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7 June 2023

Tax Considerations for Non-Profit Organisations: Understanding Public Benefit Organisations

Non-profit companies (NPCs) play a vital role in society by serving the public interest or pursuing cultural and social activities for the betterment of communities. Non-profit companies in South Africa operate in a different manner compared to for-profit companies. They must utilise their income and property to advance their stated purpose, rather than distributing it to individuals associated with the organisation. The Companies Act 71 of 2008 (CA) defines these organisations, and they are also subject to specific tax regulations outlined in the Income Tax Act 58 of 1962 (ITA).

Understanding Public Benefit Organisation (PBO)

Qualifying as a Public Benefit Organisation (PBO)

To qualify for preferential tax treatment or approval as a public benefit organisation (PBO), an organisation with a non-profit motive or registered under the Non-Profit Organisations Act 71 of 1997 (NPOA) must meet certain criteria. Once the Commissioner approves an organisation as a PBO and it maintains compliance with the prescribed requirements and conditions stated in the ITA, it receives preferential tax treatment. It’s important to note that approval as a PBO may still subject the organisation to partial taxation.

Public Benefit Activities

A public benefit organisation, as defined in section 30 of the ITA, is subject to regulations that govern its activities for tax purposes. Public benefit activities encompass a wide range of benevolent endeavours, such as welfare and humanitarian efforts, healthcare initiatives, education and development programs, conservation and environmental projects, and more. The Minister has the authority to determine additional activities of a benevolent nature that qualify as public benefit activities.

Eligibility for Public Benefit Organisation Approval

A PBO can directly engage in public benefit activities or provide funds, assets, or resources to other approved PBOs or organisations engaged in such activities. To qualify for approval as a PBO, an organisation must establish itself as a non-profit company, trust, association of persons, or branch of a foreign tax-exempt organisation. The sole or principal objective of the PBO should be the carrying out of public benefit activities in a non-profit manner, driven by philanthropic or altruistic intent. The PBO’s founding document must explicitly state its specific activities, ensuring they align with its objective.

Maintaining PBO Status

Organisations must demonstrate that they do not pursue public benefit activities for profit or financial gain in order to maintain PBO status. Altruism and philanthropy should be the guiding principles, focusing on the well-being of others and the promotion of the general welfare. The organisation must not promote the economic self-interest of any fiduciary or employee unless reasonable remuneration is provided. The benefit of the public should be at the forefront, with activities aimed at the wider community rather than exclusive groups.

Conditions for PBO Approval

Approval as a PBO is granted by the Commissioner after satisfying various conditions outlined in section 30(3) of the ITA. These conditions include compliance with prescribed requirements and regulations, submission of the organisation’s founding document, avoidance of tax-avoidance schemes, reasonable remuneration practices, adherence to reporting requirements, and avoidance of resource utilisation for political party benefits. Approval is generally effective from the date of the notice, and retrospective approval may be granted if the organisation met the requirements during the specified period.

Taxation for PBOs

In terms of taxation, a PBO may be eligible for exemption from income tax on receipts and accruals, provided certain conditions are met. If a PBO engages in a business undertaking or trading activity, it may be exempt from income tax if it aligns with the PBO’s sole or principal objective, operates primarily to recover costs, and avoids unfair competition with taxable entities. Occasional activities carried out with voluntary assistance and no compensation may also qualify for an exemption. The Minister has the power to approve other exempt undertakings or activities based on their scope, connection to the PBO’s objective, profitability, and potential economic distortion.

If a PBO does not qualify for the exemptions mentioned above, it will be subject to income tax at the standard rate of 28% on its taxable income. However, PBOs enjoy various exemptions from other taxes and duties. Donations made to or by a PBO are exempt from donations tax, promoting philanthropic giving. Property bequeathed to a PBO is excluded from estate duty, allowing individuals to allocate assets toward charitable causes. Additionally, PBOs may be exempt from transfer duty, dividends tax, securities transfer tax, and skills development levy, depending on the specific criteria and activities of the organisation.

Conclusion

Understanding the tax implications for non-profit organisations is essential for financial planning and compliance. Non-profit organisations can optimise their tax positions and ensure the effective direction of resources toward achieving their social objectives by comprehending the concept of public benefit organisations, navigating the approval process, dealing with partial taxation, and understanding exemptions. By adhering to the relevant regulations and seeking professional advice when needed, non-profit organisations can successfully manage their tax responsibilities and continue making a positive impact in their communities.

– Written by guest bloggers Jean-Roux van Huyssteen, Director at TRM Tax Attorneys

and Rebecca Kaps, Candidate Attorney at TRM Tax Attorneys