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Are you a welfare organisation? Discover the special Vat treatment that applies to you

by , 20 November 2014
Under the Vat Act, Public Benefit Organisations (PBOs) fall into two categories: Associations Not for Profit and Welfare Organisations.

The difference between these two lies in their activities and their Vat requirements.

That's right! Contrary to the popular belief that they're Vat exempt, these two categories of PBOs do have Vat requirements.

If you're a welfare organisation, you need to know what the Vat Act requires from you, or you could end up with harsh penalties from SARS.

To help you avoid this, we're explaining what this special Vat treatment is.

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But first, here's how to tell if you qualify as a welfare organisation

A welfare organisation is PBO that has also receives an exemption from income tax in terms of Section 10(1)(cN) of the Income Tax Act
Note that it's now compulsory for all such organisations to register as PBOs under the Income Tax Act if they wish to obtain tax exemption status.
A welfare organisation is essentially the same as an Association Not for Gain but with additional requirements (the income tax exemption). The constitution of such an association requires that any property or income it uses is solely to further its aims or objectives. This is consistent with the requirements contained in both the Income Tax Act and the Non-Profit Organisations Act
The organisation must carry on welfare activities categorised under the following headings:
• Welfare and humanitarian;
• Healthcare;
• Land and housing;
• Education and development; and
• Conservation, environment and animal welfare.
The welfare organisation will thus be a Vat vendor as long as it carries on the above welfare activities, and it makes taxable supplies as a result.
Now that you know whether or not your organisation is a welfare organisation, here's what you need to know about its special Vat treatment.
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Here's the special Vat treatment that relates to welfare organisations

According to tariffandtrade.co.za, SARS doesn't require a welfare organisation to supply goods or services for it to treat it as an enterprise for Vat purposes. This means it doesn't have to receive payment for goods or services supplied to qualify as an enterprise and to register for Vat
A welfare organisation also mustn't charge Vat for any of its exempt activities.
But there is special Vat treatment for welfare organisations in addition to those SARS grants to Associations Not for Gain. They are as follows:
The organisation can register for Vat even if its taxable supplies are under R20 000 per annum or even nil. For a normal profit-making entity, SARS will refuse a voluntary registration if the taxable supplies are below this threshold.
The R300 000 annual turnover compulsory registration threshold also applies to welfare organisations.
It can still register for Vat even though it only receives donations.
It can register for Vat on the payments basis. This has its advantages from a cash flow perspective.
It doesn't pay over output tax on any donations it receives. This is different to a normal profit-making entity, where the vendor must account for output Vat on goods it receives without consideration.
It can claim input tax on all its expenses that relate to taxable supplies it makes.
Any subsidies and grants it receives from the government (or local authorities) are zero-rated if they relate to the performance of any welfare activities. This is in contrast to the specific activities that an Association Not for Gain must carry on to qualify for the zero-rating.
There you have it. Now that you know how SARS will treat your welfare organisation in terms of Vat, ensure you comply with its rules.
For more on the Vat treatment for PBOs check out the Practical Vat Loose Leaf Service

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