This article extracts some basic information from the updated SARS Guide – Issue 5, not covered in a previous article published in 2021 on www.fincor.co.za named “Recreational Clubs and Taxation”.
Unfair competition with entities liable for normal tax
It is a requirement that the qualifying business undertaking or trading activity must not result in unfair competition for taxpaying entities.
The Ninth Interim Report of the Commission of Inquiry into Certain Aspects of the Tax Structure of South Africa provides the following on unfair competition:
“In granting privileged tax status to particular organisations, the fiscus needs to have regard to the issue of ‘unfair competition’ between bodies which are subject to tax and those which are tax exempt. The broad issue of fairness or equity within a free-market economy is a fundamental one that warrants some degree of vigilance. However, the Commission is of the view that this value should not be elevated to the status of a ‘summum bonum’ and needs to be counter-balanced with other important values in society, including the need for a strong, independent, and viable NPO sector.”
A recreational club should not be in a more favourable position or have an unfair advantage over a taxable entity conducting the same business undertaking or trading activity.
A recreational club has an advantage in that it is not required to sacrifice a portion of its profit in the form of tax. Each case will be considered on its own merits to determine whether a recreational club has an unfair advantage. In determining whether a recreational club has an unfair advantage, various factors could be considered, such as:
• whether the club engages in active advertising or marketing;
• whether the activity is conducted on a competitive basis with the intention of maximising profits;
• the amount of membership fees or other income received;
• location and availability of similar facilities; or
• voluntary assistance provided by other persons.
Fundraising activities
The receipts and accruals from any fundraising activities of any approved recreational club will be exempt from income tax to the extent that they are of an occasional nature and undertaken substantially with assistance on a voluntary basis without compensation.
The Act does not define “occasional”, “nature”, “substantially”, “assistance”, “voluntary”, or “compensation”. The Cambridge Dictionary provides the following descriptions:
• “Occasional” is “not happening or done often or regularly.”
• “Nature” is “the type or main characteristic of something.”
• “Assistance” is “help.”
• Voluntary” is “done, made, or given willingly, without being forced or paid to do it.”
• “Compensation” is “the combination of money and other benefits (rewards) that an employee receives for doing their job.”
A fundraising activity of an occasional nature is one conducted on an irregular, infrequent basis or as a special event. It is a requirement that a significant portion of the occasional fundraising activity must be undertaken with the assistance of volunteers without compensation. For example, fundraising activities that take place on an annual basis with the aid of helpers or volunteers who are not compensated for their services.
The repayment of reasonable and necessary out-of-pocket expenditure to volunteers assisting in the carrying on of the recreational club’s occasional fundraising activity is allowed. The difference between occasional and frequent is that “occasional” occurs irregularly, from time to time, once in a while, therefore rarely, while “frequent” occurs regularly, very often or many times. Fundraising activities will thus not be regarded as occasional if there is a frequency and continuity to them, and if such activities are pursued in a manner similar to commercial activities of taxpaying entities.
The following are non-exhaustive examples of qualifying fundraising activities:
• Fêtes, cake sales, raffles, and jumble sales that usually take place on an annual basis, and with the assistance of helpers or volunteers who are not remunerated for their services.
• Fun runs, dinners, or dances are held occasionally with the assistance of volunteers.
• A gala dinner or gala prize giving is held to raise funds.
• An annual golf, tennis, or bowling day hosted by volunteers at which the prizes have been donated or items donated for auction, and the proceeds used to fund capital improvements to the recreational club.
Exemption from other taxes and duties
In addition to being exempt from the payment of income tax on certain receipts and accruals, approved recreational clubs also enjoy the benefit of being exempt from certain other taxes and duties, which are considered below.
Donations tax
Donations tax is payable on the value of any property wherever situated, disposed of by donation, whether directly or indirectly, and whether in trust or not, by any resident (the donor) to another person (the donee), unless an exemption applies, at the rate of:
• 20% of that value if the aggregate of that value and the value of any other property disposed of under a taxable donation on or after 1 March 2018 until the date of that donation does not exceed R30 million; and
• 25% of that value to the extent that that value exceeds R30 million.
A donation comprises any gratuitous disposal of property, which includes cash or non-cash property, including any gratuitous waiver or renunciation of a right, for example, the waiver of debt. The disposal of property at less than its market value will also constitute a donation to the extent that the Commissioner is not satisfied that the consideration was adequate.
The term ”property” is legally a very wide concept and inclusive of not only movable or immovable property, corporeal (tangible) or incorporeal (intangible), but also a right in that property. Property is an object of legal rights and includes anything tangible or intangible over which a person has a legal title. Property is movable if it can be moved from one place to another without being damaged and without losing its identity. Some examples include stocks, money, notes, patents, as well as intangible property such as copyrights. Animals that can move on their own are also movable property. Immovable property is land, things attached to it, as well as certain rights registered against the title deed of the land.
The main function of money is distinguished as a medium of exchange or a unit of account and therefore falls within the definition of “property”.
Donations tax is payable by the donor, but if the donor fails to pay the tax within the prescribed period, the donor and donee are jointly and severally liable for the tax.
Donations made by or to a recreational club are exempt from the payment of donations tax.
Dividends tax
The provisions relating to dividends tax are contained in sections 64D to 64N and apply to any dividend paid by a company, other than a headquarters company. Although dividends tax is part of the Act, it is a separate tax from income tax.
Dividend tax is levied at the rate of 20% of the amount of a dividend paid by a company that is a resident. Dividend tax is also payable on a foreign dividend to the extent that the foreign dividend does not constitute the distribution of an asset in specie and it is paid by a foreign company in respect of a listed share.
Dividend tax on a cash dividend is levied on the person entitled to the benefit of the dividend attaching to the share. This person is generally known as the beneficial owner.
Generally, a company declaring and paying a dividend must withhold an amount of dividends tax, except to the extent that the dividend consists of a distribution of an asset in specie, in which case, the company paying the dividend is potentially liable for dividends tax unless an exemption applies. The exemptions from dividends tax for cash dividends are contained in section 64F, while the exemptions for dividends in specie are contained in section 64FA(1).
It is not the responsibility of the company or regulated intermediary paying the dividend to determine who the beneficial owner of a dividend is and whether that person qualifies for an exemption from dividends tax.
Any recreational club that is the beneficial owner of a dividend is exempt from dividends tax. This exemption applies only if the recreational club has submitted a declaration to the company that declared and paid the dividend or to the regulated intermediary that paid the dividend, stating that it is exempt from dividends tax. The recreational club is also required to submit a written undertaking to the company or regulated intermediary that it will inform such company or regulated intermediary in writing should it cease to be the beneficial owner of the shares or if the circumstances affecting the exemption change.
The Commissioner has not issued actual forms to be used for purposes of a declaration or written undertaking, but has prescribed the required wording and minimum information required in the forms that are to be prepared by the company, regulated intermediary, or beneficial owner.
The obligation lies with the recreational club, which is the beneficial owner of the dividend, to ensure that the prescribed declaration and written undertaking are filed timely with the company or regulated intermediary paying the dividend.
Any recreational club that is a beneficiary of a trust should determine whether it has a vested right to a dividend received by it or which accrued to the trust before the dividend is paid by the relevant company to ensure that the necessary declaration of exemption is filed with the company or regulated intermediary. A beneficiary that has a vested right in a dividend received by or which accrued to a trust will be regarded as the beneficial owner. Should the trust be the beneficial owner of the dividend, dividends tax at the rate of 20% may become payable. A trust whose beneficiary acquires a vested right to a dividend after it is paid but before the end of the trust’s year of assessment may be able to claim a refund of the dividends tax withheld.
Capital gains tax
CGT was introduced in South Africa on 1 October 2001, but in relation to recreational clubs, it became effective only some years later on a variety of dates ranging between 1 April 2007 and 1 April 2010, depending on the year of assessment of the club and when it applied for approval.
With the introduction of the system of partial taxation for recreational clubs under section 10(1)(cO), clubs fell outside paragraph 63 of the Eighth Schedule and were no longer able to automatically disregard capital gains and losses on the disposal of any of their assets. The valuation date of a club is therefore the date on which a recreational club became partially taxable under section 10(1)(cO) that caused it to fall outside paragraph 63 of the Eighth Schedule under which it had previously enjoyed a complete exclusion.
CGT is a complex subject, and a full explanation of all its aspects extends beyond the scope of this guide. All capital gains and capital losses of recreational clubs made on the disposal of assets are potentially subject to CGT unless excluded by a specific provision. A recreational club does not qualify under paragraph 64 of the Eighth Schedule, since that provision specifically excludes any asset used to produce exempt receipts and accruals contemplated in section 10(1)(cO).
Paragraph 65B of the Eighth Schedule provides roll-over relief for assets used in carrying on the club’s activities. The rollover relief granted to clubs entails a deferment or delay in paying the CGT on a taxable capital gain made on the disposal of an asset, provided the proceeds are used to acquire a replacement asset. The liability for CGT will arise on the subsequent disposal of the new asset purchased to replace the asset disposed of.
A person must disregard any capital gain or capital loss determined in respect of the donation or bequest of an asset to an approved recreational club.
A future article will deal with other applicable tax liabilities.