There have recently been drastic changes in the rules applicable to tax exempt entities. There is a specific change which has major implications for sports clubs. Section 10(1)(cB)(ee) of the Act, that governed the granting of exemption to associations providing social or recreational amenities or facilities for members, was withdrawn with effect from 15 July 2001.
Associations such as country clubs now seeking exemption will have to comply with the provisions set out in the new Section 10(1)(d) of the Act. Section 10(1)(d) governs all country club type associations, and has its own set of regulations that need to be complied with in order to obtain a tax exemption. The consequence of this amendment is that country clubs and similar associations will now be required to reapply for tax exemption under this new section.
The regulations governing the new section 10(1)(d) are still in the process of being drafted. What does raise a bit of concern though, is that the SA Revenue Service (Sars) has indicated that these regulations are being drafted by using the rules that govern Public Benefit Organisations - that is section 30 of the Act and its regulations - as a benchmark. There is a specific aspect of section 30 which could be problematic for sports clubs if it is made applicable to them.
An overriding theme of Section 30 and its regulations is that tax-exempt organisations should not compete unfairly with tax paying entities. Inline with this approach Section 30 states that an organisation`s gross income derived from business/trade must not exceed the greater of 15% of its gross receipts or R25 000.
It is possible that a similar restriction may be placed on clubs. This could mean that a club may be prevented from deriving more than 15% of its gross income from trading activities. Members` subscriptions will presumably not be regarded as trading income. However, income derived from facilities open to the public - such as a conference or functions facility, restaurant or bar - will fall within the prohibition. This may result in the tax-exempt status of a club being jeopardised.
All is not lost, however. Sars has afforded clubs the opportunity to provide input as to the content of the regulations. Suggestions by clubs will be taken into consideration in the drafting of the regulations that govern section 10(1)(d) of the Act. Clubs must however act quickly as the regulations are expected to be out in the first quarter of 2002.
So now is the time for action! Clubs must consider carefully how the new rules will affect them and whether to urgently formulate a submission. As these regulations are currently being drafted this really is a very limited window of opportunity.
*by Santha Moodley, consultant, Deloitte & Touche Taxation Services
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