A public benefit organisation (“PBO”) is an entity which is created to carry on some form of public benefit activity (“PBA”). Due to the fact that a PBO acts in the public interest, it enjoys certain tax benefits. These benefits include not paying income tax, donations tax and if the PBO has section 18A approval then persons who make donations to the PBO will be able to deduct those donations from their taxable income. Not all non-profit organisations are entitled to these benefits. In order to receive the abovementioned benefits the entity must be registered as a PBO.
The Tax Exemption Unit (the “TEU”) is responsible for reviewing and approving applications to register an entity as a PBO. The TEU will only approve an application if the sole and principal object of the entity is to carry on one or more of the PBA’s listed in Part 1 of the Ninth Schedule to the Income Tax Act No.58 of 1962 (“Tax Act”). Categories of PBA’s are as follows:
- Welfare and humanitarian;
- Land and housing;
- Education and development;
- Religion, belief or philosophy;
- Conservation, environment and animal welfare;
- Research and consumer rights;
- Providing of funds, assets or other resources; and
The TEU will also have to determine whether the entity complies with the requirements as set out in section 30 of the Tax Act. The first requirement is that the entity must be one of the following:
- a trust established in the Republic of South Africa (“RSA”);
- an association of persons formed or established in RSA;
- a branch established in RSA by a foreign organisation that is in itself exempt from income tax in terms of the Tax Act; and
- a non-profit company incorporated in RSA.
Other requirements to be registered as a PBO are that the entity’s sole and principal object must be to perform one or more PBA’s in a non-profit manner and with an altruistic and philanthropic intent. Furthermore, the PBO’s activities may not promote the self-interest of any of the PBO’s employees or persons acting in a fiduciary capacity. However, they may still receive reasonable remuneration. Lastly, the entity must carry out its PBA’s in a manner that it benefits a widely accessible group or the public at large.
All of the abovementioned requirements must be met before an entity will be registered as a PBO and thus be entitled to the tax benefits that accrue to being registered as a PBO.
Once an entity has been approved as a PBO the TEU will monitor it to make sure it adheres to the requirements of the Tax Act and to prevent malpractice.
While the requirements for being registered as a PBO are set out in section 30 of the Tax Act. The rules regarding the preferential tax treatment of a PBO are set out in section 10(1)(cN) of the Tax Act. This section sets out which receipts and accruals are exempted for income tax purposes. There are broadly two categories into which receipts and accruals can be categorised in order to be exempt from income tax.
The first category of exempted income is those receipts and accruals that derive otherwise than from business or trading activity.
The second category of exempted income is those receipts and accruals that derive from a business undertaking or trading activity which is:
- integral and directly related to the sole and principal object of the PBO;
- occasional in nature and undertaken substantially with assistance on a voluntary basis without compensation; or
- approved by the Minister of Finance.
If the income does not fall into one of the abovementioned categories, it will be taxable income. However, section 10(1)(cN)(ii)(dd) states that 5% of the PBO’s total income or R200 000, whichever is the greater, will be exempt income and no tax is payable on that portion.
PBO’s are given preferential tax treatment in order to conduct one or more of the abovementioned PBA’s. However, in certain cases, unscrupulous parties will utilise this tax benefit to their own advantage without fulfilling the PBO’s sole and principal object of assisting the destitute and indigent. Despite the stringent rules and requirements put into place by SARS and the State. Abuse of PBO’s remains a massive issue. Although the concept of PBO’s is a laudable and necessary one. Stricter rules and regulations should be considered to make sure that money donated to a PBO on a tax free-basis will be used for the purpose it was donated.