There are more than 230 000 registered Non-Profit Organisations (NPO’s) 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 NPO’s (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 NPO’s 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 NPO’s, and the average proportion of CSI funding directed to NPO’s was 54 percent.

Nonetheless, many NPO’s 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 NPO 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.

VAT claims are one of the biggest money losses for NPO’s.  Most organisations are unaware of the potential VAT benefits available to them or have been incorrectly advised...

When NPO’s do obtain advice from finance professionals, they sometimes present conflicting opinions, because they are not necessarily trained in specific specialised tax disciplines.  We have found that there is a high degree of misinformation in the sector.  Legislation applicable to profit-making entities is often incorrectly applied to NPO’s. 

Certainly there are tax advantages that Non-Profits are not reaping the benefits of.  VAT claims are one of the biggest money losses for NPO’s.  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 NPO’s – yet it is essential that they are informed and better positioned to understand and navigate the accounting, statutory and tax landscape impacting on NPO’s.

Challenging Areas for NPO’s

South African NPO’s can consist of one of three legal entities - a Non-Profit Company (NPC), 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 NPO’s, are generally unheard of. These are not concepts which accountants come across within their roles very often.

With sustainability and income generating projects under the spotlight, there is also a myth that NPO’s 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.

Even to most Chartered Accountants, many terms such as Public Benefit Activities and Foreign Donor Funded Projects etc, that are applicable to NPO’s, are generally unheard of.

Section 18A compliance is another area which most NPO’s tend to get wrong, with many NPO’s 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 S18A certificates.  This must be referenced in the 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 – 18A PBO’s must also disclose specific 18A receipts data to SARS as part of the recently introduced mandatory IT3(d) submissions. Further, independent audit certificates confirming the correct usage of 18A donations is required for dual activity PBO’s (i.e. organisations performing both 18A and non 18A activities).

Tax Savings and Income

An important point is that PBO’s 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 these agree with the payroll, 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.

Inyathelo and Turning Point Chartered Accountants

The mission of Inyathelo, an NPO founded in 2002, is to help build a strong, stable civil society and democracy in South Africa by contributing to the development of sustainable organisations and institutions. Its offerings for NPO’s include financial reporting and tax workshops, in collaboration with Turning Point Chartered Accountants (TPC), a multi-disciplinary audit and consulting firm geared at supporting NPO’s country-wide. Inyathelo first introduced these workshops almost 11 years ago and has collaborated closely with TPC’s Director of Tax - Ridhwaan Khan CA(SA), HDip (Tax), HDip (Vat), Director of Risk & Compliance - Reza Amra CA(SA) and Director of Audit & Reporting - Farida Lavangee CA(SA), RA in rolling out capacity building programmes.

• Authors: Inyathelo Finance Director - Soraya Joonas, and Turning Point Chartered Accountants (TPC) Director of Tax - Ridhwaan Khan CA(SA), and Director of Risk & Compliance - Reza Amra CA(SA)

• Sources: Civil Society in South Africa study 2017, Trialogue Business in Society Handbook 2018 and 2019.

• To find out more visit http://www.inyathelo.org.za and www.tpcsa.co.za
  

• Image credit: Financials by Nick Youngson CC BY-SA 3.0 Pix4free