Charities and tax exemptions

ANY organisation receiving donations from the public and spending monies on charitable activities without any intention to make profits could be subject to tax on the surplus on grounds that there is an organised activity to collect the donations and to distribute/spend the funds for charitable activities.

In taxation, the donor and recipient are not treated equally. From the donor’s perspective, it would be a gift given gratuitously without expecting any benefit in return and therefore not eligible for a tax deduction. However, the recipient organisation carrying out an organised activity with people, premises, facilities and actively seeking donations could be viewed as a profit-making undertaking carrying out charitable activities.

The only solution for such organisations to be exempt from tax is to apply for approval under Section 44(6) of the Income Tax Act 1967 (ITA) which will automatically exempt the charitable organisation from income tax and allow donors to claim a tax deduction up to 10% of their aggregate income on all sources.

Basic conditions to be met

Three common ways to operate charitable activities will be through a company limited by guarantee under the Companies Act 2016, a trust under the Trustees (Incorporation) Act 1952, or an organisation under the Societies Act 1966. The respective regulatory authorities such as the Companies Commission of Malaysia (CCM), Registrar of Societies, and the Legal Affairs Division of the Prime Minister’s Department have different sets of rules to be met. An example is that CCM requires RM1 million to be pledged to by the contributors within six months after the company’s incorporation to remove the word “Bhd” which is a requirement for Section 44(6) approval.

Before applying for such an exemption, the organisation should be operating for at least two years in carrying out the charitable activities.

The benefits provided by the charitable organisation should be provided to all Malaysian irrespective of their race, religion, or political affiliation. The founders, promoters, board of trustees, directors, committee members, family members connected to the foregoing, employees of the organisation and anyone connected with the organisation such as advisers etc should not benefit directly or indirectly from the benefits provided by the charity.

More than 50% of the board of trustees, board of directors or committee members must be “outsiders” entirely independent of the parties mentioned above. This is to ensure that the promoters do not influence the direction of the organisation or in the disbursement of funds to pursue their business interests or personal benefit.

Generally, the trustees, board of directors and committee members should not receive any remuneration from the organisation other than minimum reimbursements for expenses incurred in carrying out their official duties.

The tax-exempt organisations can carry out business activities provided they do not utilise more than 25% of their accumulated funds and the profits are re-employed for charitable purposes.

Do not abuse the privilege

The Inland Revenue Board (IRB) is extremely cautious and vigilant in approving and thereafter monitoring exempt institutions to ensure that the founders, promoters, contributors, and anyone connected to the trust do not use it as a conduit to either avoid taxes and to benefit from the funds available.

The time taken to obtain such exemptions can be protracted as IRB would require appropriate changes to the deed, constitution and would ask many questions before they are satisfied that the institution is eligible for exemption.

If there are any changes to the activities or if there has been a temporary non-compliance with the exemption requirements, it is imperative that the organisation reverts to IRB to obtain a waiver for the temporary non-compliance.

Final reminder to tax exempt organisations: You can lose your exemption status if you do not comply with the stringent requirements imposed on you by IRB and if there is any suspicion of fraud.

This article was contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai.