Tax exempt status may be awarded to a non-profit organisation (NPO) that solely or primarily undertakes public benefit activities with a philanthropic or altruistic intent.
An NPO that has been granted tax exempt status (commonly referred to as a public benefit organisation or PBO) is generally exempt from income tax. Certain approved PBOs may also issue section 18A certificates to donors. A section 18A certificate entitles the donor to claim a tax deduction, up to a threshold.
Tax exempt status is desirable for encouraging donations. South Africa has a donations tax regime. After the threshold is breached, which in the case of individuals is R100 000 per annum, donations tax is payable by the donor at a rate of 20% (where the aggregate donations do not exceed R30m). However, donations made to a PBO are not subject to donations tax and do not count towards determining whether the donor’s threshold has been reached.
The starting point in ascertaining if an NPO may apply for tax exempt status is determining whether or not the NPO carries on at least one public benefit activity. Part I of the Ninth Schedule to the Income Tax Act, 1962 contains the full list of activities that are designated public benefit activities. Not all good deeds fall within this list. The public benefit activities range from welfare and humanitarian, education to healthcare, housing, cultural to religion, conservation, sport and research to providing funding and resources. Typical examples of public benefit activities include the provision of disaster relief (think Gift of the Givers), providing healthcare services to poor and needy persons, building and equipping clinics and crèches, awarding scholarships and bursaries, promoting the arts and protecting the natural environment. The list is fairly static and has not been updated or amended in years.
If an NPO’s activities do not fall under of one of those in the list of public benefit activities, the NPO is not entitled to tax exempt status. The consequence is that a donor making a donation to the NPO will be subject to the donations tax regime. It matters not that the NPO is engaged in good works, what matters is that the good works fall within the list of designated public benefit activities and has PBO status.