NPOs, PBOs, Section 18A and more.....

There are a number of aspects of organisational governance that need to be considered including the requirements of the Dept of Social Development (DSD) for Non-Profit Organisation (NPO) registration, SARS for Public Benefit Organisation (PBO) registration and the donor's requirements for both adequate corporate goverrnance and Section 18A tax certificates. The issues can be complex and each SIDI entity is advised to obtain appropriate professional advice.  The notes below are a brief introduction and do not constitute legal advice! 

The first requirement is for registration is as a PBO with DSD.  A PBO can take one of three forms:
    • A voluntary association, requiring only a constitution which meets DSD's requirements
    • A Trust, which requires a Trust Deed which must first be registered with the Master of the Supreme Court
    • A Non-Profit Company (NPC) which requires a Memorandom of Incorporation (MOI) which must be lodged with the Companies and Intellectual Properties Commisioner (CIPC)
There is a useful YouTube video from Ricardo Wyngaard Attorneys (RWA) which gives an introduction to these three types.  It is worth viewing if not familiar with the concepts.  RWA's website also has a range of other resources that NPOs may find useful. 

Once the necessary groundwork has been done to set up a voluntary association, trust or NPC, registration as a NPO should be a simple procedure which can be done online on the DSD website. The reality is that despite DSD claiming 16 days or so for processing on-line registrations, experience indicates it can take much longer and "lost" documents are not unusual. 

SARS used to require registration as an NPO before one could apply to be a PBO. This is no longer the case.  Details of the requirements and how to apply as a PBO are on the SARS website.  As part of the application to become a PBO, aplication can be made to issue Section 18A tax certificates for specific types of donations. SARS's requirements to become and remain a PBO are signficantly more onerous than DSD's requirements to register as an NPO. There is a useful YouTube video from Ricardo Wyngard Attorneys (RWA) which gives an introduction to registration for tax exemption. 

One of the complications is that the constitution (for a voluntary association), MOI (for a NPC) or Trust Deed (for a trust), must also be submitted to both DSD and SARS. If the constitution does not meet the requirements of DSD or SARS, then a revised constitution would first have to be submitted to CPIC (for a NPC) or the Master (for a Trust), before resubmitting to DSD and SARS. Getting it right first time is strongly advised as one can otherwise waste a lot of time and money... 

Pros and cons of different structures: 

A voluntary association is the simplest and easiest to set up and nearly 90% of NPOs use this form, with the balance being split about equally between trusts and NPCs. The key differences (and similarities) are:
    • There is a perception that the cost of maintaining a non-profit company is higher than for a voluntary association.  This is incorrect as the costs of an NPC are fairly minimal. There is no requirement for audit and statutory returns would mostly comprise tax reporting which would be the same cost which a trust or voluntary association would incur.  In each instance, financial statements are required to maintain PBO registration with SARS, and these also satisfy the obligations under the Companies Act in respect of the NPC, so there is no additional cost;  

    • While the incorporation costs of a voluntary association are low, those of an NPC are probably less than that of a trust and in any event these are one off costs so are not a major consideration; 

    • The inherent advantage of an NPC or trust is that they exist as their own entity in law, other than in an informal way like a voluntary association and therefore are more likely to endure past the involvement of the associating parties and their immediate successors and could arguably then provide a sustainable solution on a medium to long term basis.

 Donor requirements:

The situation in SIDI is influenced strongly by the fact that a single donor is the primary funder.  The donor has certain requirements that must be met before a donation can be made to any organisation. The most important of these is that the organistion must be able to issue Section 18A tax certificates i.e. it must be both a NPO and a PBO and be able to issue 18As. This is mandatory.

With regard to governance structure, the donor has a preference for organisations that are NPCs rather than voluntary associations or trusts, for the reason that the requirements of the companies act ensures tighter and more formal governance than there is with a voluntary association.  If an organisation applying for donor funding is a voluntary association, they are likely to face closer scrutiny and will have to demonstrate that adequate governance structures are in place.  These requirements are likely to be well above the minimum NPO requirements.