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Driving positive change: Non-profit organisations
Exploring what non-profit status means, and the tax implications of NPOs.
There are many misconceptions about non-profit organisations (NPOs) in South Africa. Many people believe that all NPOs automatically receive tax-exempt status, or that all donations to NPOs are tax-deductible. However, the rules are a bit more complicated. This article will explore what NPOs do, how they operate as organisations, and the South African Revenue Service (SARS) tax rules relating to NPOs.
The Nonprofit Organisations Act governs the registration and incorporation of NPOs in SA. The Act was introduced to encourage the creation of organised civil society bodies that are essential for democracy and development. These organisations are part of neither government nor the private sector, but rather advance the public interest or some common interest of their members.
NPOs do not exist to make a profit from their work, but to serve specific public purposes. If members of the NPO receive payment or benefits, this will be in the form of a reasonable return for work done. Any profit resulting from the work of an NPO is ploughed back into the activities of the organisation and used to help its beneficiaries.
Most NPOs rely on grants and donations from fundraising, as they usually serve sections of the community that couldn’t afford to pay the full cost of the service.
Leveraging NPO status
The NPO Act provides a registration facility for South African NPOs. Importantly, it enables trusts, which must be registered with the Master of the High Court, and section 21 companies, which must be registered with the Registrar of Companies, to be body corporates that are are considered to be legal persons.
NPOs can access benefits in terms of the Income Tax Act which can help thir financial sustainability
NPOs that receive a tax benefit must be registered in terms of the NPO Act. This step increases accountability and transparency for NPOs. The registration requirements with the government’s NPO Directorate also have the effect of legally setting up the NPO as a body corporate and distinguishing them from for-profit organisations. An NPO remains registered until it is actively deregistered.
Once a NPO has been registered, it is obliged to comply with various information and reporting provisions and formalities, especially keeping accounting records and financial statements up to date.
NPOs and taxation
There is often a misconception that NPOs have a special tax dispensation that allows tax benefits to business owners. The tax status of NPOs is, however, strictly controlled to ensure that they meet their mandate as civil society organisations using their profits for their stated goals of public service and upliftment.
That said, NPOs can access benefits in terms of the Income Tax Act, which can help their financial sustainability. NPOs have the following main tax benefits:
- Full exemption from paying income tax if the NPO carries on no or limited trading activities.
- Receiving donor-deductible contributions. Only approved public benefit organisations (PBOs) can issue receipts for donations, allowing donors to make deductions from their taxable income.
- Exemptions from transfer duty, estate duty, capital gains tax, donations tax, skills development levies, and dividends tax, depending on the NGO’s PBO status.
NPOs can access these benefits only by becoming an approved PBO with the Commissioner of SARS after demonstrating their legal and business status.
If you’re interested in starting an NPO to make a difference in your community, our business advisory and financial planning services can provide you with the right advice and guidance to lead you through the NPO start-up process, getting you set up to give back to society.
