Know the difference between an NPO, NPC & PBO

In South Africa, entities that operate on a not-for-profit basis can be classified and registered as several organisational forms: Non-Profit Organisation (NPO), Non-Profit Company (NPC), and Public Benefit Organisation (PBO). Each type serves a unique role in society and has specific legal and tax implications. This article explores the differences between these three types of entities, their legal frameworks, governance structures, and tax treatment, with a focus on how NPOs and NPCs can qualify as PBOs and the conditions under which PBOs can issue section 18A tax receipts.

Non-Profit Organisation (NPO)

An NPO is an entity registered under the Non-Profit Organisations Act of 1997 with the Department of Social Development. The primary characteristic of an NPO is that it is established for a public purpose, and its income and property are not distributable to its members or office bearers except as reasonable compensation for services rendered.

NPOs can be trusts, companies or other associations of persons established for a public purpose. Trusts and companies are governed by trust deeds and memorandums of incorporation, respectively, while associations not for gain are generally governed by their constitution.

The main aim of registering as an NPO is to create a trustworthy environment for donors and beneficiaries, ensuring that the organisation’s efforts are transparent and aligned with its altruistic objectives. NPO registrations are voluntary but required for accessing certain benefits, including public funding opportunities. The NPO Directorate provides a regulatory framework, requiring annual submissions of reports detailing the organisation’s activities and financial accounts.

Non-Profit Company (NPC)

An NPC is registered under the Companies Act of 2008 and is characterised by its incorporation not for profit, but to serve a public benefit or a specific group. Unlike NPOs, NPCs are subject to stricter governance and compliance standards, including the requirement to have a memorandum of incorporation that restricts the company’s powers, ensuring that activities align with non-profit objectives.

NPCs are particularly suitable for larger operations and are often preferred by donors and funding agencies due to their robust governance structures. They must not distribute profits to members, and any profits generated through operations must be reinvested into the public benefit objectives of the company. NPCs are required to have at least three directors and are subject to annual audit requirements, depending on their level of income.

It is important to note that an NPO or NPC does not automatically enjoy tax exemption. Application for tax exemption is a separate application that must be submitted to the Tax Exemption Unit (TEU) of the South African Revenue Service (SARS). Only when the application is approved can the organisation be considered a PBO (refer to qualification as a PBO below).

Public Benefit Organisation (PBO)

A PBO is an entity recognised by the South African Revenue Service (SARS) under section 30 of the Income Tax Act. It can be an NPO, NPC, or trust that carries out public benefit activities in a non-profit manner and with altruistic or philanthropic intent. To qualify as a PBO, the organisation must meet specific requirements, including having a sole or principal objective of carrying out one or more public benefit activities, all of which must be conducted in a non-profit manner and with an altruistic or philanthropic intent.

Qualification as a PBO

An NPO or NPC qualifies as a PBO if it conducts one or more public benefit activities as listed in Part I of the Ninth Schedule of the Income Tax Act. These activities include a wide range of charitable, religious, and educational programs that benefit the public. In order to be allowed tax exempt status, the entity must apply to SARS for PBO status, which, if granted, comes with significant tax benefits. These benefits include exemption from income tax and potential exemption from other taxes, such as estate duty, transfer duty, and even donor taxes under certain conditions.

Issuing section 18A receipts

Once entities are registered as a PBO, they are not automatically allowed to issue section 18A receipts. A PBO may qualify to issue section 18A tax receipts to donors if it conducts activities listed specifically in Part II of the Ninth Schedule of the Income Tax Act. These activities generally include those that have a more direct charitable consequence, such as welfare and humanitarian efforts, healthcare, land and housing development projects, and educational and conservation activities.

The ability to issue section 18A receipts is a significant advantage for a PBO because it incentivises individual and corporate donors by offering a tax deduction for donations made. The receipt allows the donor to deduct the amount of their donation from their taxable income, subject to certain limits. This not only benefits the donor but also enhances the PBO’s capacity to attract more significant funding.

Click here to access the new requirements for valid section 18A receipts.

Conclusion

While NPO registration focuses on ensuring compliance and public trust, NPC status is suitable for those seeking robust governance structures. PBO status, on the other hand, offers substantial tax benefits, encouraging donations and financial sustainability.

Entities must consider their long-term objectives, operational size, and the nature of their activities when deciding which form to adopt. Understanding the legal implications and benefits of each can help in making an informed decision that aligns with the organisation’s mission and maximises its impact on society. Through careful consideration and compliance with legal requirements, entities can maximise their impact and efficiency in contributing to public welfare.

The illustration below summarises the different entity types and registrations:

Please direct any further questions with regards to a NPO, NPC or PBO to Jan Louis Koen at tax@asl.co.za.