Top 5 tax myths for non-profits
In our experience in working with non-profit organisations, we have encountered some common myths in relation to tax. Unfortunately, the impact of these myths can be devastating for these organisations, so here we try to debunk them.
Myth 1: “Non-profit entities are not taxpayers”
- Every legal entity must be registered as an income taxpayer with SARS (and have an income tax number) and submit an annual tax return, including non-profit organisations.
- Every legal entity, whether for-profit or not, carries the same tax obligations unless it has specific written approval for any exemptions or preferential tax treatment from SARS.
- However, note that there is no provisional tax for approved PBO’s.
- An entity can apply for approval for exemptions (preferential tax treatment and benefits) under section 30 of Income Tax Act. These exemptions are:
- PBO – Public Benefit Organisation carrying out public benefit activities (PBA’s)
- Section 18A status (if available for your organisation’s public benefit activities) – this brings benefits to donors
- Concessions and benefits are mostly specified in the SARS PBO letter addressed to the organisation. Reading the letter is very important!
- Furthermore, if a non-profit entity employs and pays staff (regardless of the amount) – it must also register as an employer with SARS, and the Dept of Labour and comply with all labour legislation (there is no special dispensation for non-profits).
Myth 2: “PBO approval equals S18A approval”
- Not all PBOs are granted section 18A status by SARS. Only approved PBO’s that carry out specific public benefit activities and have a confirming letter from SARS may issue a section 18A receipt for a “bona fide donation”. Examples of public benefit activities for which a S18A receipt cannot be issued are promotion of arts or culture, religious or philosophical activities, youth development and research.
Myth 3: “PBO’s are precluded from, or are limited in, generating income from trading activities”
- Approved PBO’s are not precluded from, or limited in, generating income from trading activities; however, the profit/surplus generated from such trading may be partially taxable.
- Where income is generated from trading activities that are directly and integrally related to the public benefit activities of that approved PBO, largely carried out on a cost recovery basis, and not in competition with a tax paying entity, this is non-taxable trade and the income generated will be tax exempt regardless of the amount.
- Income generated from trading unrelated to the entity’s public benefit activities (including all rental income) is taxable after taking account of the tax exempt portion (the basic exemption of R200 000 or 5% of gross annual receipts, whichever is greater) and the expenditure related to the generation of that income.
Myth 4: “Once for all time PBO approval”
- There are on-going conditions for approved PBO status and therefore for section 18A approval too, including conditions that there is:
- No economic self interests
- No control by a single person
- A group of at least three unconnected persons to carry fiduciary responsibility
- No option for revocable donations
- Not excessive remuneration paid
- The entity operates in a philanthropic manner.
- A PBO also needs to submit annual tax returns, ensure that there is an appointed tax representative and keep its registered details up to date with SARS. Failure to comply can result in SARS withdrawing PBO approval, unless corrective steps are taken.
Myth 5: “PBO’s and non-profit entities are VAT exempt”
- There is no “VAT exemption” for any entity (non-profit, PBO or otherwise). Certain activities are VAT exempt (unrelated to the nature of the entity), including, for example, crèche, school and tertiary education fees, finance charges, public road transport fees, and more. No VAT is included the cost of these services and the VAT included in any expenditure to generate such income cannot be claimed back from SARS.
- The VAT Act does refer to associations not for gain and welfare organisations (not specifically to PBO’s), and to certain benefits for these organisations, including voluntary registration as a VAT vendor for welfare organisations and more. Voluntary VAT registration may be beneficial for certain non-profit entities.
- If an entity has “taxable supplies” exceeding R1 million in a 12 month period it is obliged to register as a VAT vendor, regardless of whether it is a non-profit, or for-profit entity.
The SARS website has a number of guides that are very useful in navigating the waters in relation to PBO tax issues. These include:
- LAPD-IT-G16 Basic Guide to Income Tax for Public Benefit Organisations - (Issue 2) - 19 September 2016
- LAPD-IT-G 17 Basic Guide to Section 18A approval – (Issue 3) – 17 March 2020
- IT-AE-44-G02 How to register on e-Filing and complete the IT12EI return for tax exempt organisations
- LAPD – ITG – 26 Tax Exemption Guide for Public Benefit Organisations in South Africa (Issue 5) - 26 January 2017
- VAT 414 - Guide for Associations Not for Gain and Welfare Organisations – 10 March 2016