Types of exempt institutions

Public Benefit Organisations:

All Public Benefit Organisations (PBO’s) engaged in public benefit activities (PBAs) and includes institutions such as religious institutions, day care centres, disaster relief organisations, and, health clinics, etc.

Section 10(1)(cN) read with Section 30 

9th Schedule of the ITA (PBAs) 

Section 18A (Tax deductible donations)

What is a Public Benefit Organisation (PBO)?

A PBO is defined in the Act as any organisation which is :

  • a non- profit company as defined in section 1 of the Companies Act, or a trust or an association of persons that has been incorporated, formed, or established in the Republic; or
  • any branch within the Republic of any company, association or trust incorporated, formed, or established in any country other than the Republic that is exempt from tax on income in that other country; of which the sole or principal object is carrying on one or more public benefit activities, where- 
    • 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).

The conditions and requirements for an organisation to be approved as a PBO are contained in section 30 while the rules governing the preferential tax treatment of PBOs are contained in section 10(1)(cN).

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 on an IT12EI – Return of Income Exempt Organisations – External Form. The income tax return enables the Commissioner to assess whether the approved PBO is operating within the prescribed limits of the relevant approval granted and 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

Tax deductible donations (Section 18A receipts)

The South African Government has recognised that certain organisations are dependent upon the generosity of the public and to encourage that generosity has provided a tax deduction for certain donations made by taxpayers. The eligibility to issue tax deductible receipts is dependent on section 18A approval granted by the TEI and is restricted to specific approved organisations which use the donations to fund specific approved Public Benefit Activities.  A taxpayer making a bona fide donation in cash or of property in kind to a section 18A-approved organisation, is entitled to a deduction from taxable income if the donation is supported by the necessary section 18A receipt issued by the organisation or, in certain circumstances, by an employees’ tax certificate reflecting the donations made by the employee. The amount of donations which may qualify for a tax deduction is limited.  

Related forms

 EI1 – Application for Exemption from Income Tax – External Form

 EI2 – Public Benefit Organisation Written Undertaking – External Form

LETTER OF APPOINTMENT OF DIRECTORS

LETTER OF APPOINTMENT OF THE PUBLIC OFFICER

Help

Income Tax Exemption Application Checklist

Income Tax Exemption Leaflet

 LAPD-IT-G16 – Basic Guide to Income Tax for Public Benefit Organisations

 LAPD-IT-G16 – Basic Guide to Income Tax for Public Benefit Organisations

PBO and VAT

An approved PBO may be classified as a welfare organisation under the VAT Act. The classification as a welfare organisation includes the PBO in the VAT dispensation without having to meet the normal registration requirements. Once classified as a welfare organisation under the VAT Act, the PBO will be able to claim input tax even though there was no output tax.

A separate letter confirming that the PBO qualifies as a welfare organisation in terms of the VAT Act will be issued.

PBO’s that are not classified as a welfare organisation may have to register for VAT if they have taxable supplies which meets the VAT registration requirements.

FAQs for PBO

FAQ: What are the requirements and conditions that the founding document of an organisation must comply with?

The requirements are set out in section 30(3)(b) of the Income Tax  Act, and are summarised as follows:

  • At least 3 persons who are not connected persons must accept fiduciary responsibility for the organisation.
  • No single person is permitted to control the decision-making powers of the organisation directly or indirectly.
  • Funds must be used solely for the object for which the organisation is established, and no funds may be directly or indirectly distributed to any person, unless this occurs in the course of undertaking an approved PBA.
  • On dissolution, the remaining assets must be transferred to a PBO which has been approved under section 30(3); an institution, board or body exempt from income tax under section 10(1)(cA)(i) that has as its sole or principal object the carrying on of any PBA; or the government of the Republic in the national, provincial, or local sphere; or the National Finance Housing Corporation, which entities are required to use the assets solely for the purpose of carrying on approved PBAs.
  • In case of a branch of foreign organisation, it is required on termination of its activities in the Republic to transfer the assets of such branch to any public benefit organisation, institution, board, body, department, or administration if more than 15% of the receipts and accruals attributable to the branch during the period of three years before the termination are derived from a source within the Republic.
  • No donation may be accepted that may be revoked by the donor or where conditions are imposed that will entitle the donor or any connected person to obtain a direct or indirect benefit there from, or where there is any misrepresentation with regard to the tax deductibility thereof under section 18A.
  • A copy of all amendments to the founding document must be submitted to SARS.

FAQ: Who must sign the written undertaking?

The written undertaking must be signed by the three persons responsible in a fiduciary capacity of the organisation.

FAQ: May an application PBO for approval be submitted without annual financial statements?

Yes, but only if an organisation has been established or formed during the financial year in which the application for PBO approval is sought.

If the organisation was dormant, an affidavit with bank statements must be submitted with the application form. Organisations that have been in existence for more than 12 months must attach the annual financial statements.

FAQ: What are the requirements that must be complied with by an approved PBO?

An organisation approved by the Commissioner as a PBO will be required to:

  • Submit annual income tax returns via SARS eFiling or manually;
  • Submit a copy of all amendments to its founding document to the Commissioner, as soon as they have been affected;
  • Inform the Commissioner of any address change for correspondence within 60 days after the address change takes place;
  • Inform the Commissioner of any change in persons accepting fiduciary responsibility for the organisation or office bearers (resignations or new appointments);
  • Inform the Commissioner if the PBO is no longer carrying on approved PBAs or ceases to exist;
  • Retain all books of accounts, records, and other documents for a period of 5 years from the date of the submission of the income tax return and if requested by SARS submit copies of such documents;
  • Ensure that at all times the PBO complies with the requirements relative to the PBO approval.

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, e.g. running clubs, angling clubs, bowling clubs etc.

 

Section 10(1)(cO) read with Section 30A

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.

EI1 – Application for Exemption from Income Tax – External Form

 EI2C – Income Tax Exemption Recreational Clubs – External Form

 LAPD-IT-G27 – Tax Guide for Recreational Clubs

Membership Associations:

Fidelity or Indemnity Fund,

Trade Union (registered with Department of Labour),

Chamber of Commerce, or Industries (or an Association of such Chambers),

Mutual Loan Association,

Local Publicity Association.

 

Section 10(1)(d)(iii) read with Section 30B

An “association not for gain” is essentially a religious institution or other society, association, or organisation (including an educational institution of a public character) which is not carried on for profit and is required to use any property or income solely in the furtherance of its aims and objects.

Membership Associations and Income Tax Further Reading & Supporting Documents

Associations Income Tax Exemption

EI1 – Application for Exemption from Income Tax – External Form

EI2A – Public Benefit Organisation Written undertaking

EI1 – Application for Exemption from Income Tax – External Form

 EI2A – Public Benefit Organisation Written Undertaking Associations – External Form

Professional Bodies:

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.

 

Section 10(1)(d)(iv)(bb) read with Section 30B

EI1 – Application for Exemption from Income Tax – External Form

 EI2A – Public Benefit Organisation Written Undertaking Associations – External Form

Small Business Funding Entity:

An entity established for the sole purpose of providing funding to small, micro, and medium enterprises (SMMEs).

Section 10(1)(cQ) read with Section 30C

A major challenge in the growth of small, medium, and micro enterprises is access to funding due to their inherent risk and lack of collateral together with the fact that they often lack the necessary training and commercial skills to manage and develop the business.

Several funding entities are engaged in activities that support small, medium, and micro enterprises, for example, the provision of developmental funding, business support and training. Relief was previously afforded to funders of small, medium, and micro enterprises only if monies were invested through a venture capital company (VCC), or if approved by the Commissioner as a PBO. Any activity provided to small, medium, and micro enterprises that did not fall under the VCC regime or PBO legislation therefore did not qualify for relief under the Act.

To assist in the development of and to encourage support to SMMEs the following were introduced specifically for SBFEs:

  • Definitions in section 1(1) of the terms “small business funding entity” and “small, medium or micro-sized enterprise”.
  • Section 30C7 setting out the prescribed requirements an entity must comply with to qualify for and retain approval as an SBFE so as to enjoy partial taxation.
  • Section 10(1)(cQ)8 providing for the exemption from income tax of certain receipts and accruals of SBFEs and the taxation of receipts and accruals falling outside the permissible business undertaking or trading activity categories provided in that section at a rate of tax of 28% of its taxable income.

An entity will enjoy preferential tax treatment under section 10(1)(cQ) only after it has been granted approval by the Commissioner under section 30C(1) and continues to comply with the relevant prescribed requirements as set out in the Act.

EI1 – Application for Exemption from Income Tax – External Form

 EI2D – Small Business Funding Entity Written Undertaking – External Form

Home Owners Associations:

Association of persons formed for managing the collective interests common to all its members in respect of expenditure applicable to the common immovable property

 

Section 10(1)(e)(i)(cc)

The “association of persons” contemplated in the definition of PBO refers to a formal association of persons established by adopting a legal founding document and which may qualify for approval as a PBO. By contrast, an “association of persons” contemplated in PBA 10(iii) is a voluntary informal association or group of persons which carries on one or more PBAs in South Africa. Such an association or group of individuals will not qualify for approval as a PBO because it does not have a founding document.

Note: The “association of persons” referred to in the definition of a PBO and an “association of persons” referred to in PBA 10(iii) are listed separately in PBA 10 as beneficiaries that may benefit from the funds, assets or other resources provided by a conduit PBO. The separate identification of a PBO and an association of persons in PBA 10 means that the respective associations of persons differ, the former being a formally approved PBO and the latter an informal voluntary association of persons.

EI1 – Application for Exemption from Income Tax – External Form

IN 61 – 80 | South African Revenue Service (sars.gov.za)– Interpretation Note 64

Public Institutions:

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.

 

Section 10(1)(cA)(i)

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.

EI1 – Application for Exemption from Income Tax – External Form

 

Statutory bodies and VAT

Statutory bodies (government institutions) are not included in the VAT. They are regarded as public authority under the VAT Act.  This means that they don’t register and file VAT 201 returns. For the purposes of VAT, a public authority means:

  • any department or division of the public service as listed in Schedule 1,2 or 3 of the Public Service Act,1994 ( Act No, 103 of 1994);
  • any public entity listed in Part A or C of the Schedule to the Public Finance Management Act, 1999 ( Act No 1 of 1999), or
  • any other public entity designated by the Minister for the purposes of this Act to be a public authority

Companies owned by Public Institutions

Any South African company of which all the shares are held by a body exempt in terms of section  10(1)(cA)(i) – i.e. wholly-owned by one or more Government Institutions.

Section 10(1)(cA)(ii)

EI1 – Application for Exemption from Income Tax – External Form

Tax deductible donations:

Qualifying entities, that have been approved as PBOs, may obtain additional approval to issue tax deductible donations to donors.

Section 18A status falls in two broad categories, namely a “doer” and a “conduit”. If the PBO conducts the qualifying activities, it is a “doer” OR provides funds or assets (excl. services and other resources) to other S18A approved entities it is a “conduit”.

In addition to PBOs, the following institutions may also apply for approval to issue S18A receipts, and if approved, these entities will also be required to meet the Commissioner’s reporting requirements.

·         Government Departments

·         Specialised Agencies

Section 18A

Section 18A(1)(a)

Section 18A (1)(b)

Part II of the Ninth Schedule 

 

Section 18A(1)(c)

Section 18A(1)(bA)

The South African Government recognises that organisations are dependent on the generosity of the public and to encourage that generosity, has provided a tax deduction for certain donations made by taxpayers. The eligibility to issue tax deductible receipts is dependent on section 18A approval granted by SARS and is restricted to specific approved organisations which use the donations to fund specific approved Public Benefit Activities. 

Are you the donee (issuer of receipt)?

The eligibility to issue section 18A receipts is restricted to specific organisations approved by the Commissioner that use the donations to carry on or fund specific Public Benefit Activities (PBAs) in South Africa. These organisations must formally apply to the Commissioner for approval under section 18A to issue section 18A receipts for donations received. A section 18A receipt may be issued by a section 18A-approved organisation, only from the date the Commissioner has confirmed section 18A approval and has issued a reference number for purposes of section 18A, that must appear on such receipts.

An application for approval under section 18A can be made simultaneously when an organisation applies for approval as a PBO under section 30 or as an institution, board, or body under section 10(1)(cA)(i). If, however, a PBO or an institution, board, or body, subsequent to obtaining approval under section 30 or section 10(1)(cA)(i), respectively, wishes to apply for section 18A approval, it may do so by a written request to SARS. The following information and documentation must be provided:

  • The relevant PBAs in Part II of the 9th schedule for which approval is sought.
  • A detailed demonstration of how those activities are carried on.
  • Relevant supporting documentation that may include the latest founding document and annual financial statements.

Section 18A-approved organisations are required to maintain proper control over the application and spending of donations received that qualify for a tax deduction and must therefore comply with the conditions and requirements as set out by legislation.

The Commissioner may withdraw the approval granted under section 18A(1) if there are reasonable grounds for believing that the person who is in a fiduciary capacity responsible for the management or control of the income or assets of an approved Section 18A PBO has breached any of the prescribed regulations.

To read more on obtaining and retaining approval under section 18A click here

Are you the donor (claiming a receipt)?

A taxpayer making a bona fide donation in cash or of property in kind to a section 18A-approved organisation, is entitled to a deduction from taxable income if the donation is supported by the necessary section 18A receipt issued by the organisation or, in certain circumstances, by an employees’ tax certificate reflecting the donations made by the employee. The amount of donations which may qualify for a tax deduction is limited.  

See the following important information on Tax Exempt Institutions, Section 18A donations and Solidarity Fund donations:

Verify here if the organisation you are donating is a S18A approved organisation

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