Registering as a Public Benefit Organisation (PBO) with the South African Revenue Service (SARS) in terms of section 10(1)(cN), requires that an organisation complies with a number of initial administrative requirements in terms of section 30 of the Income Tax Act 58 of 1962 (the Act). Further, compliance procedures are prescribed in the Act which has to be adhered to in order for an income tax exempt organisation to retain its exempt status.
It remains beneficial for organisations which conduct Public Benefit Activities (PBAs) listed in the Ninth Schedule to the Act, to apply for income tax exempt status.
Firstly, once an organisation is exempt from income tax in terms of section 10(1)(cN) of the Act, and becomes a Public Benefit Organisation (PBO), provision is made that certain receipts and accruals of that organisation will be tax exempt. PBOs are permitted to carry on limited business or trading activities on a tax-free basis within certain specific parameters, but will be taxed on receipts and accruals derived from any business undertaking or trading activity that falls outside the parameters of these permissible trading rules. Therefore, preferential tax treatment is provided to PBOs.
Further, a PBO could consider applying for section 18A donor deductibility status. An organisation which qualifies as a PBO in terms of section 30 of the Act and conducts PBAs listed in Part II of the Ninth Schedule, will qualify for this status. Subsequently, donors of funds to such a PBO will be permitted to deduct the value of its donation from its taxable income. This is a significant benefit which could assist in attracting donations. A donation will be deductible if the donation:
- Is supported by a donation certificate; and
- Does not exceed 10 percent of the taxable income of the taxpayer calculated allowing any deduction under section 18A.
In the National Budget of 11 February 2009, reference was made to certain PBOs, namely those organisations designed to provide support to other PBOs that currently cannot obtain section 18A donor deductibility status. It was proposed that the deductible status of PBOs supporting other PBOs would be considered to the extent that is does not give rise to income tax avoidance. It remains to be seen what this will mean in practice.
Donations tax is payable at a rate of 20 percent on the value of any gratuitous disposal of property by one person to another, including the disposal of property by one person to another, including the disposal of property at less than its market value. Donations tax is payable by the donor, but if the donor fails to pay the tax timeously the donor and donee shall be jointly and severally liable for the tax. However, a specific exemption is granted for donations made by or to a PBO.
Specific taxation regimes also exist for PBOs in terms of their potential transfer duty, capital gains tax, VAT liabilities and Skills Development Levies.
The preferential tax treatment granted to PBOs should therefore be borne in mind when finalising the tax affairs of a non-profit organisation serving the general public.
- Erika Wessels is manager at KPMG Development Advisory Services in Cape Town. This article is republished here with the permission of the CMDS website.