Public Benefit Organisations (PBOs) and Their Tax Implications

Advising clients on structuring their organisations can be crucial for their financial efficiency and compliance with tax regulations. One such structure is a Public Benefit Organisation (PBO), which offers significant tax benefits while serving a public cause. Understanding these can help you assist clients in making informed decisions about how to operate their non-profit organisations (NPOs). The tax advantages are substantial, but it is important to ensure compliance with the rules and regulations that govern PBOs. By guiding your clients through the process of registering as a PBO and maintaining compliance, you can help them maximise their impact while maintaining financial sustainability.

How can an NPO become a Public Benefit Organisation (PBO)?

An NPO, such as a non-profit company, trust, or association of persons can become a PBO when certain criteria is fulfilled. Despite popular belief, not all NPOs qualify for tax exemptions. Firstly it has to be established with a sole or primary objective to carry out public benefit activities (PBAs), with most of their benefits accessible to the public. The NPO must not be driven by profit motives. Common examples include religious institutions, daycare centers, or a community health clinic providing free medical services in underprivileged areas without profit motives. PBOs receive written tax exemption from the South African Revenue Services (SARS) after due processes are completed.

To qualify for PBO status, an organisation must:

• Be a non-profit entity incorporated in South Africa (such as a non-profit company or trust).

• Carry out one or more public benefit activities as listed in the Ninth Schedule of the Income Tax Act.

• Submit the necessary application form (EI1) to SARS with supporting documents, such as the founding document (e.g., a trust deed or memorandum of incorporation).

• Adhere to the conditions prescribed in the founding document, which must align with the requirements of Section 30 of the Income Tax Act, including having at least three unrelated fiduciaries.

Key Tax Benefits for PBOs

1. Income Tax Exemption (Section 10(1)(cN))

   Approved PBOs are exempt from income tax on their receipts and accruals if they directly relate to their public benefit activities. This means that the income they generate from donations, grants, and fundraising activities does not incur income tax, allowing them to maximise the funds available for public benefit activities.

   Note: Certain income of the PBOs may be taxable

   PBOs must understand that income derived from business activities not directly related to the PBO’s objectives could still be taxed. For example, when PBOs generate income from trading or business activities that do not directly relate to the PBO’s objectives, these may be taxable. For example, when a PBO operating a community library sells donated books as a fundraising activity, the income may be taxable unless it meets specific exemption criteria.

2. Tax Deductible Donations (Section 18A)

   PBOs can apply to SARS for additional approval under Section 18A to be able to issue tax-deductible receipts for donations made to them. This is a powerful incentive for donors, who can reduce their taxable income by donating to a Section 18A-approved PBO. For example, a business donating R10,000 to an approved education PBO can deduct that amount from its taxable income, reducing its overall tax liability.

   Note: The PBO need additional approval from SARS to issue section 18A receipts.

   For example, a donor gives R10,000 to a PBO running a feeding scheme for the homeless. If the PBO is approved under Section 18A, the donor can deduct the donation from their taxable income, reducing their tax liability.

3. Capital Gains Tax (CGT) Relief

   In certain instances, capital gains made by PBOs are disregarded, such as gains from assets used directly in public benefit activities. If a PBO sells land that was used for educational purposes, any capital gain realised may not be subject to CGT.

4. Exemption from Other Taxes

   PBOs may be exempt from other taxes, including donations tax, estate duty, and transfer duty on property acquisitions. This is particularly advantageous when the PBO acquires property for use in their public benefit activities, such as setting up a new clinic or community center.

5. VAT Implications

   PBOs that fall under the VAT Act's definition of welfare organisations can claim input VAT on purchases, even if they do not charge VAT on the services they provide. This provides significant financial relief, especially for organisations like disaster relief groups that make large purchases of supplies.

   VAT Registration is required for PBOs that are not welfare organisations if their taxable supplies exceed the registration threshold.

For example, consider a charity that provides school supplies and scholarships to underprivileged students. By registering as a PBO, this charity not only benefits from tax exemptions but can also offer its donors a tax incentive through Section 18A certificates, thus encouraging more donations. Additionally, if the charity owns the property, it may be exempt from paying transfer duty upon acquisition of the property, provided it is used for the charity's activities.

Compliance and Reporting of PBOs

Once approved as a PBO, the organisation must submit an annual income tax return (IT12EI), which helps SARS monitor compliance with the tax laws. This is crucial because failing to comply with PBO regulations can result in penalties or the withdrawal of PBO status, which can have significant financial consequences.

find more information on the benefits of PBOs and further guidance on the application process on the SARS website.

Become a CIBA licensed Nonprofit Accountant and learn how to assist your nonprofit clients

This course is designed to enhance the expertise of Business Accountants (BAP(SA) or similar designations) by equipping them with the necessary skills and knowledge to assist non-profit organisations (NPOs) in becoming compliant. Key benefits include:

1. Financial Compliance: Learn to compile accounts from incomplete records to help NPOs comply with the Department of Social Development (DSD) deregistration campaign.

2. Marketing Strategies: Gain insights into effective marketing strategies and industry trends to boost income potential.

3. NPO Accounting Expertise: Develop skills in charity and NPO financial management, reporting, and compliance with the Non-Profit Organisations Act and Income Tax Act provisions.

4. Financial Statement Requirements: Understand how to present and disclose financial statements specific to not-for-profit entities.

5. Filing Requirements: Identify the Department of Social Development and SARS filing requirements and understand when an NPO may face unrelated business income tax.

6. Governance and Risk Management: Learn best practices in board governance, risk assessment, and internal controls for NPOs.

7. Audit and Review Engagements: Understand the steps for planning successful audits or reviews, focusing on key considerations and client communication.