Navigating South African tax law for non-profit organisations (NPOs) can be quite confusing. This article provides a quick vocabulary to help you better understand the key terms and concepts related to NPO taxes, ensuring you can make sense of the benefits and requirements for your organization.

 What is a Non-profit 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 gain that the NPO makes will not be distributed to any individual, member or trustee of the organisation but will be channeled back into the organisation.

NPO activities could relate to social, religious, educational, welfare & 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 simple 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 & on qualification, the organisation will be issued with an NPO number which results in the following benefits:

• Public recognition
• Promotes good standing, transparency & accountability in activities
• Promotes access to government & corporate funding 

NB. No tax benefits are achieved from an NPO number!

Unlocking tax benefits

Our Government, recognising that NPOs play a significant role in society, has designed specific tax benefits & exemptions to assist NPOs in meeting their objectives. This is to ensure monies that are needed to provide goods & services, which are generally for the benefit of the poor & needy, are not trapped as a tax cost to the NPO.

Obtaining a tax exemption

 The Income Tax Act defines the types of activities that an NPO has to undertake before it is granted a tax-exempt status. In addition, the NPO's 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 & obtain other benefits.

Who can access tax benefits?

To access the tax & other benefits, the NPO has to be classified as a Public Benefit Organisation (PBO) & must undertake Public Benefit Activities (PBAs). 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 PBO status.

What is a PBO?

A PBO is any welfare, religious or cultural body, private school, bursary fund, charitable trust or sporting body that has been approved by SARS. The PBO can be structured either as a Non-Profit Company (currently referred to as an NPC), a Trust or an Association of Persons (Voluntary Association).

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 & are classified under:

• Cultural
• Research & Consumer Rights
• Welfare & Humanitarian
• Religion, Belief or Philosophy
• Health Care
• Land & Housing
• Education & Development
• Conservation, Environment & Animal Welfare
• Sport
• Provision of funds to other PBOs

Tax savings 

Section 18A income tax deductions

When donors (individuals or companies) donate to PBOs that conduct PBAs falling under the following categories:

• Welfare & Humanitarian
• Health Care
• Education & Development
• Land & Housing
• Conservation & Environment & Animal Welfare.

they can claim these donations as tax-deductible expenses from SARS. The donation can be in cash or in the form of goods in kind (e.g. a supermarket may donate groceries & qualify for this tax benefit). The claim is limited to 10% of the donor's taxable income & donations in excess of the 10% may be carried forward to be claimed in a subsequent year.

PBOs that carry on PBAs under the above categories should apply for an 18A status from SARS. However, PBAs of a religious or cultural nature (such as places of worship, art galleries & museums), & sport & recreational bodies do not qualify for 18A.

Tax benefits – PBO vs non-PBO

Income tax on trading income (27%)

An NPO that does not have a PBO status will pay Income Tax at the rate of 27% on all of its trading or business income (rental income or income from a business) as well as on any passive income it earns (interest etc.). However, a PBO will pay 27% income tax on its trading or business income, only when this income is either more than R 200 000 or 5% of the PBO's total income (whichever is the greater).

Donations tax (20%)

Donations Tax (20%) is payable when an individual gives assets in excess of R 100 000 per annum free of charge to someone else. The onus is on the donor to make payment. When giving to a PBO, the donor does not pay any Donations Tax & there is no limit to the amount that he can give free of Donations Tax - e.g. when a person donates a property worth R 700 000 to a PBO, no Donations Tax is payable. However, a similar donation to a non-PBO, would cost the donor 20% Donations Tax or R 120 000.

Estate duty (20%)

A bequest to a PBO can be deducted & save the estate 20% on Estate Duty. The estate loses out on this deduction when the bequest is made to a non-PBO.

Transfer duty (3 - 13%)

A PBO which acquires immovable property to further its objectives is exempt from paying Transfer Duty, whereas a non-PBO cannot take advantage of this incentive.

Value - added tax (15%)

PBOs that undertake certain qualifying PBAs may claim back input VAT relating to their welfare activities whilst non-PBOs cannot.