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Non-profit and public benefit organisations

21 Jun 2011

Jonathan CoetzeeConfusion often arises around the terms non-profit organisation and public benefit organisation.

All non-profit organisations in South Africa are governed by the Non-Profit Organisations Act, No 71 of 1997 (the Act), which came into effect on 1 September 1998. In terms of this Act, a non-profit organisation (NPO) is defined as either a trust, company or other organisation or association of people established to serve a public purpose. The organisation is therefore not set up for the profit of its members, but for the benefit of the public. The Act therefore requires the profits of the organisation to be re-invested and used for the purpose of attaining the main goal of the organisation. Profits are not to be distributed to its members.

A public benefit organisation (PBO) can be a trust, a company (a not-for-profit company in terms of the new Companies Act) or another association registered with the South African Revenue Service (SARS) in terms of Section 30(1) of the Income Tax Act, No 58 of 1962. All non-profit organisations are encouraged to register as public benefit organisations. Section 10 (1)(cN) of the Income Tax Act and Paragraph 5.3.2.3 of the Tax Exemption Guide for public benefit organisations assume that ALL income derived by such organisations will be exempt from normal income tax provided that the income is not distributed (directly or indirectly) to its members.

The question, however, is: are non-profit organisations and public benefit organisations still viable? If so, what should they do to be sustainable?

With the increased risk of fraud in organisations, it is extremely important for the boards of non-profit organisations to be aware of the threat of fraud. These organisations are under the watchful eyes of the general public and occurrences of fraud may discourage potential donors to open their hearts and bank accounts for them. With the uncertainty of donor-dependent income, especially in light of the risk of fraud, it has become increasingly important for an NPO to create a sustainable stream of income, e.g. an endowment. The latter comprises investing a sum of money that will grow to such an extent that the organisation will be able to fund its operations into perpetuity. Richard Holloway cited the following ways to establish a reserve or endowment in his book Towards Financial Self-Reliance:

  1. The use of a substantial grant to create an endowment that will have, as its primary purpose, the contribution to ongoing expenses of the NPO;
  2. The accumulation of substantial grants to form an endowment, which will be large enough to generate income to support both the core expenses of the NPO, and the different project costs;
  3. The provision of an endowment as a form of challenge to other donors supportive of the NPO’s objectives; and
  4. The accumulation and re-investment of undesignated surpluses (including interest on surplus funds) to serve as sustainability reserves.

Since any NPO registered with SARS as a PBO is exempt from income tax, the tax exemption serves as a further incentive to create a constant stream of income by way of endowments over and above the donations received.

Reference: Accountancy SA

For more information contact Jonathan Coetzee at the Somerset West office of Tenk Loubser & Associates on tel. 021 852 0382 or jonathanc@exceedssw.co.za

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