Basic overview
Entities operating as non-profit organisations have many forms and different variations (each with its own set of rules).
Having a look at public benefit organisations (PBO’s) specifically, there are important factors to consider and requirements to be met, in order to qualify for an income tax exemption. Section 10(1)(cN) of the Income Tax Act, Act No. 58 of 1962 (hereafter referred to as the ITA).provides that the receipts and accruals of any public benefit organisation, which has been approved by the Commissioner, will be exempt from income tax.
It is important to note that the above-mentioned income (receipts and accruals) of a PBO must fall within the ambit of the prerequisites of section 30 of the ITA.
What is a public benefit organisation (PBO)?
Section 30(1) ITA sets out the different requirements which must be complied with by organisations in order to qualify as public benefit organisations. These requirements can be summarised as follows:
- Firstly, the organisation must be a non-profit organisation, which was formed, incorporated or established in South Africa, or a non-profit organisation established in a foreign country, that is exempt from income tax in that foreign country;
- Secondly, the organisation’s sole or principle objective/goal must be to carry on one or more public benefit activities, where –
- All the activities are carried on in a non-profit manner; and
- with an altruistic of philanthropic intent; and
- No such activity is intended to directly or indirectly promote the economic self-interest of any fiduciary or employee of the organisation – other than by way of reasonable remuneration payable to that fiduciary or employee.
- Thirdly, each of the activities must be for the benefit of the public or must be widely accessible to the public at large, including any sector thereof (other than small and exclusive groups).
The founding document
In addition to the above requirements, which can also be seen as the elements of a PBO, section 30(3) of the ITA, prescribes that each PBO must submit a copy of its constitution to the Minister (which, in this case, refers to submitting it to the South African Revenue Service (SARS)).
Why is it crucial to apply for the income tax exemption?
The fact that your organisation complies with the requirements set out in section 30 of the ITA, does not automatically grant your organisation a tax exemption. In order to qualify for the said exemption, your organisation must apply for its PBO status. This application must be submitted to SARS’s tax exemption unit. Together with your application, you must also submit your organisation’s constitution.
Once your organisation’s application has been approved, your organisation will no longer be liable for income tax (and donations tax).
Keep in mind that your organisation must still submit annual tax returns (IT12EI), as this obligation does not fall away. This form can be obtained in the following manners:
- Through eFiling if you are a registered eFiler;
- By phoning the SARS Contact Centre on 0800 00 7277;
- By visiting your local SARS Branch; or
- By calling or visiting the Tax Exemption Unit (TEU) office.
Remember that you are responsible to inform SARS of any changes pertaining to your PBO and/or its status.
Can a PBO’s status/approval be back-dated to an earlier date?
Yes, it is possible. In practise many non-profit organisations, complies with the requirements of section 30 of the ITA, but for some reason, have not yet applied for the income tax exemption, as described above.
Section 30(3)(3B) of the ITA, gives the Commissioner the authority to approve a PBO’s status retrospectively. This means that if your organisation complied with the requirements of the definition of “public benefit organisation” in terms of section 30(1) of the ITA, during the period prior to its application (for PBO status), your organisation’s PBO status may be back-dated to an earlier date.
Does the above back-dating apply to all types of non-profit organisations?
No, unfortunately not. A common misconception exists, where some taxpayers assume that the status of an association, as contemplated in section 30B of the ITA, can also be approved by the Commissioner with retrospective effect. It is thus important to note that section 30B does not make the provision for the back-dating of an association’s status/approval, like in the case of a PBO’s status.
In this instance, it is important to note that an association, also being a non-profit organisation, differs from a PBO and can expressly be noted by looking at the objectives of the entities.
The difference:
| PBO | Association |
Sole object:
|
Sole object:
|
| Example:
A church |
Example:
The South African Institute of Charted Accountants (SAICA). |
What about donations granted by taxpayers to non-profit organisations?
Most non-profit organisations depend on donations from the public. The South African Government has recognised this and to encourage the generosity of the public, has provided a tax deduction for certain donations made by taxpayers.
- How does this work?
Section 18A of the ITA makes provision for the issuing of tax-deductible receipts. Tax deductible receipts, in this regard, must be approved by the TEU and is restricted to specific approved organisations, which uses donations to fund specific approved public benefit activities.When a bona fide donation is made to a section 18A-approved organisation, the donor/taxpayer is entitled to deduct the value of the donation from its taxable income.
- The rules
The taxpayer, wishing to make use of the deduction – must be in possession of a section 18A receipt, as issued by the organisation, or in some circumstances, by an employees’ tax certificate reflecting the donations made by the employee.
- What information must a section 18A receipt include?
Section 18A(2) states that the following must reflect on such a receipt:- The reference number of the PBO;
- The date of the receipt of the donation;
- The name of the PBO;
- The address of the PBO;
- The name and address of the donor;
- The amount of the donation, if the donation was made in cash;
- The nature (and value) of the donation, if it was not made in cash;
- A certification to the extent that the receipt is issued for the purposes of section 18A of the ITA, specifically; and
- That the donation has been or will be used solely for the object of the PBO (in carrying on the relevant public benefit activities); or
- An employee’s tax certificate (as defined in the Fourth Schedule of the ITA), on which the amount of the donation(s) as contemplated in paragraph 24(4)(f) of the mentioned Schedule, for which an employer received a receipt for a donation made.
-
Donations which does not qualify, for a deduction:
- Tithes and offerings;
- Donations of a service, such as time, effort or skill to an approved organisation;
- Amount paid for the attending of a fundraising event/charity event;
- Amount paid for the successful bid of goods auctioned at a fundraising/charity event by an organisation (and which goods have been donated for the event);
- Sponsorship and advertising;
- School fees or entrance fees for attending school or compulsory school levies.
The takeaway
Make sure that your organisation:
- Complies with the rules and regulations in terms of section 30 of the ITA;
- Has provided SARS’s Tax Exemption Unit with its current/updated constitution;
- Submits its annual tax returns (even though all income and/or donations qualify for the exemptions);
- Informs SARS of any changes relating to the nature or status of the organisation;
- Issues section 18A receipts to all taxpayers whose donations qualify for the section 18A deduction;
- Make sure that such donations have been or will be used solely in the pursuance of the organisation’s objective.
For more information, or assistance in this regard, kindly send an email to c.vandermerwe@fhbc.co.za.
Source Reference:
The Income Tax, No. 58 of 1962
Davis Tax Committee: Public Benefit Organisation Report: March 2019