Exempt Institutions Categories

Institution, Board or Body (established by Law)

Institution, board, or body established in terms of South African legislation and partially or fully funded through public resources. This excludes National, Provincial and Local Government.

These institutions, boards or bodies enjoy preferential tax treatment after they have been granted approval by the Commissioner and continue to comply with the relevant requirements and conditions as set out in the Act. Any institution, board or body approved by the Commissioner under section 10(1)(cA)(i) of the Act carrying on public benefit activities in Part II of the Ninth Schedule to the Act in South Africa may also qualify for approval under section 18A of the Act.

Section 10(1)(cA)(i) of the Income Tax Act, 1962 (the Act) provides an exemption from normal tax of –

• receipts and accruals of any institution, board, or body (other than a company as defined in the Companies Act, any co-operative, closed corporation, trust, water service provider).
• established by or under any law and which, in the furtherance of its sole or principal object-
  • conducts scientific, technical or industrial research.
  • provides necessary or useful commodities, amenities or services to the State (includes any provincial administration), or members of the general public; or
  • carries on activities (including the rendering of financial assistance by way of loans or otherwise) designated to promote commerce, industry or agriculture or any branch

Public institutions which are established in terms of South African legislation and partially or fully funded through public resources.

These include:

• Public institutions per the PFMA
• Public FET Colleges as defined in the Further Education and Training Colleges Act
• Universities as defined in the Higher Education Act.
• Public Hospitals or Public Health Care Establishments as defined in the National Health Act
• Public Schools as defined in Chapter 3 of the South African Schools Act
• Public Museums as defined in the Cultural Institutions Act
• Public Pension Funds created as per the Pension Funds Act

Any department of government approved by the Commissioner for purposes of Section 18A may issue a Section 18A receipt for any donation only to the extent that it will be used solely in carrying on any PBAs in Part II.

The updated guide provides general guidance on the exemption from income tax of qualifying institutions, boards or bodies under section 10(1)(cA)(i) of the Income Tax Act 58 of 1962 (the Act).

Private Companies Wholly Owned by Institutions, Boards or Bodies

Section 10(1)(cA)(i) and (ii) respectively provide an absolute exemption from income tax of the receipts and accruals (see 11) of any –

• institution, board or body established by or under any law;1 and
• company all the shares of which are held by any institution, board or body provided the operations of such company are ancillary or complementary to the object of the institution, board or body.

An institution, board or body envisaged in section 10(1)(cA)(i) may for various reasons establish a company whose operations are ancillary or complementary to the object of the institution, board or body. If that institution, board or body holds all the shares in such company, the receipts and accruals of that company will also be exempt from income tax if the requirements of section 10(1)(cA)(ii) are met.

Section 10(1)(cA) does not contain provisions restricting or prohibiting business or trading activities. All the operations of the wholly owned company, however, must be ancillary or complementary to the object of the institution, board or body. If the company is merely a trading entity operating, say, a hotel, holiday resort, service station, cinema, or carries on business as a debt collector for the sole financial benefit of the institution, board, or body, it will not qualify for the exemption under section 10(1)(cA)(ii). Examples of qualifying operations may include the development and maintenance of the South African national road system, the provision of development finance to small, micro and medium enterprises to stimulate growth and development of the economy, mining, housing finance or investments.

The Tax Exemption Guide for Companies Wholly Owned by Institutions, Boards or Bodies provides guidance on the Income Tax Exemption of Private Companies Wholly Owned by Institutions, Boards or Bodies.

Public Benefit Organisations

A Public Benefit Organisation (PBO) must meet the conditions and requirements contained in section 30 while the rules governing the preferential tax treatment of PBOs are contained in section 10(1)(cN).

The entity must be one of the following legal entity types:

• Non-Profit Company (NPC) registered with the Companies and Intellectual Property Commission (CIPC)
• Trust (Inter-vivos or Testamentary) registered with the Master of the High Court
• Association of Persons
• A Branch of a foreign tax-exempt organisation or an external foreign Company

The entity must have the sole or principal object is carrying on one or more public benefit activities, where (not full list):

• all such activities are carried on in a non-profit manner and with an altruistic or philanthropic intent.
• no such activity is intended to promote the economic self-interest of any fiduciary or employee of the organisation directly or indirectly, otherwise than by way of reasonable remuneration payable to that fiduciary or employee; and
• where each such activity carried on by that organisation is for the benefit of, or is widely accessible to the general public at large, including any sector thereof (other than small and exclusive group).

Section 10(1)(cN) provides for the exemption from normal tax of certain receipts and accruals of approved PBOs. Certain receipts and accruals from trading or business activities will nevertheless be taxable.  

Approved PBOs have the privilege and responsibility of spending public funds, which they derive from donations or grants, in the public interest on a tax-free basis. The donations or grants may be received from the general public or directly or indirectly from the State. It is therefore important to ensure that exempt organisations use their funds responsibly and solely for their stated objectives, without any personal gain being enjoyed by any person including the founders and the fiduciaries. 

Approved PBO’s must continue to comply with the Act and related legislation throughout their existence. This includes the submission of annual income tax returns, which enables the Commissioner to assess whether the approved PBO is operating within the prescribed limits of the relevant approval granted. The submission of annual returns also provides the Commissioner to determine whether the partial taxation principles must be applied to receipts and accruals derived from a trading activity or business undertaking which does not qualify for exemption.

An organisation which provides scholarships, bursaries and awards for study, research or teaching must comply with the conditions prescribed in Regulation R.302 (published in Government Gazette No. 24941 on 28 February 2003).

What is a public benefit activity (PBA)?

A PBA is any activity listed in Part I of the Ninth Schedule and any other activity determined by the Minister of Finance from time to time by notice in the Gazette to be of a benevolent nature, having regard to the needs, interests, and well-being of the general public.

The approved PBAs are grouped into categories each with specific activities that qualify as PBAs. Refer to Part I of the Ninth Schedule to the Income Tax Act for the comprehensive list of approved PBAs.

Recreational Clubs

Clubs are formed for the mutual benefit of members who contribute to share the cost of providing a collective benefit, namely, the social or recreational facility. The common objective of recreational clubs excludes personal financial gain of individual members. Under this principle, the sharing of expenses by various members joining together based on mutuality, does not generate additional taxable income for the recreational club and it is to this extent that clubs enjoy preferential tax treatment.

Sporting organisations qualifying for preferential tax treatment may be divided into two categories, namely –

• Recreational clubs; and
• Amateur sporting bodies generally approved as PBOs.

Although both categories qualify for exemption from income tax on certain of their receipts and accruals, they are approved under different sections of the Act, each section having its own requirements and conditions.

The Tax Exemption Guide for Recreational Clubs (Issue 5) provides general guidance on the approval by the Commissioner of a recreational club under section 30A; and partial taxation of approved recreational clubs under section 10(1)(cO) of the Income Tax Act 58 of 1962 (the Act).

Membership Associations and Professional Bodies

The Membership Associations and Professional Bodies are diverse in nature but have in common that they usually do not have a profit motive nor do they provide any monetary gain or material advantage for their individual members. The entities are membership based and exist largely (but not exclusively) for the benefit of their members. However, the approval under this section is limited to those entities that can demonstrate that substantially the whole of their funding is derived from their annual or other long-term members or from an appropriation by the government. 

Membership Associations

Membership Associations must meet the requirements set out in Section 10(1)(d)(iii) read with Section 30B of the Income Tax Act.

Membership Associations are based on the membership to pursue a common interest. Membership Associations includes Mutual Loan Associations, Trade Unions, Fidelity or Indemnity Fund, Trade Union (Registrar of Labour Relations at the Department of Employment and Labour), Chamber of Commerce, or Industries (or an Association of such Chambers), Mutual Loan Association, and Local Publicity Association.

Professional Bodies

Professional Bodies must meet the requirements set out in Section 10(1)(d)(iv)(bb) read with Section 30B of the Income Tax Act.

Professional Bodies include company, society, or other association of persons established to promote the common interest of persons, carrying on any particular kind of business, profession, or occupation.

Levy Membership Association (Home Owners Associations)

A Levy Membership Association (also known as a Home Owners Association) is an association of persons formed for managing the collective interests common to all its members in respect of expenditure applicable to the common immovable property.

These entities must meet the legal requirements set out in Section 10(1)(e)(i)(cc). The Interpretation Note 64 provides guidance on the interpretation and application of section 10(1)(e) that is applicable to the income tax exemption of bodies corporate, share block companies, and associations of persons managing the collective interests common to all members.