This article follows on from part 1 published on 22 June 2020.
Capital Gains Tax is a complex matter to understand and more so when it is applied to Public Benefit Organisations. The information relevant to this matter is extensive and will be dealt with in more than one article with respect to disposal of an asset by a PBO in paragraph 63 of the Income Tax Act 58 of 1962.
SARS issued INTERPRETATION NOTE 44 on 21 February 2020 providing guidelines for PBOs and CGT as defined in the Income Tax Act 58 of 1962 and is the reference material for this article.
- Donations and bequests to public benefit organisations
Any capital gain or capital loss determined on an asset donated or bequeathed to a PBO which has been approved by the Commissioner under section 30(3) must be disregarded by the donor or deceased person.
- Transfer duty
Transfer duty will become payable on a property which qualified for an exemption from transfer duty if the whole of the property or substantially the whole of that property is used for purposes other than the carrying on of any PBA. The transfer duty becomes payable at the time the property is used for any purpose other than for the purpose of carrying on one or more PBAs. 26 For further information in this regard see Interpretation Note 22 “Transfer Duty Exemption: Public Benefit Organisations and Institutions, Boards or Bodies”.
Paragraph 63A if the Income Tax Act 58 of 1962 is of use when dealing with PBOs and CGT. An extract is given below.
63A. Public benefit organisations.
A public benefit organisation approved by the Commissioner in terms of section 30(3) must disregard any capital gain or capital loss determined in respect of the disposal of an asset if:
(a) that public benefit organisation did not use that asset on or after valuation date in carrying on any business undertaking or trading activity; or
(b) substantially the whole of the use of that asset by that public benefit organisation on and after valuation date was directed at:
(i) a purpose other than carrying on a business undertaking or trading activity; or
(ii) carrying on a business undertaking or trading activity contemplated in section 10(1)(cN)(ii)(aa), (bb) or (cc) of the Act.
SARS published two useful examples to assist with understanding comment (b) “substantially the whole” above. One being area-based usage and the other time-based usage.
Determining “substantially the whole of the use” of the asset on AREA USAGE [paragraph 63A(b]
An approved PBO provides counselling services to prisoners from a residential house which it owns.
The PBO uses only a portion of the house for counselling services and lets the remaining rooms to third parties at a market-related rental.
The area of the house is 210 sq metres. The area of the property which is let is 30 sq metres and the balance of 180 sq metres is used for Public Benefit Activities.
The financial year of the PBO ends on 28 February.
The property was valued on 1 March 2007 and sold on 30 June 2019 realising a capital gain.
As from its first year of assessment commencing on or after 1 April 2006, the PBO is subject to paragraph 63A in determining whether any portion of a capital gain or capital loss on disposal of its assets must be disregarded. Keep in mind that PBOs became subject to a system of partial taxation with effect from years of assessment commencing on or after 1 April 2006.
For paragraph 63A to apply it is necessary to determine whether the property was substantially used on or after the valuation date to conduct PBAs.
The area which was used for PBAs in relation to the whole property, namely, 180 / 210 × 100 = 85,7%.
The capital gain made on the sale of the property must be DISREGARDED, since substantially the whole of the use of the property, more than 85%, was directed at carrying on PBAs (referred to in the previous article – part 1).
Author Craig Tonkin