PBOs, NPOs and taxes – A guide for CIBA accountants
Non-profit organisations (NPOs) are crucial in delivering social value in South Africa, ranging from education and healthcare to religious, environmental, and humanitarian work. But while these organisations operate for the public good, they’re not automatically free from tax rules. Accountants working with NPOs and Public Benefit Organisations (PBOs) must understand their special tax treatment, registration requirements, and compliance obligations.
What is a Non-Profit Organisation?
An NPO is any trust, company, or association of persons set up for a public purpose, where income and property are not distributed to members. NPOs may be set up in different legal forms, such as companies registered with CIPC, charitable trusts registered with the Master of the High Court or voluntary associations.
Under the NPO Act, NPOs can register with the Department of Social Development (DSD). While registration is optional, it is compulsory for NPOs operating outside South Africa or receiving foreign funding and is often required to access public or corporate funding.
However, NPO registration alone does not confer tax exemption. An NPO must apply to SARS for PBO status to obtain tax benefits.
Qualifying for PBO Status
To qualify for tax-exempt Public Benefit Organisation (PBO) status, an organisation must meet several key requirements set out in the Income Tax Act:
Be a South African non-profit entity, such as a non-profit company (NPC), a registered trust, or an association of persons.
Carry out one or more approved public benefit activities (PBAs) as listed in Part I of the Ninth Schedule to the Income Tax Act, including:
Welfare and humanitarian work
Healthcare
Education and development
Religion or belief
Conservation and animal welfare
Disaster relief
Housing, among others
Only organisations whose main purpose is to carry out these activities may qualify for PBO approval.
Submit an application to SARS using the EI1 form, along with supporting documents such as the founding document (e.g., trust deed, memorandum of incorporation, or constitution). Download the SARS Guide for further information.
Include prescribed clauses in its founding document, as required by Section 30 of the Income Tax Act. These include, among others:
At least three unrelated fiduciaries (not family members or connected persons),
A prohibition on the distribution of funds to members or founders,
Proper winding-up clauses ensure that assets are transferred to another approved PBO or qualifying body upon dissolution.
SARS must approve the organisation as a PBO under section 30 of the Income Tax Act to enjoy tax exemptions. This approval is not automatic, even if the entity is a registered NPO, there is a process to follow. Only NPOs with valid tax exemption certificates can take advantage of the tax benefits described below.
Tax Benefits for Approved PBOs
Income Tax Exemption (Section 10(1)(cN))
Once approved, a PBO is exempt from income tax on receipts and accruals arising from its approved public benefit activities. This includes most donations, grants, and fundraising income.
📌Note: Not all income of a PBO is automatically tax-free. That income may be taxable if the PBO conducts trading or business activity that is seen to be unrelated to its public benefit work, unless there is proof that:
Is directly related to the PBA and integral to its operations;
Happens only occasionally (e.g. fundraising events);
Falls within the basic exemption threshold or is approved by the Minister of Finance.
For example, if a PBO running a health clinic also operates a café to raise funds, the café’s profits could be taxed unless the activity meets SARS’s exemption rules (e.g., it is integral, occasional, or under the basic exemption threshold).
PBOs must also:
Submit annual tax returns (IT12EI form) to SARS
Submit IT3d returns
Comply with the approved activities
Avoid personal benefits to any fiduciary or employee other than reasonable pay.
Tax-Deductible Donations (Section 18A)
Some PBOs can receive donations that are deductible for the donor—but only if:
They are specifically approved under Section 18A following a process prescribed by SARS.
They use the donation to fund PBAs listed in Part II of the Ninth Schedule (such as welfare, education, and healthcare)
They issue a Section 18A receipt with all required information.
📌Note: Not all PBOs qualify for Section 18A approval.
Value-Added Tax (VAT) and Welfare Organisations
Under the VAT Act, a welfare organisation is a special category of vendor that qualifies for preferential VAT treatment.
Approved PBOs can apply for recognition as welfare organisations, allowing them to claim VAT input even if they don’t charge output VAT, reducing purchase costs. To be recognised as a welfare organisation, an entity must:
Be approved as a PBO by SARS under section 30 of the Income Tax Act, and
Conduct one or more approved welfare activities as defined in Government Notice No. 112 (GN112), falling under the following categories:
Welfare and Humanitarian (e.g. feeding the homeless),
Health Care (e.g. free medical clinics),
Education and Development (e.g. training for the unemployed),
Land and Housing, and
Conservation, Environment and Animal Welfare.
📌Note: Activities related to religion, culture, and philosophy (while qualifying for PBO status under the Income Tax Act) do not qualify as welfare activities for VAT purposes. This is a crucial distinction.
✅ When Input VAT Can Be Claimed
A welfare organisation can deduct input VAT on goods or services only if:
The organisation is registered as a vendor for VAT, and
The goods or services are acquired for use in carrying out approved welfare activities, as listed in Government Notice 112 (GN112), and
It holds valid tax invoices for those expenses.
📌 Note: Even if the organisation does not charge for the welfare services (i.e. no output VAT), it may still claim input VAT because of a special rule in the VAT Act that treats these activities as part of an "enterprise" for VAT purposes.
❌When Input VAT Cannot Be Claimed
Welfare organisations cannot deduct VAT input if the expenses relate to:
Non-welfare activities (e.g., religious, cultural, or belief-based services not listed in GN112),
Exempt supplies (e.g., educational services provided by registered schools or renting residential property),
Fundraising events where goods are sold and less than 80% of materials are donated (unless standard-rated),
Private or out-of-scope activities.
🛑 For example, If a welfare organisation runs a free health clinic (approved welfare activity) and a church ministry (not a welfare activity under VAT), input VAT on the clinic’s costs is deductible, but VAT on church expenses is not.
If some costs relate to both welfare and non-welfare activities (like rent or utilities), the organisation must apportion the VAT input using a fair method, typically using a turnover-based formula.
For more information and examples, consult the SARS VAT 414 Guide for Welfare Organisations.
Employees’ Tax (PAYE)
All PBOs must:
Register for PAYE if they have employees earning above the tax threshold
Deduct and pay over UIF and possibly SDL unless specifically exempt
Keep employment tax records and submit regular declarations (EMP201, IRP5s, etc.).
IT3(d) Reporting Requirement: Section 18A Donations
If a PBO is approved under Section 18A and issues tax-deductible receipts to donors, it must also comply with SARS’s third-party data reporting requirements. IT3(d) submissions must be made by:
Biannually, in October (period March-August) and covering the previous tax year (March to February) by the end of May.
Reporting each qualifying donation with donor details, amount, and receipt number.
Failure to submit IT3(d) reports may result in penalties and could jeopardise Section 18A approval status.
📌Note: Ensure your clients keep detailed donation records and capture all required data (ID numbers, contact info, receipt numbers) when issuing the 18A certificate.
🔍Key Compliance Tips
Founding Documents
Ensure the founding document complies with Section 30, has at least three unrelated fiduciaries, and includes required clauses (e.g. no distribution of profits, proper winding-up).
SARS Approvals
Verify that the PBO has valid SARS approvals—Section 30 (PBO), Section 18A (donations), VAT (if applicable), and registrations for PAYE/UIF/SDL.
Notifications to SARS
Report any changes (address, fiduciaries, founding document) or cessation of activities within 21 days.
Tax Returns
Submit the IT12EI return annually and track any taxable income from unrelated trading activities.
VAT Compliance
If VAT-registered, claim input VAT only on approved welfare activities, apply correct apportionment, and submit VAT201s timeously.
Section 18A & IT3(d)
Ensure proper 18A receipts are issued and IT3(d) donor data is submitted annually to SARS.
Recordkeeping
Maintain accurate and complete financial records and retain them for at least five years.
Employment Taxes
Ensure PAYE, UIF, and SDL are declared and paid, and that IRP5s are issued to employees.
DSD Reporting (for NPOs)
File annual reports with the Department of Social Development if the organisation is registered under the NPO Act.
Activity Monitoring
Reassess compliance if new income streams, partnerships, or service expansions occur that may affect tax-exempt status.
In Summary
The tax treatment of PBOs and NPOs is generous but comes with strict conditions and ongoing compliance responsibilities. As accountants, we are uniquely positioned to help these organisations stay compliant while focusing on their important work for society. Download CIBA’s PBO checklist to ensure that your PBOs comply with relevant tax requirements.
