Delecia Venter - Tax Director | PKF Port Elizabeth

A Public Benefit Organisation (PBO) is a non-profit organisation whose sole or principal objects are to carry out one or more public benefit activities with altruistic or philanthropic intent. These public benefit activities include:

• Welfare and Humanitarian Services
• Health Care Services
• Education and Development Services
• Conservation, Environment and Animal Welfare Services
• Land and Housing

For an organisation (trust, non-profit company or association) to enjoy the preferential tax treatments (exemption from income tax) under section 10(1)(cN) of the Income Tax Act, it must be formally approved by SARS as a PBO in terms of section 30 of the Income Tax Act.

SARS has ramped up its oversight on PBO compliance to ensure that PBO’s do not abuse its tax-exempt status afforded to them. This notable increase in compliance requirements includes:

• The introduction of third-party reporting (IT3(d)) whereby PBO’s with approved section 18A status have to disclose to SARS all section 18A donation certificates issued during a tax year.
• Obtaining of an independent audit certificate to confirm that an approved section 18A PBO conducting both Part I and Part II public benefit activities as outlined in the Ninth Schedule of the Income Tax Act, has correctly issued and ring-fenced the section 18A donation certificates to Part II public benefit activities only.

Recently, we have noted that SARS’s area of focus has turned to the alignment of a PBO’s constitution, founding document or trust deed with the provisions of section 30 of the Income Tax Act during a SARS verification process. An approved PBO is required to ensure its constitution, founding document or trust deed is updated to give effect to the provisions of section 30 of the Income Tax Act. Failure to comply may lead to further scrutiny by SARS or withdrawal of its tax-exempt status, which could expose an organisation to significant tax liabilities. SARS’s PBO approval letters generally grant an approved PBO anywhere between 6 and 12 months to submit an updated constitution, founding document or trust deed to the SARS Tax Exemption Unit. The approval letter specifies what amendments are required to the constitution, founding document or trust deed.

If you are unsure, a constitution, founding document or trust deed of an approved PBO should include specific clauses that reflect the requirements of section 30 of the Income Tax Act such as:

• At least three unconnected persons will accept fiduciary responsibilities for the PBO, and no single person directly or indirectly will control the organisation’s decision-making powers.
• Funds will be used solely for the objects for which the PBO was established.
• No activity will directly or indirectly promote the economic self-interest of any fiduciary or employee of the organisation.
• Funds will not be distributed to any person, other than in the course of undertaking its public benefit activity.
• A dissolution clause requiring that the remaining assets of the PBO must be transferred to:
  • Another approved PBO.
  • Any other institutions exempt from payment of income tax whose sole or principal object is to carry on any public benefit activity; or
  • Any department of state or administration in the national or provincial or local sphere of government.
• The activities of the organisation are to be carried on in a non-profit manner and with an altruistic or philanthropic intent.
• The PBO will not knowingly be involved any transaction, operation or scheme intending to reduce, postpone or avoid its liability for any tax, duty or levy.
• No resources will be used, directly or indirectly, to support advance or oppose any political party.
• Remuneration paid to any employee, office bearer, member or other person will not be excessive, nor will it economically benefit any person in a manner which is not consistent with its objects.
• All public benefit activities carried on by the PBO will be for the benefit of, or widely accessible to, the general public at large, including any sector thereof, other than small and exclusive groups.

This list is not exhaustive, but merely a guide to some of the key clauses necessary to align the governing documents with section 30 of the Income Tax Act.

It is advisable that long standing approved PBO’s review their constitution, founding documents, or trust deeds to ensure alignment with the PBO requirements in section 30 of the Income Tax Act. Similarly, newly approved PBO’s are encouraged to amend its constitution, founding documents, or trust deed per its SARS approval letters and submit to their updated documents to the SARS Tax Exemption Unit.

Don’t delay, please contact your nearest PKF office for assistance on reviewing your PBO governing documents to ensure your PBO is fully complaint.