There are around 230 000 registered not for profit organisation (NPOs) in South Africa, and the numbers are growing rapidly. This is driven by several factors including a desire to provide social services to under-resourced communities, and also to drive social justice and hold the state to account in delivering the promises of the Constitution.
The Civil Society in South Africa study in 2017, an initiative of the Funding Practice Alliance, and funded by the National Lotteries Commission, revealed that the majority of South African NPOs are newly-established and ‘micro’ (annual income less than R50,000) to ‘small’ (annual income greater than or equal to R50,000 but less than R500,000).
Worryingly, according to the Trialogue Business in Society Handbook 2018 (Overview of non-profit organisations in South Africa) almost half of NPOs (49%) had six months or less of operating costs in reserve.
NPO funding and challenges
The reality of an economic downturn and a change in donor funding focus – less support from international funders – means that many NPOs are operating under greater financial constraints.
South African companies remain the largest source of NPO income. According to the 22nd edition of the annual Trialogue Business in Society Handbook, companies in South Africa spent R10.2 billion on corporate social investment in 2019. Ninety percent of surveyed companies gave to NPOs, and the average proportion of CSI funding directed to NPOs was 54 percent.
Nonetheless, many NPOs face growing challenges in covering core costs: They are under-resourced and highly dependent on single sources of funding support. This situation is exacerbated by limitations in resource mobilisation skills and a need for capacity building. While some incorporate innovative funding models and a variety of resource mobilisation strategies, these organisations are in the minority.
They need advice in the areas of non-profit budgeting and planning, accounting, analysing, reporting and preparing for the audit process. They also need to address financial governance, ethics and financial sustainability, and learn how to set up and run a non-profit finance unit.
When NPOs do obtain advice from finance professionals, they sometimes present conflicting opinions, because they are not necessarily trained in specific specialised tax disciplines. There seems to be a high degree of misinformation in the sector. Legislation applicable to profit-making entities is often incorrectly applied to NPOs.
Certainly there are tax advantages that non-profits are not reaping the benefits of. VAT claims are one of the biggest money losses for non-profits. Most organisations are unaware of the potential VAT benefits available to them or have been incorrectly advised as to whether they can or cannot register for VAT.
Clearly, being informed and up to date can make the difference between a healthy organisation and one that is struggling to survive. Accounting and tax terms, registration and processes can be confusing for many NPOs – yet it is essential that they are informed and better positioned to understand and navigate the accounting, statutory and tax landscape impacting on NPOs.
Challenging areas for NPOs
South African NPOs can consist of one of three legal entities: a Non-profit Company, a Non-profit Trust or a Voluntary Association. It is optional for these organisations to apply to the NPO Directorate (via the Department of Social Development) for NPO status. In turn, these organisations, if applicable, can apply to the SARS to obtain public benefit organisation (PBO) status.
Even to most Chartered Accountants, many terms such as Public Benefit Activities and Foreign Donor Funded Projects etc., that are applicable to NPOs, are generally unheard of. These are not concepts which they come across within their roles very often.
With sustainability and income generating projects under the spotlight, there is also a myth that NPOs are prohibited from trading. As a result, many NPOs establish separate entities within which the trading operations are housed, only to then pay income tax on the taxable income, thus not taking full advantage of the potential income tax exemption the PBO status offers. A PBO whilst trading, needs to only ensure that its sole or principal object still remains the conducting of one or more Public Benefit Activities in a non-profit manner.
Section 18A compliance is another area which most NPO’s tend to get wrong, with many NPOs issuing (and service providers requesting) Section 18A certificates for services rendered on a pro bono basis. Section 18A(1) of the Income Tax Act is quite clear in this regard in that it is only applicable to “bona fide donations made by the taxpayer in cash or of property given in kind”.
Obtaining a PBO status does not automatically entitle an organisation to issue 18A certificates. This must be referenced in their PBO letter from SARS. A PBO must thus ensure that no 18A certificates are issued for services received in kind; for example, free or discounted office rentals (which is the provision of space and therefore regarded as a service).
Further, a “donation” which leads to some form of direct identifiable benefit back to the donor (e.g. in the form of advertising on their behalf), is not a true donation and may not qualify for an 18A certificate.
Compliance is also critical. Organisations must disclose how many 18A receipts along with the Rand value of certificates issued in the financial year. Further, independent audit certificates confirming the correct usage of 18A donations is required for dual activity PBOs (i.e. organisations performing both 18A and non 18A activities).
Tax savings and income
An important point is that PBOs are not exempt from taxes in their entirety. For example, PBO’s are exempt from income tax only on non-trading and non-business income and in limited instances, certain of their trading income. An assessment of taxable income is therefore required (like every other business) and an annual income tax return submission is also mandatory.
Many NPOs outsource taxation services but organisations should be encouraged to take ownership of these tax processes i.e. make sure they are signing off on their VAT returns, check the PAYE submissions in detail to ensure that they agree with the accounts, ensure that (although they may be income tax exempt), they have reviewed and approved the information that is being submitted in the annual income tax return.
It is critical that an organisation understands these processes as ultimately, the liability rests with the organisation and not the service provider. These processes should be driven internally and compliance (updating details and governance structures) is key information that should be provided to SARS.
Sources: Civil Society in South Africa study 2017, Trialogue Business in Society Handbook 2018 and 2019.
Reza Amra CA (SA) is Turning Point Director, Ridhwaan Khan CA (SA) HDip (Tax) Turning Point Director of Tax and Soraya Joonas – BSc Honours (Acc), ACCA L2, MBA is Inyathelo Finance Director