Hefty tax bill may be waiting to smite prophets' profits
The media has been focusing on pastors who have established so-called charismatic churches. These churches have a great number of congregants who are loyal to the church, but, in most instances, more loyal to the founding pastor.
We see these pastors displaying imported cars, upmarket residential properties and private aircraft. Many people find it difficult to comprehend how these pastors and their churches could have amassed so much wealth in such a short period.
This display of wealth has not gone unnoticed by the South African Revenue Service (Sars), which has indicated that it will be engaging with the religious institutionsto investigate possible noncompliance with tax laws.
Traditionally, churches raise funds through donations and tithes from their congregants. Sometimes congregants and charitable organisations, including private and public companies, provide funds and assets to churches as donations to enable them to continue with their religious activities.
Churches may, on their own, conduct fundraising activities and may invest surplus funds earned from those activities to earn interest. Many of us would have participated in fundraising activities with a specific purpose: to build a church, or facilities to housethe pastor and family.
These activities are not motivated by profit or the enrichment of the pastor. However, where the motive is not benevolent, nor for the benefit of the members or congregants, but for profit, taxes will usually have to be paid on the profits.
Nonprofit organisations, such as churches, are defined as public benefit organisations (PBOs) in terms of section 30 of the Income Tax Act (the act). A PBO's sole or principal object is the carrying on of one or more public benefit activities. Such public benefit activities for churches are the promotion or practice of religion, which encompasses acts of worship, teaching and community service that is based on a belief.
A PBO can apply to Sars to be approved as such. If approved, it will be required to utilise its funds solely for the object for which it was established. Once approved, it may apply for an exemption from income tax and other taxes in terms of section 10 of the act.
Such an exemption has stringent conditions. Basically, the business of the PBO must be integral and directly related to the sole or principal object of the church; and the business must be conducted on a cost-recovery basis and should not result in unfair competition with other taxable entities.
A church may not pay its employees, members or founders excessive amounts as salaries, otherwise its PBO status may be revoked. Further, a PBO must submit tax returns yearly to Sars's Tax Exemption Unit for the revenue service to monitor compliance with its tax-exempt status.
The act allows congregants and members of a church and other entities to deduct genuine donations made in cash or as property to a tax-exempt PBO. Deductible donations include payments by electronic fund transfer, credit card and debit order, hence the proliferation of "speed points" in some churches.
Congregants and members who have monthly debit orders in favour of their churches are entitled to deduct these monthly payments, provided the total annual amount of the instalments does not exceed 10% of their taxable income for the year.
However, the deduction may only be allowed by Sars if supported by a receipt issued by the church. This receipt must indicate the PBO reference number, church's name, date of the donation, address of the church, name and address of donor, amount of the donation or nature thereof if not in cash, and that the donation will be used exclusively for the sole object of the church.
Some of the church's receipts, such as tithes, Sunday cash collection, and funds received via the church's occasional fund-raising activities, are not subject to income tax.
Many churches qualify as PBOs, but the challenge for them is compliance with the exemption requirements necessary for retaining their exempt status.
With all these compliance requirements, we have to continuously determine whether the "charismatic" churches are tax-exempt. Many are making a profit that is disproportionate to the public benefit activities they were approved to conduct as churches. This conclusion is based on observation of the luxury assets that some of these churches have acquired, amounting to millions of rands. On the face of it, it appears that these churches and pastors are liable for tax on profits earned.
And any organisation or person that donated money or assets to these churches may be liable for donation tax on the donation. If those persons cannot be traced, the church or pastor, or both, may be liable for this donations tax.
Where money was deposited into the bank account of the church or the pastor, and the identity of the depositor cannot be verified, the amount may be regarded as income for the church or pastor and thus taxable as such. It will not assist the church or the pastor to argue that it is a donation if the identity of the depositor cannot be verified and the depositor cannot confirm that it is indeed a donation.
A church may be liable to income tax at the rate of 28% when it is incorporated as a company, and the pastor may be liable for income tax of up to 45% of his or her earnings when the income received in a year exceeds R1.5m.
Should the church and pastor fail to satisfactorily explain to Sars how they acquired their assets, further income will be attributable to them based on the value of those assets. This income will automatically increase their tax liability. Sars may also impose penalties for non-declaration of income, non-submission of income tax returns and for evasion of paying taxes properly due, which may vary from as little as 5% to 200% of the tax determined to be due.
Both church and pastor will be facing a hefty tax bill.
And in these days of huge revenue shortfalls, Sars will be knocking on their door sooner rather than later.
• Mofokeng is a tax partner at RM Partners