In order to register as a Public Benefit Organisation ("PBO") with the South African Revenue Service ("SARS"), an organisation must comply with a number of provisions, set out in section 30 of the Income Tax Act No 58 of 1962 ("the Income Tax Act"). Preferential tax treatment is conferred on a non-profit organization which has obtained PBO status and such compliant organisation's receipts and accruals are exempt from certain South African taxes.
One of the first administrative requirements to satisfy relates to the manner in which the non-profit organisation is constituted and in order to qualify as a PBO, a non-profit organisation must be constituted in one of the following ways: a non-profit company ("NPC"), a trust, a voluntary association of persons or as a branch of a foreign charitable organisation which is exempt from income tax in its country of origin.
In this regard, the vehicle used most often is a NPC. In South Africa, all companies are regulated in terms of the new Companies Act, 71 of 2008 ("new Companies Act"). A variety of statutes govern the abovementioned vehicles and as a consequence thereof, each requires adherance to different rules and procedures. With this in mind, it is of the utmost importance to take note of any legisltive changes relevant to the specific vehicle utilised in incorporating a particular a non-profit organisation.
In terms of the previous the Companies Act, 61 of 1973, a NPC was known as a section 21 company (association not for gain). The new Companies Act came into operation on 1 May 2011 and on such effective date essentially, all existing section 21 companies were required to convert to NPCs.
This conversion included the conversion of the company's founding documents, which in the case of a section 21 company resulted in the adoption of a Memorandum of Incorporation ("MOI"). The MOI wholly replaced the company's existing Memorandum and Articles of Association.
In an attempt to alleviate the financial and administrative burden for companies being required to convert, provision has been made for a "transitional period". This is a period of two years from the effective date of 1 May 2011 and during this time all existing companies are required to amend their MOIs in order to bring same in line with the new Companies Act.
Where a NPC is required to amend its MOI, the company is presented with an ideal opportunity to update and streamline its founding documents as well as its governance structures. This is of particular relevance for any qualifying NPCs which are not yet registered as PBOs.
As mentioned above, various compliance procedures are prescribed in the Income Tax Act, which are to be adhered to, in order for a non-profit organisation to formally apply to SARS for tax exempt status. In this regard, it is important to note that registration as a NPC does not automatically result in the organisation qualifying for tax exemption.
It is imperative for any NPC, which carries on any one of several public benefit activities ("PBA") (provided for in Part I and Part II of the Ninth Schedule to the Income Tax Act) and which is not currently registered by SARS as a PBO, to be adequately informed of the immeasurable benefits available to such an organisation, in the event of it being able to successfully register as a PBO.
The benefits do not exclusively relate to exemption from income tax, but in certain instances, may be extended to donor deductibility. Provided certain additional requirements are complied with, namely that the NPC conducts any of the specific public benefit activities listed in Part II of the Ninth Schedule, such a NPC will also qualify for section 18A donor deductibility status. In other words, where donors donate funds to a PBO having section 18A approval, the donors will be permitted to deduct the value of their donation from their taxable income, limited to 10% of the donor's taxable income. This is a benefit which could significantly assist a non-profit organisation in attracting donations and funding in general.
In conclusion, it is important for qualifying non-profit organisations to note that both the conversion of the founding documents as well as the application for PBO status can be a cost effective and efficient process. The benefits of attaining PBO status are infinite and may ultimately allow a PBO to significantly expand the reach of its activities and thus provide greater assistance to its community.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.