The ABCs of Taxes in the Nonprofit Sector

ngos donors financial management tax benefits
Tuesday, 9 April, 2013 - 13:13

Both South African nonprofit organisations and donors can enjoy tax benefits if the former are registered as Public Benefit Organisations

Many charities do not realise or understand the benefits of being registered as a public benefit organisation (PBO), Hoosen Agjee explains.
 
In our many years working with the nonprofit sector (NPO) sector, we have identified that a significant number of organisations are still unaware of the specific tax benefits available to them,’ says Hoosen Agjee, managing director of Turning Point Consultants (TPC) and author ofTax Benefits for the Nonprofit Sectorand A Guide to the New Companies Act and Nonprofit Organisations.
 
In fact, he adds, “There’s a common misconception that an exemption from Income Tax and certain rates are perhaps the only benefits available to the sector’. Agjee says that, “All is not lost for NPOs who haven’t been tax efficient in the past.” TPC has designed a system tailored specifically for such organisations, measuring the quantitative impact of such inefficiencies, and more importantly focusing on practical solutions to remedy this. With many organisations experiencing significant reductions in donor funding, these savings and recoveries have also opened up an additional recurring income stream for NPOs.
 
When Agjee published his first book,Tax Benefits for the Non Profit Sector, in August 2002, the general comments received from NPOs included:

  • What has tax got to do with NPOs?
  • As an NPO we are exempt from taxes – we don’t pay taxes;
  • We have an NPO number therefore we can access all the tax-benefits; and
  • As we are a Section 21 company, we can issue our donors tax deductible certificates.

‘These comments could not be further from the truth, he says.
 
What is a Nonprofit Organisation (NPO)?
 
An NPO is any entity (whether formally registered or not) which carries out activities in a nonprofit manner.This means that any surplus or gains that the NPO makes will not be distributed to any individual, member or trustee of the organisation but shall be for the benefit of such organisation. NPO activities could relate to social, religious, educational, welfare and the list goes on. The fundamental requirement is that the NPO should not promote the economic interest of any individual or employee. Therefore, most or all organisations may be regarded as NPOs if they meet these criteria.
 
What are the benefits of an NPO number?
 
The NPO Act regulates NPOs in South Africa. Once an NPO meets the requirements of the NPO Act, it may apply to the Department of Social Development and on qualification, the organisation will be issued with an NPO number which results in the following benefits:

  • Public recognition;
  • Promotes good standing;
  • Transparency and accountability in activities; and
  • Promotes access to government and corporate funding. 

However, an NPO number does not give the organisation any tax benefits.
 
Unlocking tax benefits
 
Our government, recognising that NPOs play a significant role in society, has designed specific tax benefits and exemptions to assist NPOs in meeting their objectives. Their principal aim is to ensure monies that are required to provide goods and services, which are generally for the benefit of the poor and needy, are not trapped as a tax cost.
 
Obtaining a tax exemption
 
The Income Tax Act defines the types of activities that an NPO can undertake before it is granted a tax-exempt status. Inaddition, the NPOs’ founding documents must comply with the requirements of the Act. NPOs that meet these requirements can take advantage of the tax benefits to reduce their tax burden and obtain other benefits. Obtaining a Tax exemption is not automatic. An application must be made to the South African Revenue Service (SARS) who, on review, will grant the NPO a tax exemption status. Once tax exemption is approved by SARS, the NPO obtains a Public Benefit Organisation (PBO) status.
 
Who can access tax benefits?
 
To access the tax and other benefits, the NPO has to be classified as a PBO and must undertake PublicBenefit Activities (PBAs).
 
What is a PBO?
 
A PBO is any welfare, religious or cultural body, private school, bursary fund, charitable body, charitable trust or sporting body approved by SARS. The PBO can be structured either as a nonprofit company (commonly known as a section 21 company), a trust or an association of persons.
 
What are Public Benefit Activities (PBAs)?
 
SARS has defined different fields of activities that a PBO can undertake for it to qualify for tax exemption. These activities are known as PBAs and are classified under:

  • Welfare and humanitarian;
  • Religion, belief or philosophy;
  • Cultural;
  • Health care;
  • Education and development;
  • Land and housing;
  • Conservation, environment and animal welfare;
  • Research and consumer rights;
  • Sport; and
  • Provision of funds to other PBOs 

Tax benefits to donors
 
Donors also benefit when donating to a PBO compared to any other organisation.By donating to a tax-exempt PBO, the donor may achieve, among others, the following tax benefits:

  • 20 percent donations tax;
  • 20 percent estate duty; and
  • 10-14 percent capital gains tax. 

To further incentivise donors to donate towards certain PBAs, government has also introduced additional tax savings to donors.Where a donor donates cash or in kind to PBOs, which are conducting certainPBAs, the donor will also achieve income tax savings by claiming a deduction of the donation against their taxable income.
 
Claiming tax deductions from SARS
 
Where donors have made donations to those PBO’s limited to conducting PBA’s under the following categories:

  • Welfare and humanitarian;
  • Healthcare;
  • Education and development;
  • Land and housing;
  • Conservation; and
  • Environment and animal welfare.

They obtain income tax benefits because they can be issued with tax deduction receipts from that PBO (knownas an 18A certificate). The donors may then use these receipts to claim their donations as tax deductible expenses from SARS in their annual income tax returns. PBAs of a religious or cultural nature (such asart galleries and museums), and sportand recreational bodies do not qualify for an 18A status from SARS and consequently cannot issue 18A receipts for these donations.
 
Who can claim and how much canbe claimed?
 
All donors - including salaried employee, a company or close corporation - can claim this deduction from SARS. The claim is however limited to 10 percent of the donor’s taxable income. The donation can be in the form of cash or in-kind (e.g. a supermarket may donate groceries and still qualify for this tax benefit).
 
Donors prefer tax–exempt charities
 
There are thousands of NPOs all competing to get their share of donor funding. A tax-exempt PBO stands a better chance of getting donor funding than one that doesn’t have this status. Tax exemption is a win-win situation for both donor and recipient because:

  • The donor gets the satisfaction that, where an organisation is tax-exempt, every cent of the donation reaches the targeted beneficiary instead of it being earmarked for taxes and duties;
  • The organisation’s expenditure is reduced by the tax saved and it can use the savings for its activities; and
  • The donor achieves income tax benefits on donations made to section 18A PBOs. 

About the Turning Point Consultants
 
Turning Point Consultants (TPC) began as a consultancy practice established more than 25 years ago. As a multi-disciplinary firm, TPC offers a comprehensive and seamless tax recovery and related consultancy service tailored specifically to meet clients’ needs while delivering value added benefits for the NPO sector.
 
- Hoosen Agjee is director at Turning Point Consultants. This article first appeared in the Downes Murray International’s Fundraising Forum electronic newsletter. He can be contacted on 083 282 8786 or 031 208 2458 or e-mailed to reza@tpcsa.co.za.

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