The private societies
Basically, private societies relate to those organisations formed or created by private individuals, partnerships or private organisations. Such organisations are usually owned and controlled by their private founders. Primarily, such societies may operate in the form of clubs, societies or institutes operating solely for social welfare, civic improvements, recreational or even advancement of a profession or trade. It is imperative to note that in terms of the tax laws such organisations are generally neither exempt persons nor is their income exempt from tax save when established for public purposes.
The law
In verbatim, the Income Tax Act provides that no tax is applied on ‘any income of a charitable religious or educational institution or a trust established for public purposes.’ From the above, it is axiomatic that the exemption is only applicable to an institution that is established for public purposes. It is therefore of paramount importance that we first establish the qualifying criteria that separates an institution established for public purposes from that of private purposes.
Public vs private institutions
The Income Tax Act does not further define or explain what an institution established for public purposes is. However, if we look at an institution that is established by private individuals or a corporate, it is plausible that surplus earnings from the operations of the institution or assets at dissolution of the same are distributed to private individuals. Put differently, at the point of dissolution of such institution, the question is whether the assets devolve to private individuals or to the public. If the assets devolve to private persons, then the organisation is private in nature and pays income tax. Where the assets can be distributed to the public, then such institution is not exempt from income tax but its income is not subjected to the tax.
The exemption
Consequently, the exemption stipulated in the Income Tax Act is only applicable to an institution established for public purposes, as alluded to above. It is therefore key to take note that an institute’s activity as well as the beneficiaries in the event of a dissolution in determining whether it is established for public purposes. As an example, a charitable foundation established through a trust whose beneficiaries are family members ceases to be for public purposes even though it performs the charitable activities to the general public. The reason being that at point of dissolution, the assets are distributed to private individuals i.e., the family members. Accordingly, should the earnings or proceeds be available for distribution to or for the benefit of the general public, then the tax exemption will apply.
Well folks, we hope that was insightful. As us the two Yours Truly say goodbye, remember to pay to Caesar what belongs to him. If you want to join our free Tax WhatsApp group, send us a text on the cell number below.
