Is PBO approval important for South African non-profits?
Over the years of consulting in the non-profit sector, we have frequently encountered organisations which have never applied for PBO approval or income tax exemption with SARS.
The reasons provided for not having done so are often based on false beliefs such as:
|All non-profits are automatically income tax exempt.|
|All non- profits registered with the Department of Social Development as an NPO are tax exempt.|
|Religious, educational, and charitable organisations are automatically tax exempt.|
|PBO approval (registration) is only relevant to larger, more established organisations.|
|Income tax exemption and therefore PBO approval is not really necessary or beneficial.|
|The costs of application and compliance outweigh any potential benefits, so it is not worthwhile.|
What is a PBO approval?
PBO is another one of the acronyms that abound in the non-profit sector. PBO stands for Public Benefit Organisation and is defined in Section 30 of the Income Tax Act. The Act goes on to confer certain taxation benefits and concessions, including partial income tax exemption, on approved PBO’s.
In terms of section 30, in order to be considered for approval as a PBO, there are a number of conditions that must be met. Amongst the conditions, the first is that the entity must be established as non-profit entity in South Africa, as either a non-profit company (NPC), trust, or voluntary association (VA), or as a branch of a foreign tax exempt non-profit entity. The entity must also carry out public benefit activities in a philanthropic manner.
Certain entities in SA that are not carrying out public benefit activities in a philanthropic manner may still obtain income tax exemption under another sub-section of Section 10 of the Income Tax Act. However, without exemption under Section 10 of the Income Tax Act, an entity will be a normal taxpayer and will not enjoy any of the benefits or concessions afforded to an approved exempt entity.
Note however that all entities, regardless of size, are required to register with SARS and complete an annual tax return, even if exempt under any sub-section of Section 10 of the Income Tax Act, including all approved PBOs.
There are, however, non-profit entities who appear to meet the main conditions for PBO approval, but yet choose to not to apply for PBO approval.
There may be valid reasons for this that include one or more of the following:
- An entity is entirely dependent on donations and has no other form of taxable income and therefore will never pay income tax, because donations received are exempt from income tax.
- An entity never actually makes a profit (surplus of income over expenditure, other than unspent donations) and therefore will never have taxable income or be actually liable for income tax.
- An entity does not receive or want to receive substantial donations from SA individual or entities, therefore, risk of incurring a donations tax* liability is not a concern.
- An entity carries out or plans to carry out substantial trading activities in competition with other tax paying entities, therefore acting like a taxable entity generating substantial taxable income.
What are the possible implications and downsides of not obtaining PBO approval?
- The entity will need to complete the IT14 income tax return every year.The IT14 return is far longer and more detailed than the IT12EI completed by exempt institutions.
- Sourcing grants and donation funding from local and international sources may be more challenging.
- International donor agencies may require evidence of local income tax exemption status, which PBO approval provides.
- Local donors are limited in their giving unless to an approved PBO, due to the donations tax* regulations.
- There is no exemption on estate duty related to bequests to the entity, unless it is an approved PBO.
- Income, other than genuine donations, may be fully taxable and will not enjoy any of the exemptions and concessions available to PBOs.
- Passive income such as interest and dividend income will be fully taxable, whereas this income is exempt to an approved PBO.
- Trading income (including income from fundraising events) will be fully taxable (after deduction of related expenditure). No exemptions provided to an approved PBO will apply, including the exemption of R200 000 or 5% of total annual receipts and accruals, whichever is the greater, against trading income.
- Property ownership and investments will have additional implications:
- Purchases and transfers of shares are subject to the usual transfer and security taxes, which are not payable by a PBO.
- Interest and dividend income are subject to normal income and withholding taxes, whereas for a PBO they are exempt.
- There are no concessions on transfer duty unless the property is purchased by an approved PBO to be used substantially for its public benefit activities.
- Rental income is fully taxable after deduction of related expenditure and no exempt portion applies.
- Any profit on the sale of assets, such as, investments (shares), property (land and buildings), plant or equipment (computers, etc.) will be subject to Capital Gains Tax (CGT), whereas PBOs enjoy certain special concessions and benefits.
- The VAT Act provides some concessions and benefits to associations not for gain which may still be available regardless of PBO approval.
- Certain approved PBOs are also afforded exemption from SDL (Skills Development Levy).
We urge you to carefully consider a decision not to apply for PBO approval, whether your underlying reason is VALID or FALSE. The loss of benefits and concessions, as described above, could be significant to your organisation. A delayed application for approval could result in penalties and tax liabilities relating the years prior to application if the organisation has failed to complete the correct annual tax return and to fully declare taxable income to SARS.
CMDS can assist you to make an informed decision. Please contact us for an appointment to discuss your organisation’s situation.