Would your Non-Profit Company's Memorandum of Incorporation meet the Requirements of Section 30(3) of the Income Tax Act Should the Company Register as a Public Benefit Organisation?
All non-profit organisations in South Africa are governed by the Non-Profit Organisations Act, No 71 of 1997 (the Act), which came into effect on 1 September 1998. In terms of this Act, a non-profit organisation (NPO) is defined as either a trust, company or other organisation or association of people established to serve a public purpose.
In terms of the Companies Act, No 71 of 2008, a non-profit company is formed for a public benefit object, or an object relating to a cultural or social activity or communal or group interest.
It is part of the essence of a non-profit company that its income and property cannot be distributed to its members, directors, incorporators, offices or persons related to any of them, except to the extent permitted by Schedule 1, item 1(3) of the Companies Act. Non-profit companies are subject to a modified application of the Act and to a distinct set of essential rules, set out in Schedule 1 to the Companies Act which govern matters unique to non-profit companies.
The organisation is therefore not set up for the profit of its members, but for the benefit of the public. The Act therefore requires the profits of the organisation to be re-invested and used for the purpose of attaining the main goal of the organisation. Profits are not to be distributed to its members.
A public benefit organisation (PBO) can be a trust, a not-for-profit company in terms of section 10 of the new Companies Act, or another association registered with the South African Revenue Services (SARS) in terms of section 30(1) of the Income Tax, No 58 of 1962.
Public benefit activity means any activity listed in Part I of the Ninth Schedule to the Income Tax Act, and any other activity determined by the Minister from time to time by notice in the Gazette to be of a benevolent nature, having regard to the needs, interests and well-being of the general public.
With the increased risk of fraud in organisations, it is extremely important for the boards of non profit organisations to be aware of the threat of fraud, and to this extent, it is submitted that non-profit organisations register as Public Benefit Organisations. Section 10(1)(cN) of the Income Tax Act and Paragraph 22.214.171.124 of the Tax Exemption Guide for public benefit organisations assume that all income derived by such organisations will be exempt from normal income tax provided that the income is not distributed (directly or indirectly) to its members.
With the uncertainty of donor-dependant income, especially in light of the risk of fraud, it has become increasingly important for an NPO to create a sustainable stream of income, e.g. an endowment. The latter comprises investing a sum of money that will grow to such an extent that the organisation will be able to fund its operations into perpetuity.
A Public Benefit Organisation is thus a category of a Non-Profit Organisation.
The Income Tax Act, and other related legislation, contains various provisions pertaining to the tax treatment of PBOs and the requirements that need to be met in the context of the tax exempt status of these entities. In order for an entity to qualify for the exemptions on various taxes and duties, the entity must be approved as a PBO in terms of Section 30 of the Act.
- Shares: If a PBO were to hold shares in a private company, the provisions of section 12(2)(o) of the Non profit Organisations Act apply and unless the laws in terms of which a non-profit organisation is established or incorporated make provision for the matters in this subsection, the Memorandum of Incorporation of a non-profit organisation that intends to register must provide that, when the organisation is being wound up or dissolved, any asset remaining after all of its liabilities have been met, must be transferred to another non-profit organisation having similar objectives. This is an important factor when utilising PBOs in structuring arrangements, such as BEE and other initiatives as the future effect may be that the shares, being an asset of the PBO, will pass to another PBO in the circumstances envisaged above.
- Dividends tax: Any dividends received by a PBO pursuant to its shareholding in a company, would, in terms of the new dividends tax regime which became effective on 1 April 2012, be exempt from dividends tax. Section 64F(c) of the Income Tax Act, as amended, contemplates that any dividend is exempt from the dividends tax to the extent that it does not consist of a dividend in specie if the beneficial owner is a public benefit organisation approved by the Commissioner in terms of section 30(3) of the Income Tax Act.
- Capital Gains Tax: Paragraph 63A of the Eighth Schedule deals with the gains tax implications when a PBO disposes of a capital asset. PBOs do not enjoy a complete exemption from CGT, as they did in the past. Any capital gain or loss made by a PBO on the disposal of an asset will be taken into account for purposes of CGT if substantially the whole of the use of the asset by the PBO was not directed toward the carrying on of a PBA.
- Part I of the Ninth Schedule: Lists all activities which are approved as PBAs and which will qualify an entity for approval in terms of Section 30 as a PBO. A PBO can be engaged in Part I and Part II PBAs but only donations in respect of the Part II PBAs will qualify for the Section 18A tax deduction in the hands of the donor if the requirements of the section are met.
- Section 10(1)(cN): The receipts and accruals of PBOs are exempt from income tax provided they meet the requirements of the section. The section further makes provision for the partial taxation of receipts and accruals by the PBO, at the normal tax rates of the form of entity in which the PBO is conducted to the extent that those receipts and accruals stem from trading or business activities which exceed the limits prescribed in the section, without compromising the exemption which is enjoyed by the PBO in respect of its public benefit activities.
- Section 18A: Creates a tax deduction in favour of a taxpayer who makes a bona fide donation to a PBO, in the circumstances set out in the section and does not exceed 10% of the taxable income, excluding any retirement fund lump sum benefit and retirement fund lump sum withdrawal benefit of the taxpayer as calculated before allowing any deduction under section 18A or section 18. This section must be read together with Part II of the Ninth Schedule which sets out the PBAs which qualify for the Section 18A tax deduction of donations made to PBOs. The PBO will have to provide a receipt to the taxpayer in order for the latter to claim a deduction.
It is vital that PBOs are structured correctly and that they maintain their tax exempt status by at all times being compliant with the related sections of the Tax Act, 1962 and Schedule 1 of the Companies Act, 2008.
Approval as a Public Benefit Organisation
The Tax Emption Unit (TEU), on behalf of the Commissioner, will only approve a PBO if it complies with all of the conditions and requirements of section 30 of the Income Tax Act.
The approval as a PBO is generally effective from the date the approval is granted by the TEU, unless the TEU advises otherwise. The TEU may approve a PBO with the retrospective effect to the extent that the TEU is satisfied that the Company or Organisation complied with the requirements of section 30 of the Income Tax Act during the period before it lodged its application.