Public Benefit Organizations and Tax
Helping clients structure their organizations is important for their financial health and tax compliance. One option is a Public Benefit Organization (PBO). This type of organization provides tax benefits while supporting a public cause. Knowing about PBOs can help you guide clients in making good decisions for their non-profit organizations (NPOs).
Registering as a Public Benefit Organization (PBO) offers important tax benefits. These benefits can help both the organization and its donors financially. However, it is essential to know that these benefits have specific rules. Following these rules is necessary to stay compliant and avoid legal problems.
As a professional advisor, you play a key role in helping clients register as a PBO. By guiding them through the steps, you ensure they meet legal requirements.
You also help them understand what being a PBO means. This includes teaching them about activities that qualify for PBO status.
Helping your clients with PBO registration can empower them to make a bigger impact in the community. Recognizing them as a PBO can help attract more donations through tax benefits.
They can also secure grants and engage in fundraising activities that other factors may limit. This financial support allows them to expand their programs and reach a wider audience.
What steps should a Non-Profit Organization take to become a Public Benefit Organization?
A non-profit organization (NPO) can become a public benefit organization (PBO) by meeting certain criteria set by regulators. This status is important because it offers benefits like tax exemptions. These exemptions can help the organization better serve its mission.
However, many people mistakenly believe that all NPOs automatically get these tax exemptions. In truth, not every NPO is a PBO, and the requirements for this status are strict.
To start, an NPO must focus on public benefit activities (PBAs) to gain recognition as a PBO. People usually define these activities as those that help the public and improve society.
The NPO cannot focus on making a profit. Examples of NPOs are religious groups, daycare centers, and community health clinics. These clinics offer free medical services in low-income areas.
To be eligible for PBO status, an organization must:
- Be a non-profit organization registered in South Africa, like a non-profit company or trust.
- Perform one or more public benefit activities found in the Ninth Schedule of the Income Tax Act.
- Submit the application form (EI1) to SARS. Include supporting documents like the founding document, such as a trust deed or memorandum of incorporation.
- Follow the rules in the founding document. These rules must meet the requirements of Section 30 of the Income Tax Act. This includes having at least three unrelated fiduciaries.
Advantages for PBOs
1) Tax-Free Income Provision (Section 10(1)(cN))
Approved PBOs do not have to pay income tax on their receipts and accruals. This applies if these funds directly relate to their public benefit activities. As a result, income from donations, grants, and fundraising is tax-free. This helps them maximize the funds available for their public benefit work.
PBOs should recognize that tax authorities may still tax income from business activities not related to their goals. If a PBO makes money from trading or business activities outside its goals, this income might be taxable. If a PBO runs a community library, it might sell donated books to make money.
2) Donations Eligible for Tax Deduction (Section 18A)
PBOs can ask SARS for extra approval under Section 18A. This allows them to give tax-deductible receipts for donations.
This is a strong incentive for donors. They can lower their taxable income by donating to a Section 18A-approved PBO. For example, a business that donates R10,000 to an approved education PBO can deduct that amount.
For example, a donor gives R10,000 to a PBO that runs a feeding scheme for the homeless. If the PBO receives approval under Section 18A, the donor can deduct the donation from their taxable income. This helps lower their tax bill.
3) Relief on Capital Gains Tax (CGT)
In certain circumstances, individuals and organizations may overlook the capital gains that Public Benefit Organizations (PBOs) generate. A PBO usually defines itself as a group that helps the public. It focuses on activities that help the community instead of making a profit for itself. These organizations often focus on various sectors, including education, healthcare, environmental conservation, and social services.
One important aspect of PBOs is their ability to hold and manage assets. People use these assets for activities that benefit the public. For example, a PBO might own land meant for education, like a school or a community learning center.
When a PBO decides to sell this land, it may make a capital gain. This gain is the profit from selling an asset that has increased in value over time.
4) Relief from Additional Taxes
Some taxes may not apply to Public Benefit Organizations (PBOs). This can greatly help them operate and achieve their goals. Specifically, these exemptions include donations tax, estate duty, and transfer duty on property purchases.
People or companies can give money or assets to a Public Benefit Organization (PBO) without paying donations tax. We call this an exemption from donations tax. This encourages more generous giving.
Donors can be sure that their contributions will go directly to the organization’s activities. Tax liabilities will not reduce their donations.
The exemption from estate duty lets the assets of deceased people go to PBOs without paying taxes. This can be particularly beneficial for PBOs that rely on bequests and legacies as a source of funding.
5) VAT Implications
PBOs defined as welfare organizations under the VAT Act can claim input VAT on their purchases. This is true even if they do not charge VAT for their services. This rule offers important financial help, especially for groups like disaster relief organizations that buy many supplies.
PBOs that are not welfare organizations must register for VAT if their taxable supplies exceed the threshold. For example, think of a charity that gives school supplies and scholarships to needy students. By registering as a PBO, this charity gains tax exemptions. It can also provide donors with tax incentives through Section 18A certificates, which encourages more donations.
Adherence and Submission of PBOs
Once approved as a PBO, the organization must submit an annual income tax return (IT12EI). This helps SARS check if they follow tax laws. Complying with PBO rules is important. Not following these rules can lead to penalties or losing PBO status.
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