The South African Revenue Service (SARS) issued a media release on 26 January 2018 (published on the SARS website) indicating that they have, after a preliminary investigation and meetings with the Commission for Rights of Cultural, Religious and Linguistic Communities (CRL), made a decision to examine religious institutions to further investigate tax compliance by such entities. SARS will be looking at these institutions and their employees to determine whether there is any non-compliance or possible tax evasion.

According to SARS, the initial investigation into the tax compliance of religious leaders and institutions revealed that some religious institutions and leaders are not in compliance with tax laws‚ and are further not declaring all their income as required under tax legislation.

Under section 10(1) (CN) of the Income Tax Act, 1962 (the ITA), read together with the provisions of section 30 of the ITA, religious institutions may apply to SARS to be exempt from Income Tax and certain other taxes to the extent that the income received is utilized solely for purposes of carrying out public benefit activities as envisaged in Part I or II of the Ninth Schedule to the ITA. A religious institution approved under section 30 must ensure that the following criteria, among others, are adhered to in order to retain its exempt status:

1. Conducting activities in a non-profit manner with an altruistic or philanthropic intent
2. No such activity is intended, directly or indirectly, to promote economic self-interest of any person other than by way of reasonable remuneration paid for services rendered
3. Religious institutions are prohibited from directly or indirectly distributing funds to any person other than in performing their religious activity

The exemption excludes religious institutions from paying taxes in respect of all income received in order to carry on its public benefit activities. This exemption does not apply to income received for any other purpose and it does not extend to the employees (e.g., religious leaders) of the religious institutions. Religious leaders still remain subject to tax on income earned from religious institutions.

The investigation by SARS further revealed that some religious institutions have not accounted for any PAYE (Pay as you Earn) in respect of religious leaders who receive remuneration for services rendered to the religious institution and are non-compliant with the tax legislation. In addition, some religious institutions are incorrectly and without necessary approvals in place issuing section 18A tax deductible receipts.

In light of the above, SARS has recommended that religious institutions that find themselves in this predicament of non-compliance apply under the Voluntary Disclosure Program (VDP) for relief and to ensure compliance going forward before an audit is conducted.

A successful VDP application will ensure that relief by SARS is granted as follows:

• No criminal prosecution for tax offenses
• Limited or no understatement penalties
• No administrative non-compliance penalties

The Tax Controversy team at EY has experience with VDP applications and can assist any affected institutions.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young Advisory Services (Pty) Ltd, Tax Controversy, Johannesburg

• Mmangaliso Nzimande
  mmangaliso.nzimande@za.ey.com
• Althea Soobyah
  althea.n.soobyah@za.ey.com
• Razina Baba
  razina.baba@za.ey.com
• Jula Mabena
  jula.mabena@za.ey.com
• Ntando Goba
  ntando.goba@za.ey.com
• Michelle Orsmond
  michelle.orsmond@za.ey.com

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ATTACHMENT

PDF version of this Tax Alert