Binding Private Ruling: BPR 387 Attribution of nett income to a public benefit organisation (09 December 2022)
This ruling determines the tax consequences of a public benefit organisation (PBO) holding a participatory interest in a controlled foreign company, which is a foreign incorporated charity.
Loyiso Bavuma
Tax Attorney
Micaela Paschini
Tax Attorney
The applicant was established to administer and control a special fund for the sole purpose of receiving donations to be used exclusively to provide funds, assets, essential services or other resources for the benefit of its beneficiaries. The applicant has embarked on a programme to solicit donations from wealthy South Africans who have emigrated to other countries. It is envisaged that charities will be established in various identified foreign countries or cities and will collect donations. These donations will be used to supplement the annual financial needs of the applicant and to build up funds which can be distributed to its beneficiaries.
This proposed transaction entails the establishment of a so-called ‘Association Charitable Incorporated Organisation’ or ‘Association CIO’ in the United Kingdom (UK), being a corporate structure designed specifically and exclusively for charities. It is regulated principally by the Charity Commission of England and Wales. The applicant will be the sole member of the Association CIO.
All or most of the trustees will be UK residents and will be chosen by their willingness and commitment to raise funds for the Association CIO. Although it is the trustees who are responsible for managing and controlling the CIO and who thus constitute its effective management, the member of the CIO would be entitled to vote. Although the CIO will be established to raise funds for the ultimate benefit of the applicant’s beneficiaries, it will, nevertheless, have full discretion as to which charity (whether in the UK or not) it will distribute its funds
The governance of the Association CIO will take place at two levels:
– The board of charity trustees, who will manage the affairs of the CIO and may exercise the powers of the CIO, collectively as a board for this purpose. The trustees must exercise their duties
in terms of English charity law and will incur a personal liability where they act in breach of their charitable duties. The board may decide to donate or distribute funds to its members if this is in furtherance of the object of the CIO and if they qualify as beneficiaries of the CIO.
– The members may also be trustees, albeit will act in different capacities when making decisions in different capacities. The following decisions can only be made by a CIO’s members
passing a resolution (by either a 75% majority in a general meeting or a unanimous written resolution) in accordance with rules set out in the relevant legislation:
. Amending the CIO’s constitution – the UK Charity Commission of the UK will review any amendments that the members may approve from time to time, and will refuse to register any amendments to the constitution which are non-compliant with general principles of UK charity law and CIO legislation;
• Applying to the Commission to amalgamate the CIO with any number of other CIOs;
• Transferring the CIO’s undertaking to another CIO; and
• Applying to the Commission for the CIO to be dissolved.
• The ruling made in connection with the proposed transaction is as follows:
• Section 9D of the Income Tax Act, 58 of 1962 applies to the applicant.
• The amount to be included in the applicant’s income under section 9D(2) will be exempt in terms of the provisions of section 10(1)(cN)(i).
• Section 72A of the Income Tax Act (return relating to a controlled foreign company) will apply to the applicant.
Binding Class Ruling: BCR 085 En commandite partnerships investing in photovoltaic solar energy plants (09 December 2022)
This Ruling determines the deductibility of expenditure to be incurred by en commandite partnerships investing in photovoltaic solar energy systems, which will be installed at the partnerships’ clients’ premises, in terms of power purchase agreements (PPAs).
The applicant is a resident company specialising in renewable energy utilities. It proposed setting up multiple en commandite partnerships with various resident individuals, trusts or companies
(limited partners), which partnerships will invest in solar energy generation assets (assets). The partnerships will generate and sell electricity to end users in terms of PPAs concluded with its clients.
Each partnership will be ringfenced in respect of projects to be invested into in a particular year of assessment. They will be closed off once the number of partners have reached 20 persons.
The assets to be procured by the partnership will include solar photovoltaic panels, cables, batteries and inverters. The acquisition of the assets will be partially funded by the applicant and partially in terms of agreements between the limited partners and third parties, which third parties will provide funding to the limited partners of up to 95% of the value of the assets in terms of ICAs. The material terms of the ICAs will be as follows –
• the finance period will be for a minimum period of 12 months;
• the financed amount will carry finance charges; and
• the financed assets will constitute security for adherence by the partners of their obligations under the ICA. In the event of a default, the financier will become entitled to the income generated by the assets.
PPAs will be concluded between the applicant and its clients, which clients will pay for the use of the electricity generated by the assets which are, or will be, owned by the partnerships and installed at the clients’ premises. The partnerships will purchase existing systems installed by the applicant; alternatively, acquire and install the assets for the specific purpose of generating and
selling electricity under the signed PPAs.
When a limited partner joins the partnership, they will be required to sign a deed of adherence, setting out the value of assets so to be acquired, which value will represent the capital contribution by the limited partner, and which amount will be used solely for the purpose of
acquiring the assets. The limited partner, as well as the third-party financier, will make payment of the respective amounts into the partnership’s bank account, which funds will then be used by the partnership to make payment of the amount required to acquire the assets.
If not already installed, the assets so acquired will be installed by a service provider appointed by
the applicant, under an outsourcing agreement. All operations will be outsourced to the applicant, including agreements for insurance and maintenance of the assets. Management fees will be payable to the applicant, as well as the fees payable for the services outsourced to the applicant.
The profits generated in respect of the assets owned by the partnerships will be paid to the limited partners in proportion to their interests therein, and with reference to the value of their capital contributions over the life of the assets.
The ruling made in connection with the proposed transaction is as follows:
(a) Each limited partner will be considered to hold a proportionate interest in the assets procured by the partnership. Their interest will be determined with reference to the value of their capital
contribution to the partnership, in relation to the total capital contribution made to the partnership.
(b) In respect of the acquisition by the partnership of assets not exceeding 1 megawatt (in relation to one or more projects), each limited partner will be entitled to a proportionate share of the
capital allowance in terms of section 12B(2)(b) of 100% of the cost of such assets, in the year of assessment in which they are brought into use.|
(c) In respect of the acquisition by the partnership of assets exceeding 1 megawatt (in relation to one or more projects), each limited partner will be entitled to a proportionate share of a capital
allowance in terms of section 12B(2)(a) of –
• 50% of the cost of the assets in the year of assessment in which they are brought into use;
• 30% of the cost of the assets in the second year of assessment; and
• 20% of the cost of the assets in the third year of assessment.
(d) In relation to the cost of the foundations and structures designed for the installation of the section 12B(1)(h) assets which meet the criteria as contained in the proviso to section 12B(1), the same deductions as the assets to which they relate.
Taxpayers Remain Unaware of SARS’ Saving Grace For Non-Compliance