Co-operative banks

2008-02-06 00:00

As an alternative to banking with commercial banks, many South Africans arrange themselves into groups and structure savings clubs and financial services co-operatives. The fiscus have indicated that the formation of such co-operatives is primarily as a result of inaccessibility to banking facilities, particularly for rural communities. An obvious drawback of these entities is that they have an identical taxing structure to commercial banks.

One of the main objectives of such co-operatives is to provide financial services to its members rather than producing income for the shareholders. The objective is clearly one of a non profit motive. One surmises that as a result of the capacity and infrastructure, these co-operative banks are barely breaking even. In order to ensure formalisation and regulation, the Co-operative Banks Bill seeks to ensure there is uniformity. In terms of the South African tax legislation, the application of the standard banking tax rules serve as an obstacle in the formalisation process. It therefore becomes imperative that these co-operatives enjoy some tax relief.

In the Revenue Laws Amendment Act No 36. of 2007, which was promulgated on January 8, 2008, section 12E has been amended to provide tax relief for co-operative banks. The fiscus have indicated that this will be done by permitting the co-operative bank to enjoy the benefits of the small business tax relief. In terms of current legislation, the turnover threshold is R14 million. The marginal tax rate of 29% will be applied in the case of taxable income exceeding R300 000 with the first R43 000 being exempt from tax. The fiscus have also indicated that membership in co-operative banks by members would not disqualify those members from receiving relief in respect of another small business company. However, such members are prohibited from holding more than five percent interest in the co-operative bank. A percentage interest in excess of five percent will trigger the disqualification.

An important point to note is that interest income earned by the co-operative bank is classified as active income. The earning of interest is core to the operation of the co-operative bank. The requirement where the small business is prohibited from receiving more than 20% from investment income will clearly not apply in this instance.

It is hoped that with this tax relief in place, it will assist the co-operative banks in the formalisation process and will certainly encourage the formation of more of these entities in the not too distant future.

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