The similarities and differences between non-profit (NPO) and for-profit organisations and the legal requirements for a NPO

This article is number two of two in this NPO series and provides further insight in to non-profit organisations and the legal framework around them.

Section 21 companies: what is a Section 21 company?

Section 21 of the original Companies Act 61 of 1973 (followed by the new Companies Act of 2008) allows for a ‘not-for-profit company’ or ‘association incorporated not for gain’. Section 21 companies resemble business oriented (for profit) companies in their legal structure, but do not have a share capital and cannot distribute shares or pay dividends to their members. Instead they are ‘limited by guarantee’, meaning that if the company fails its members undertake to pay a stated amount to its creditors.

Example

You may choose to be a Section 21 company if you are a large organisation like a development foundation, because a company has a well developed legal structure and its methods of operation are familiar to the business world.

Governance structure

A company has a two-tiered governance structure consisting of the members and directors. The members exercise their powers in general meetings. For example, they have the power to appoint and remove directors, amend the founding documents of the company, and dispose of the NPO’s assets. The directors have broad executive responsibility. However, they must appoint independent auditors and convene an annual general meeting at which various matters, including the presentation of the audited financial statements, are attended to.

Which laws govern Section 21 companies?

  • Constitution of the Republic of South Africa, Act 108 of 1997 (as amended)
  • Companies Act of 2008 and Companies Amendment Act of 2011
  • Non-Profit Organisations Act 71 of 1997 (as amended) (“NPO Act”)
  • Trust Property Control Act 57 of 1988 (“TPCA”)
  • Income Tax Act 58 of 1962 (as amended)
  • Value Added Tax Act 89 of 1991 (“VAT Act”)
  • Financial Intelligence Centre Act 38 of 2001 (“FICA”) and Financial Intelligence Centre Amendment Act, 2017 (Act 1 of 2017)

How to form a Section 21 company

All companies, including Section 21 companies, are registered with the CIPC in terms of the Companies Act of 2008. Before you are registered, the Registrar must approve the name you have chosen. A company may not begin its work until it is registered.

To register as a Section 21 Company:

  • Your organisation must be established for a lawful objective.
  • Your main objective must be the promotion of religion, the arts, science, education, charity, social activity or a communal or group interest.
  • All income and property must only be used for the promotion of the main objective and no amount or asset may be given or distributed to the organisation’s members or office-bearers, except as reasonable compensation for their work for the organisation.
  • On dissolution of the company, all surplus assets must be transferred to another organisation with similar purposes.
  • Along with other public companies, your organisation must have at least seven founding members and two directors.

The founding documents of a Section 21 company

The founding documents for a Section 21 company are the memorandum and the articles of association. The memorandum sets out the purpose of the NPO; the articles of association regulate how it operates. A typical memorandum and articles of association will contain clauses dealing with the following:

Name followed by the phrase ‘association incorporated not for gain’ must follow the name.

  • Statement of purpose
  • Describing the main object and the main business of the company.
  • Powers of the company
  • Governance structure
  • Procedural clauses
  • Meetings, quorums, notice periods and so on.
  • Financial control and reporting
  • Standard of conduct required of office bearers
  • Indemnity for officers acting in good faith
  • Ongoing regulatory requirements

In order to be registered and remain registered, a company is obliged to comply with the extensive formalities and ongoing reporting requirements of the Companies Act, including the following:

  • The company must appoint auditors and inform the Registrar of Companies of any change of auditors.
  • The company must appoint a registered address and inform the Registrar of any change of address.
  • The company must keep up-to-date registers of members and directors in the prescribed form.
  • The directors’ names must appear on all letters, catalogues and circulars distributed or published.
  • Directors must ensure that proper minutes and attendance registers are kept of all meetings.
  • The company must hold an annual general meeting in accordance with the prescribed procedures.
  • The company must keep financial and accounting records in the prescribed form, present these to the AGM of members and file them with the Registrar.
  • The directors’ report must be presented to the AGM.

Annual returns

Every company must file an annual return in the prescribed form (CoR 30.1) together with the prescribed fee set out in Table CR2 B of the Regulations, unless exempt from such payment, within 30 business days after:

The anniversary of its date of incorporation, in the case of a company incorporated in the Republic; or
The date that its registration was transferred to the Republic, in the case of a domesticated company.

Any company that has been inactive during the financial year preceding the date on which its annual return becomes due, may apply to the Commission for an exemption from payment of the fee, provided that the application is supported by the financial statements indicating that the company had in fact no turnover during that financial year.

A company that is required by the Act or Regulations to have its annual financial statements audited must file a copy of the latest approved audited financial statements on the date that it files its annual return. Alternatively, a company that is not required in terms of the Act or Regulations to be audited, may elect to file a copy of its audited or reviewed statements together with the return.

A company which does not file annual financial statements as described above, must file a financial accountability supplement to its annual return.

Not for Profit Organisations and Tax

To access the tax and other benefits, the NPO has to be classified as a PBO and must undertake Public Benefit Activities (PBAs). The preferential tax treatment for not for profit organisations is however not automatic and organisations that meet the requirements set out in the Income Tax Act, 1962, must apply for this exemption. If the exemption application has been approved by SARS, the organisation is registered as a Public Benefit Organisation (PBO) and allocated a unique PBO reference number.

What is a PBO?

A PBO is any welfare, religious or cultural body, private school, bursary fund, charitable body, charitable trust or sporting body approved by SARS. The PBO can be structured either as a non-profit company (commonly known as a section 21 company), a trust or an association of persons.

What are Public Benefit Activities (PBA’s)?

SARS has defined different fields of activities that a PBO can undertake for it to qualify for tax exemption. These activities are known as PBA’s and are classified under:

  • Welfare and humanitarian;
  • Religion, belief or philosophy;
  • Cultural;
  • Health care;
  • Education and development;
  • Land and housing;
  • Conservation, environment and animal welfare;
  • Research and consumer rights;
  • Sport; and
  • Provision of funds to other PBO’s

Tax benefits to donors

Donors also benefit when donating to a PBO compared to any other organisation. By donating to a tax-exempt PBO, the donor may achieve, among others, the following tax benefits:

  • 20 percent donations tax;
  • 20 percent estate duty; and
  • 10-14 percent capital gains tax.

To further incentivise donors to donate towards certain PBA’s, government has also introduced additional tax savings to donors. Where a donor donates cash or in kind to PBO’s, which are conducting certain PBA’s, the donor will also achieve income tax savings by claiming a deduction of the donation against their taxable income.

Claiming tax deductions from SARS

Where donors have made donations to those PBO’s limited to conducting PBA’s under the following categories:

  • Welfare and humanitarian;
  • Healthcare;
  • Education and development;
  • Land and housing;
  • Conservation; and
  • Environment and animal welfare.

The donors obtain income tax benefits because they can be issued with tax deduction receipts from that PBO (known as an 18A certificate). The donors may then use these receipts to claim their donations as tax deductible expenses from SARS in their annual income tax returns. PBA’s of a religious or cultural nature (such as art galleries and museums), and sport and recreational bodies do not qualify for an 18A status from SARS and consequently cannot issue 18A receipts for these donations.

Submission of IT12EI (Income Tax Return)

Exempt organisations must annually submit an IT12EI income tax return.

It is important to note that an organisation that has a non-profit motive or is registered as a non-profit organisation (NPO) or Non Profit Company (NPC) does not automatically qualify for preferential tax treatment. An organisation will only enjoy preferential tax treatment after it has applied for and been granted approval as a Public Benefit Organisation (PBO) by the Tax Exemption Unit (TEU).

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 TEU, 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.

Employees’ tax

Employees’ tax deducted serves as an income tax credit that is set off against the income tax liability of an employee, calculated on an annual basis in order to determine the employees’ final income tax liability for a year of assessment.

Employees’ tax must be deducted or withheld by every employer (or representative employer when the employer is not resident in South Africa) who pays or becomes liable to pay an amount of remuneration to any person.

A PBO is not exempted from the obligation to deduct or withhold employees’ tax. The PBO must register as an employer for employees’ tax purposes.

The PAYE to be deducted or withheld is calculated according to the tax deduction tables prescribed by the Commissioner.

A PBO that is an employer must register for employees’ tax within 21 business days of becoming an employer. A registered employer will receive a monthly return, the EMP 201 form, which must be completed and submitted together with the payment of employees’ tax within seven days after the end of the month during which the deduction was made.

An employer must issue an employee with an employees’ tax certificate (IRP 5 certificate) if employees’ tax was deducted from the employees’ remuneration. This certificate discloses, among other things, the total remuneration earned during a year of assessment and the employees’ tax and unemployment insurance fund contributions deducted by the employer.

Employers who administer donations made by employees through payroll-giving must take these donations into account when determining the monthly employees’ tax to be deducted from their remuneration. The deduction is limited for employees’ tax purposes to 5% of remuneration after deducting certain amounts as specified in the Fourth Schedule.

Donations may be taken into account only if the employer received section 18A receipts issued by section 18A-approved organisations for donations made on behalf of employees. If an employee makes a donation to a section 18A-approved organisation independently of the employer, the employer is not entitled to take the donation into account. Although the section 18A receipt is issued to the employer by the section 18A-approved organisation, the employer does not qualify for a deduction under section 18A. The section 18A receipts must be retained by the employer for record purposes.

Author Craig Tonkin

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