The legal framework for not-for-profit, nongovernmental organizations (“NGOs”) in South Africa consists of four primary tiers.
At the first tier, statutory and common law recognize the following NGO legal forms:
Voluntary associations;
Non-Profit Trusts; and
Section 21 Companies limited by guarantee (sometimes called “associations incorporated not for gain”)
A second tier of legislation allows any of these organizational forms to apply for the status of “Non-Profit Organization.” Among other requirements, a Non-Profit Organization cannot distribute profits, and it must meet certain governance criteria.
A third legislative tier enables a Non-Profit Organization to apply for the status of “Public Benefit Organization.” Among other requirements, the organization's sole purpose must be to undertake one or more public benefit activities, carried out in a non-profit manner and with an altruistic or philanthropic intent. Public Benefit Organizations are restricted in their ability to engage in political activities but not in lobbying. They are entitled to a broad range of tax benefits, including income tax exemptions and exemptions from the donations tax.
Finally, a fourth legislative tier allows Public Benefit Organizations to apply for the right to receive tax-deductible donations.
Other not-for-profit legal forms, which are outside the scope of this Note due to their limited interaction with U.S. grantmakers, include trade unions, employers' organizations, political parties, and so-called Friendly Societies established for the benefit of their members.
The Income Tax Act provides two major benefits to the not-for-profit sector: tax exemption, for organizations that qualify as Public Benefit Organizations; and donor deductibility, for contributions to those Public Benefit Organizations that carry out certain specified Public Benefit Activities (“Public Benefit Organizations with Donor-Deductible Status”). Public Benefit Organizations are also entitled to benefits with regard to donations tax, estate duty, transfer duty, and the skills development levy. Finally, certain organizations are eligible for Value Added Tax preferences.
South Africa and the United States have entered into a double taxation treaty.
The voluntary association is the most common legal form for not-for-profit organizations in South Africa. No office of registry exists for voluntary associations. Forming a voluntary association requires only that three or more people agree to achieve a common objective, primarily other than making profits. The agreement may be oral or written, though it is customary for the agreement to take the form of a written constitution. Voluntary associations are a product of the common law and not regulated by statute. This can be confusing, because the common law is not easily accessible and sometimes is conflicting. Voluntary associations may be classified as follows:
Corporate bodies under the common law, known as “universitas”; and
Bodies that remain unincorporated at common law, known as "non-corporate associations."
When deciding how to classify a voluntary association, a court will consider the organization's constitution as well as its nature, objectives, and activities. An organization generally must meet three requirements in order to be a universitas:
It must be structured to continue as an entity notwithstanding a change in membership;
It must be able to hold property distinct from its members; and
No member can have any rights, based on membership, to the property of the association. If all of these requirements are met, the organization will be deemed a universitas with legal personality.
Non-Profit Trusts
Trusts in South Africa are governed under the Trust Properties Control Act and common law. A trust can be established for private benefit or for a charitable purpose. In order to determine whether a trust qualifies as a charitable trust under South African law, a grantmaker must look to the trust deed.
A trust is created when property is transferred by a trust deed; the trust then manages the property for the benefit of others or for the achievement of a particular goal. The property can be transferred by written agreement, testamentary writing, or court order. The person who administers the trust property is called a trustee.
[TPCA §1] A court official, called a Master of the High Court, has jurisdiction over a trust if the majority of the trust property is situated in his or her jurisdiction. [TPCA § 3] The Master holds the trust instruments, oversees the appointment of trustees, and polices the trustees' performance with respect to the trust property. [TPCA § 4; §§ 6-7; §§ 16-20]
A trust does not have separate legal personality, though it may enter into contracts in its own name if the trust deed so allows. All rights and responsibilities vest collectively in the Trustees.
Section 21 Companies
The South African Companies Act provides for an “association not for gain in terms of Section 21.” [Companies Act §21] Such an organization, commonly called a “Section 21 Company,” must have at least seven members, each of whom makes a guaranteed commitment in the event of the institution's financial failure (although such commitment may be purely nominal). The primary purpose of a Section 21 Company must be to promote religion, the arts, science, education, charity, recreation, any other cultural or social activity, or communal or group interests. [Companies Act §21(1)(b)] A Section 21 Company must register with the Registrar of Companies. [Companies Act §63(1)] The records of the Registrar are open to the public. Section 21 Companies have legal personality and therefore offer limited liability to their members and directors. They can enter into contracts and sue and be sued in their own name.
Branches of foreign not-for-profits in South Africa can be registered under Section 21A of the Companies Act. [1]
It includes certain internal governance provisions in its constitution [NPO Act §12(2)].
An organization seeking NPO status must apply to the Directorate for Nonprofit Organisations. If the organization qualifies, the Directorate issues a certificate and registration number. To retain this status, the organization must submit narrative and financial reports to the Directorate annually.
Registered Public Benefit Organization
To qualify as a Public Benefit Organization (PBO), an organization must comply with all of the following requirements of Section 30 of the Income Tax Act:
It must be a Section 21 Company, a charitable trust, a voluntary association, or “any agency or branch within the Republic of any company, association, or trust incorporated, formed, or established in terms of the laws of any country other than the Republic that is exempt from tax on income in that other country.” [Revenue Laws Amendment Act of 2006§24(a)(ii)]
Its objectives must be to carry on one or more public benefit activities; it cannot pursue any other objectives.
The activities must be carried on in a not-for-profit manner and with altruistic or philanthropic intent. No activity can promote the economic self-interest of any fiduciary or employee, other than reasonable remuneration to employees or officers.
At least 85 percent of such activities, measured either by cost or by time, must benefit persons in South Africa. Under ITA §30(1)(b)(iii), out-of-country activities can be offset by out-of-country donations. Specifically, an organization can subtract donations received from non-residents (as well as receipts and accruals derived directly or indirectly from those donations) from costs incurred to benefit persons outside the Republic, when determining whether its in-country activities fall below the 85 percent threshold.
Finally, each of the organization's activities is for the benefit of, or widely accessible to, the general public at large, including any sector thereof (other than small and exclusive groups).
The qualifying activities appear in the first part of the Ninth Schedule to the Income Tax Act. The Minister of Finance may, however, determine additional activities from time to time. At present, more than 60 activities qualify. [ITA, Schedule Nine, §1-11] They fall under the following headings:
Welfare and Humanitarian;
Health Care;
Land and Housing;
Education and Development;
Religion, Belief or Philosophy;
Cultural;
Conservation, Environment and Animal Welfare;
Research and Consumer Rights;
Sport;
Providing of Funds, Assets or Other Resources; and
General.
Additional PBO requirements are discussed below.
Organizations seeking PBO status must apply to the Tax Exemption Unit of the South African Revenue Services, which also has on-going supervisory powers over PBOs.
Specific prohibitions against private inurement would be included in a voluntary association’s founding documents. In general, directors of voluntary associations are bound by the common law fiduciary duty to act in good faith and avoid conflicts of interest in their dealings with the organization.
Trusts
Generally, the terms of a trustee’s remuneration are provided in the instrument establishing the trust. If the instrument is silent in this regard, the trustee will receive reasonable compensation. [TPCA §22] The Master will set the amount in the event of a dispute. An auditor of a trust's accounts must report any apparent material irregularities in the accounts to the trustee. [TCPA §15] The Trust Property Control Act requires trustees to “act with the care, diligence and skill which can reasonably be expected of a person who manages the affairs of another.” [TPCA §9(1)] A trustee's improper accounting in administering the trust violates this fiduciary duty and constitutes grounds for removal. [TPCA §20(2)(e)]
Section 21 Companies
In its articles of association, a Section 21 Company must prohibit the transfer, in any form, of the association’s income or property to its members, a holding company, or any subsidiaries that it may have. A Section 21 Company may, however, pay its members, officers, or employees reasonable remuneration for services rendered. [Companies Act §21(2)(a)]
Registered Non-Profit Organizations
In order to register under the NPO Act, a non-profit organization must state in its constitution that its income and property are not distributable to its members, officers, or trustees, except as reasonable compensation for services rendered. [NPO Act/1997 §12(2)(c)]
Registered Public Benefit Organizations
In order to obtain approval from the Commissioner under § 30 of the ITA, an organization cannot conduct any activity intended directly or indirectly to promote the economic self-interest of any fiduciary or employee of the organization, other than through reasonable remuneration. In addition, the organization must not distribute any of its funds to any person, other than in the course of undertaking a public benefit activity; and it must use its funds solely for the objective for which it has been established or for certain investments.
If a voluntary association prohibits its members, directors, or employees from having a proprietary interest in the organization's assets, the prohibition will appear in the organization’s founding documents.
Trusts
The Trust Property Control Act provides that trust property may not form part of the personal estate of a trustee, unless the trustee is also a beneficiary entitled to the property under the trust instrument. [TPCA §12] The trust documents identify the beneficiaries of the trust.
Section 21 Companies
The founding documents of a Section 21 Company must provide that the property of the organization, however derived, will be applied solely to the organization's main objectives. [Companies Act §21(2)(a)] Upon winding up, deregistration, or dissolution, a Section 21 Company must transfer any assets that remain after satisfying its liabilities to other association(s) and/or institution(s) pursuing similar objectives. [Companies Act §21(2)(b)]
Registered Non-Profit Organizations
The constitution of an organization registered under the NPO Act must provide that the members, officers, and trustees have no rights in the assets of the organization solely by virtue of being members, trustees, or officers. [NPO Act/1997 §12(2)(f)]
Registered Public Benefit Organizations
In order to register as a Public Benefit Organization under Section 30 of the Income Tax Act, an organization cannot accept any donation that is revocable at the donor’s request. Moreover, the donor may not impose conditions that could enable the donor or any person related to the donor to benefit, directly or indirectly, from the application of such donation. [ITA§(30)(3)(b)(iv)] In addition, the organization must apply its funds solely to the objectives for which it was formed. [ITA§(30)(3)(b)(iv)]
The founding documents would contain any provisions governing the transfer of assets of a voluntarily dissolving voluntary association, whether a universitas or an informal voluntary association. A voluntary association can also be involuntarily dissolved by an order of the High Court upon application of an interested party. In that case, the association’s net assets will be transferred to an organization with a similar purpose.
Trusts
In limited situations, the trustee, or a person the court finds to have a sufficient interest in the trust property, can petition the court to vary trust provisions or to terminate the trust altogether. These situations include: where the terms of the trust hamper the achievement of the founder’s objective, prejudice the interests of trust beneficiaries, or are against the public interest. [TPCA §13] No provision in the Trust Property Control Act deals explicitly with the treatment of assets upon termination of a trust.
Section 21 Companies
Upon dissolution of a Section 21 Company and settlement of all outstanding liabilities, any remaining assets must be transferred to association(s) or institution(s) having an objective similar to the main objective of the dissolving company. [Companies Act §21(2)(b)] The transferee is generally designated by the members of the Section 21 Company at dissolution or before. If the members do not make such a designation, the matter is left to the court overseeing the dissolution.
Registered Non-Profit Organizations
To register under the NPO Act, the organization must require in its constitution that any assets remaining upon dissolution or winding up will be transferred to another non-profit organization with similar objectives. [NPO Act/1997 12(2)(o)] Failure to transfer the assets to such an organization may result in a fine, imprisonment, or both for the person responsible. [NPO Act/1997 §30]
Registered Public Benefit Organizations
In order to obtain approval from the Commissioner under Income Tax Act Section 30, an organization must provide in its constitution that any assets remaining upon dissolution or winding up must be transferred to: (1) a similar public benefit organization approved under this section; (2) an institution, board, or body which is exempt from tax under the provisions of section 10(1)(cA)(i) of the ITA, and which has as its principal objective any public benefit activity.
Voluntary associations can engage in any lawful activities in pursuit of a legitimate objective, as long as those activities are not for gain.
Trusts
Trustees can engage in any lawful activities as long as they remain within the bounds of their fiduciary duty to the trust beneficiaries.
Section 21 Companies
Section 21 Companies can carry on any activities to promote religion, arts, science, education, charity, recreation, any other cultural or social activity, or communal or group interests. [Companies Act §21(1)(b)]
Registered Non-Profit Organizations
The NPO Act does not address permissible activities. Because a registered non-profit organization will ordinarily be a trust or a Section 21 Company, the laws governing those legal forms and the tax laws provide guidance on permissible activities. A voluntary association's founding documents will specify activities.
Registered Public Benefit Organizations
The Tax Act defines public benefit activity by listing some 67 permissible activities (see Section IV, above, for further discussion).
2. Economic Activities
Voluntary Associations
An association can conduct subsidiary activities to make some profits, as long as its main objective is not the acquisition of gain.
Trusts
Trusts are generally flexible structures that can be used for a variety of purposes. The purpose of a discretionary trust must be lawful and sufficiently certain. If a trust has a mainly charitable purpose, the fact that it has a noncharitable subsidiary purpose will not invalidate it.
Section 21 Companies
A Section 21 Company can conduct subsidiary activities to make some profits, as long as its main objective remains the promotion of religion, the arts, science, education, charity, recreation, any other cultural or social activity, or communal or group interests.
Registered Public Benefit Organizations
The law explicitly limits the extent to which the economic activities of organizations approved under Section 30 of the Income Tax Act will be tax exempt. The receipts and accruals from such undertakings or activities shall be exempt from normal tax only if one of the following criteria applies:
A) The undertaking or activity meets all of the following requirements:
It is integral and directly related to the sole object of the public benefit organization as contemplated in paragraph (b) of the definition of ‘public benefit organization’ in section 30;
Substantially the whole of its revenues are directed toward the recovery of its costs; and
It does not result in unfair competition in relation to taxable entities.
B) The undertaking or activity is of an occasional nature and substantially performed by uncompensated volunteers.
C) The undertaking or activity is approved by the Minister of Finance by notice in the Gazette, taking into account the following factors:
The scope and benevolent nature of the undertaking or activity;
The direct connection between the undertaking or activity and the sole purpose of the public benefit organization;
The profitability of the undertaking or activity; and
The economic distortion that may result from allowing a tax-exempt organization to carry out the undertaking or activity.
D) The undertaking or activity does not qualify under any of the above criteria, and the revenues it generates do not exceed the greater of the following:
5 per cent of the public benefit organization's total receipts and accruals during the relevant year of assessment; or
An Amendment to the Income Tax Act passed in 2006 removed existing restrictions on investments made by PBOs; PBOs are now allowed to invest their funds only subject to restrictions that may exist in the common law. [RLAA§24(d)(ii)]
The Income Tax Act restricts PBOs from using their resources to directly or indirectly support, advance, or oppose any political party. [ITA § 30(3)(h)] South African law does not restrict the political activities of organizations not registered as PBOs. Moreover, the law does not clearly restrict lobbying by any organizations.
The Constitution of the Republic of South Africa (1997) stipulates that neither the State nor any person may unfairly discriminate against anyone on the basis of race (among other grounds). [Constitution §§ 9(3) and (4)] Section 29 of the Constitution establishes an individual’s right to receive a basic education and to further his/her education. [Constitution §29(1)] The right to receive a public education in the language of one’s choice, where reasonably practicable, is also guaranteed. [Constitution §29(2)] The Constitution further provides that everyone has the right to establish and maintain independent educational institutions, so long as those institutions do not discriminate on the basis of race. [Constitution §29(3)(a)]
South African law does not restrict legal entities or foreign persons from serving as members, promoters, directors, or trustees of not-for-profit organizations. Therefore, it is possible for a South African NGO to be controlled by a for-profit entity or by an American grantor charity (which must be disclosed in the affidavit).
In order to be eligible for exemption from income tax and certain other taxes, an organization first must qualify as a Public Benefit Organization under Section 30 of South Africa’s Income Tax Act, as summarized in Section IV, above. Eligibility for tax exemption further requires the PBO to satisfy additional conditions on its governance and operations. For example, the organization’s constitution must provide that at least three unrelated persons have fiduciary responsibility for the organization, and that no single person can directly or indirectly control the decisions relating to the organization. [ITA § 30(3)(b)(i)] In addition, the law limits the extent to which the business activities of the organization are tax exempt (see section V(D)(2), above). [ITA §10(1)(cN)] Upon the organization’s termination, its assets must be transferred to similar approved PBOs or the state. [ITA § 30(3)(b)(iii))]
A PBO approved for exemption from income tax is also exempt from capital gains tax, donations tax, estate duty, stamp duty, transfer duty if the property will be devoted to public benefit activities, and, in certain cases, skills development levy. [Tax Exemption Guide for Public Benefit Organisations in South Africa at 11]
Other non-profit organizations
(that are not approved Public Benefit Organisations or exempted from paying tax elsewhere under Section 10 of the Income Tax Act)
are liable for income and other taxes and duties on the same basis as ordinary taxpayers.
B. Deductibility of Donations
An individual or company is entitled to deduct from taxable income a donation (in cash or in kind) to a Public Benefit Organization carrying out specified public benefit activities. These organizations are sometimes referred to as “Public Benefit Organizations with Donor-Deductible Status.” The donation must be supported by a receipt issued by the Public Benefit Organization, and it cannot exceed 10 percent of the taxable income of the taxpayer. [2]
The Public Benefit Activities approved by the Minister of Finance for purposes of Section 18A are set out in the Part II of the 9th Schedule to the Income Tax Act . Currently over 40 activities are approved. They fall under the following headings:
The Value Added Tax Act imposes a 14 percent tax on the value of goods or services supplied by a vendor, imported goods, or services provided by a resident supplier or one carrying out business outside of South Africa to a resident of South Africa who uses the services in South Africa. [VATA §7(1)]
The VAT Act confers certain benefits on organizations that qualify as "associations not for gain," "welfare organizations," or both. [VATA § 1] Qualifying organizations can claim the VAT they incur as input tax and, generally speaking, must pay output tax only when they charge for goods or services.
An "association not for gain" is defined as a religious institution or other society, association, or organization (including an educational institution of a public character), which is not carried on for profit and which is required to use any property or income solely to further its aims and objects. An association not for gain is treated much like any other business if it makes taxable supplies, but the following special provisions apply:
No output tax is payable on any “unconditional gifts” received, such as a club member's donation of money to cover the costs of new equipment for the club’s soccer team.
A VAT exemption applies to the sale of any donated goods or services, and to the sale of manufactured goods where donated goods and services constitute at least 80 percent of the value thereof.
Certain subsidies and grants received from National or Provincial Governments (public authority) are zero-rated.
Some associations not for gain also qualify as "welfare organizations," which entitles them to the benefits listed above plus additional ones. In order to qualify as a "welfare organization," an organization must:
Be an association not for gain;
Be exempt from tax in terms of section 10 (1) (cN) of the Income Tax Act; and
Carry on activities in the following categories:
Welfare and humanitarian;
Health care;
Land and housing;
Education and development; or
Conservation, environment, and animal welfare
Along with the benefits listed above for associations not for gain, a welfare organization is eligible for the following additional benefits:
Even where no charge is made for supplies, the organization can register for VAT and obtain input tax relief on its purchases.
A subsidy or grant received from the Government (or local authorities) related to welfare activities will be zero-rated.
As of 2006, tax exemption is granted to brances of foreign legal entities operating in South Africa, on the condition that they qualify for tax exemption in the country in which they are established. [RLAA§24].
[1] The Companies Act is currently being reviewed in its entirety by the Department of Trade and Industry and the first version of the new Companies Bill was published for public comment in February 2007.
[2] The Taxation Laws Amendment Bill, 2008 being considered by the South African Parliament proposes that this restriction be removed.
[3]
The Taxation Laws Amendment Bill, 2008 being considered by the South African Parliament proposes that if the branch of a foreign exempt charity dissolves, it must transfer its assets locally, as prescribed, if more than 15 percent of the receipts attributable to that to branch were derived from a South African source.
