Issues affecting NPOs (Katz Commission): hearings

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Finance Standing Committee

25 October 1999
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Meeting report

FINANCE PORTFOLIO COMMITTEE
26 October 1999
FISCAL ISSUES AFFECTING NON-PROFIT ORGANISATIONS: 9TH INTERIM REPORT OF KATZ COMMISSION: HEARINGS

Documents handed out:

Oral submissions
Ninth Interim Report of the Katz Commission: Fiscal Issues affecting Non-Profit Organisations
[This is a .pdf file so Adobe Acrobat reader required]
South African Revenue Services and Department of Finance Submission
Non-Profit Partnership Submission
List of letters endorsing the Non-Profit Partnership Submission
Western Cape Cultural Organisation Submission
South African Catholic Bishop's Conference Submission
Legal Resource Centre Submission
Black Sash Trust Submission

Written Submissions
The Banking Council Submission
South African Council of Churches Submission
International Fundraising Consortium Submission
EU Foundation for Human Rights Submission
Habitat for Humanity Submission
South African National Council for Child Welfare Submission

SUMMARY
Various non-profit organisations endorsed the Katz Commission 9th interim report that NPOs should be allowed to trade and that the donor exemption should be expanded. The Department of Finance is keen that there should be oversight over this sector. SARS does not have the capacity to administer many of the taxes proposed by the Katz Commission. A great deal of work would be necessary to ensure accountability and oversight of NPOs.

MINUTES
Katz Commission
The Commission was represented by Prof M Katz (Chairperson), Judge D Davis (Chairperson of Subcommittee), Adv P Du Toit and Dr J Graaff. Prof Katz and Judge Davis briefed the Committee on the 9th Interim Katz Report.

Prof Katz said that this Interim Report should not be seen in isolation to the other reports. Several of the recommendations in this report are directed at "reinforcing the principles set out in previous reports". He went on to emphasise the two distinct categories of tax benefits favourable to Non Profit Organisations (NPOs), firstly the exemption available to NPOs in respect of its liability for income tax and secondly the right available to donors to deduct donations from their taxable income. These two categories give rise to different tax status to NPOs and donors.

The tax status of NPOs is governed by section 10 of the Income Tax Act No. 58 of 1962 (the Act), which makes provision for its income to be at large tax exempt. NPOs also enjoy further privileges such that donations and bequests to them are also tax exempt.

The tax status of donors is governed by section 18A, which provides that donations made to NPOs will be tax deductible. Most people are unhappy with the current application of section 18A. A compelling argument is made, especially by universities, that donor deductibility should be expanded.

Prof Katz reminded the meeting that NPOs are seen as playing an important role in society, which "cannot be overemphasized". NPOs are experiencing financial difficulties and in order for them to be more self-supporting, they should not be discouraged from embarking upon trading activities. Cognisance was also taken of the argument of unfair competition should NPOs be allowed to indulge in trading activities. In conclusion Prof Katz proposed that the Commission's recommendations should be implemented, as NPOs are in desperate need of assistance.

Judge Davis, Chairperson of the subcommittee (the committee) which produced the document, explained how the report was compiled. In establishing the subcommittee, varied expertise was drawn on, as is evident from the membership. The committee was unable to find sufficient information from other countries which was of any assistance in compiling the report.
Judge Davis went on to say that the South African Revenue Service (SARS) is policing NPOs, which should not be happening. He shared the opinion raised by Prof Katz that NPOs should be allowed to trade in order to become self-sufficient. Furthermore the application of section 18A should be broadened to give donors an incentive to give donations to NPOs. In conclusion Judge Davis said that there are major discrepancies, if one looks at our system of taxation of NPOs and that of other countries.

Questions from members
Prof B Turok (ANC): "I have no doubt that this country in order to progress needs to have a sound civil society. As for SARS, it represents the whole of society and not just treasury. Accountability of NPOs is a very important issue and therefore one would like to see accountability to be built into all of this."

Response from Judge Davis: "Of cause SARS represents the whole of society, I do not argue with that. When it comes to accountability present legislation provides for voluntary registration of NPOs and this puts no compulsion on NPOs to register, which in effect makes it difficult to oversee their activities."

Mr K Andrew (DP): "Firstly, our concern is the ability of various SARS activities to counter relative abuse of the tax exemption and given SARS' current capacity these concerns are important. Secondly, amateur sports clubs, in terms of these proposals, are not taxed?

Response Prof Katz: "Your first concern is something we have considered when looking at these exemptions. It is important that we do not overload the already overloaded SARS, therefore we propose that a carefully structured fiscal regime which facilitates oversight and limits the opportunity for abuse is looked into. Concerning amateur sports clubs there are different arguments to this, but the bottom line is that we are in favour of encouraging NPOs to trade and be exempt from tax."

Mr C Saloojee (ANC) said that NPOs have a critical role to play, especially in welfare and social services. He went on to say that in effect most of their services relieve the financial burden that would otherwise have been on the state to provide these services. It is therefore no question that they do need money to provide these services effectively. SARS have swooped on NPOs who are trying to stay alive by trading and this makes it difficult for NPOs to provide the necessary service. NPOs are desperate to sustain their services and this is something that deserves almost immediate attention.

Since there were no further questions to the Commission, the Chairperson thanked the Commission for their presence and the report.

Department of Finance and SARS
Mr Kosie Louw and Mr Mark Keanham gave a consolidated presentation on behalf of the Department of Finance and SARS.

Mr Louw informed the meeting that both the SARS and Department of Finance recognise the important and good work of NPOs and also that a certain amount of certainty pertaining to NPOs is necessary. As far as administrative capacity Mr Louw said that SARS does not have the capacity to administer many of the taxes proposed, but have "to take cognisance of the issue". A great deal of work would be necessary to ensure accountability and oversight of NPOs, of which checking whether NPOs are still carrying on business that they purported to take on, would be a major task.
Mr Louw went on to say, "We support the exemption available to NPOs, but on the question of deductibility we are hesitant to support the recommendations, which we think is an area that requires a lot of research".

Mr Keanham echoed the view that that the DOF and SARS acknowledge the vital role played by NPOs. (See document by SARS and DOF)

Questions from members
Prof Turok (ANC): "Firstly, the report provides that the defining characteristics of `exempt public-benefit organisations' should include the avoidance of conflict of interest. I think the drafting of conflict of interest should be reconsidered. Secondly, donors do not fund the accountancy costs of NPOs. If we lay down strict accounting requirements, the NPOs will have problems. What do you think should be done?"

Response from Mr Keanham: "We support the inclusion of conflict of interest, but would like clearer guidelines than just conflict of interest. As for the accounting side, I do not have an answer

Dr G Koornhof (UDM): "The Commission said that supervision and accountability of NPOs are also important, but SARS have said that they do not have the administrative capacity. Who is then going to take that responsibility?

Response from Mr Keanham: "Local SARS offices have assessors receiving the forms from NPOs. We would prefer that these assessors establish whether each NPO falls within the exemptions, but our assessors at present lack the ability to fulfill that role. We are looking at having a central system of performing the assessing, for which manpower would be required. At the moment we have six people and in order to be effective approximately 60 people are needed. However, this is something that can be developed over time."

The Chairperson said that the intention is not to put a large load on SARS, but the question is really who will enforce accountability. Since there were no further questions, the Chairperson thanked the SARS and DOF for there input.

Non-Profit Partnership
Mr E Saldanha (Charities Aids Foundation) and Ms M Honey (Legal Resources Centre) presented on behalf of this grouping. The Non-Profit Partnership is supported by between 35 and 40 organisations across the country.

Mr Saldanha informed the meeting that their submission is a culmination of a very lengthy process, over a number of years. In response directed at the concerns of SARS and DOF pertaining to tax abuse, Mr Saldanha said, "Our response is that we are not convinced that legislation should be designed to reign in the few who will break the law, at the expense of the masses, but rather it should assist the masses". Mr Saldanha confirmed that the NPO Act is a good piece of legislation, but "the message from the sector is that it does not want to be regulated too much".

The Non-Profit Partnership is encouraged by the Department of Welfare's promotion of partnerships with non-profit organisations. He went on to say that Government accepts that NPOs have a vital role to play in reconstruction and development, but the law prohibits NPOs from carrying on business. The sector believes that a move should be made towards NPOs becoming more sustainable and therefore many of the Katz Commission recommendations are welcomed.

Ms Honey in her briefing supported and called for the implementation of the Katz Commission recommendations, conditional upon some minor changes.

Questions from members
Prof Turok (ANC): "The trading by NPOs is a very complicated issue, where is the line drawn to avoid competition with tax paying institutions or organisations? As for accountability, how do you see that government improves its oversight over NPOs?"

Response from Mr Saldanha: The question of trading and accountability depends largely on the objectives of the organisation and, with regard to accountability in particular, on the management of an organisation. We welcome the use of the word `oversight' instead of `control' in regard to accountability as we wish to remain independent. We are also very keen to work with the committee in considering mechanisms of accountability.

Western Cape Cultural Organisation
The Western Cape Cultural Organisation came out strongly in favour of the recommendations made by the Katz Commission. Their submission elicited no comments or questions from committee members.

South African Catholic Bishop's Conference
The South African Catholic Bishop's Conference's contingent comprised of Bishop Cawcutt and Mr M Pothier (Research Officer). Bishop Cawcutt said that considering that such important social benefits are delivered by NPOs there is a "desirability of instituting a tax regime that is friendly to non-profit organisations". Mr Pothier raised his concern that hopefully government does not take it that NPOs are asking for handouts from government.
The committee members made no comments.

Legal Resources Centre
The National Director of the Legal Resources Centre, Mr B Majola, very much endorsed and supported the submissions made by the Non-Profit Organisation. Members made no comments or questions.

The Chairperson thanked all stakeholders for their participation in the hearings. She went on to acknowledge the receipt of written submissions from other organisations. Black Sash was also thanked for withdrawing from oral submissions due to time constraints, but was assured that it will be taken into consideration when considering the proposals and recommendations made. The meeting was adjourned.

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