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This is a general guide to the tax consequences of giving directly to non-profit organisations and is not intended to be comprehensive. It is important to seek advice applicable to your own circumstances.

Tax approvals

If an organisation carries out activities that are for the public benefit, it can obtain certain tax approvals from the South African Revenue Service (SARS), which will enable it to pay no (or less) tax and through which it can offer its donors certain tax advantages.

The main advantages are:

  • Public Benefit Organisation (PBO) approval
  • Approval in terms of Section 18A of the Income Tax Act (S18A)

These approvals are not automatic and not all organisations or foundations qualify for either or both. A donor would need to find out from an organisation which approvals it enjoys.

PBO approval

If an organisation has PBO approval, its donors can benefit from a number of tax savings in respect of their donations. Depending on the facts, this could include exemption from donations tax, capital gains tax and estate duty savings.

Section 18A approval

If an organisation has S18A approval, it can offer its donors a level of tax deductibility in addition to the tax savings already mentioned. Broadly speaking, a donor can deduct the total value of donations made in any tax year to S18A-approved organisations up to the value of 10% of the donor’s taxable income in that year. Any surplus can be carried over and claimed as a deduction in the subsequent tax year (again up to the same 10% limit).

This deduction is claimed through the donor’s tax return and the donor must obtain a S18A receipt from the beneficiary organisation.

The flow chart below illustrates some of these advantages: 

By Anna Vayanos

A charitable foundation is a structure through which the donor conducts their giving or corporate social investment (CSI) activities to help ensure focused and sustained giving.  It usually takes the form of a trust or a non-profit company (NPC), and involves the donation of capital to the foundation (either at the start or over time) and the investment of this capital or endowment. Proper investment of the capital should produce income to cover part or all of the distributions to beneficiaries or programme costs. In this way, the foundation becomes financially sustainable and able to give independently and into the future.

Why set up a foundation?

Corporate donors

  • Sustainable CSI

A financially sustainable foundation can continue to give in tough financial times, as amounts available for CSI are no longer dependent on the company’s financial position in any particular year, provided that the foundation has a reasonable endowment.

  • Easier quantification of CSI

It is becoming increasingly important to track CSI spend for reporting against the B-BBEE scorecard, for example. CSI efforts and spend can be tracked more easily by channelling all relevant activities through a foundation. Similarly, it then becomes easier to measure the impact of your company’s CSI.

  • Protection of CSI funds

The foundation’s assets will be separate from those of the company’s and thus protected from any of the company’s financial risk.

  • Fundraising

Directing money generated from fundraising campaigns directly into a separate foundation provides external donors with peace of mind, knowing that their contributions are paid to an entity separate from the company, for a clearly defined purpose.

  • Branding and legacy

Managing CSI through a foundation creates a branding opportunity for the business, using the name of the foundation as a related brand to highlight CSI efforts. A foundation separate from the company can also continue to exist even if the company ceases activities in the country or shuts down. The foundation and its brand can then remain as a legacy. An example of this is the well-established Zenex Foundation in South Africa.

  • Significant tax saving

A company could benefit from a number of tax advantages whether it gives directly to beneficiaries or through a foundation. However, the added advantage of making use of a foundation that enjoys the necessary approvals is that there should be no income tax or capital gains tax payable on the investment of the funds within the foundation. Funds that would have been paid towards tax can instead be used towards the objectives of the foundation.

  • Input from independent trustees

Independent trustees can be appointed to the board of a foundation – and should be carefully selected for their relevant expertise and experience in a business’s CSI focus areas. They can help guide a company’s CSI to ensure the effectiveness of programmes and their involvement can add credibility in the eyes of beneficiary communities.

Families and individuals

  • Determining your vision and committing to giving

The exercise of setting up a foundation involves the donor considering their values, passions and the areas in which they would like to make a difference. Once there is clarity on these, the foundation should be carefully structured to ensure commitment to the achievement of the donor’s vision for the longer term.

  • Sustainable giving

With proper funded and investment, a foundation can ensure that the donor’s giving is financially sustainable and not reliant on the availability of excess personal income. Income earned within the foundation can be distributed to beneficiaries long after any initial donations have been made to the foundation. Not only does this allow the donor to plan their giving but it also allows for longer-term commitments to beneficiaries, which is immensely beneficial to them and their programmes.

  • Involvement of the next generation

By including the donor’s children as trustees, or in the everyday activities of the foundation, an opportunity is created to keep their family connected and involved. This can also help to ensure that the donor’s vision is understood during their lifetime, which will assist with its continued achievement after their death.

  • Leaving a legacy

Many people would like to leave a legacy after their death by using funds made during their lifetime, to continue to make a difference long after they have passed away. Setting up a foundation either while still alive or in terms of the donor’s will can enable them to do this.

  • Significant tax savings, including estate duty savings

The donor could benefit from a number of tax advantages whether they give directly to beneficiaries or through a foundation. However, the added advantage of making use of a foundation that enjoys the necessary approvals is that there should be no income tax or capital gains tax payable on the investment of the funds within the foundation. Funds that would have been paid towards tax can instead be used towards the objectives of the foundation.

When not to establish a foundation

A foundation requires longer-term commitment and sufficient funds to make it practically and financially viable. If a company chooses to spend CSI funding, or an individual chooses to spend excess personal income, within a short time period from when it becomes available, then a foundation would not be appropriate. Giving directly to organisations or beneficiaries would make more sense.

Furthermore, if the amounts available for giving or CSI activities are quite low, the use of a foundation might not be financially viable.

Should a foundation continue for a limited period or into perpetuity?

This is a matter of choice. It is usually not viable to set up a foundation for too short a time period but some donors do prefer to set a time limit on the lifespan of their foundation. For an individual donor, this could be because they would rather see, and give input on, the impact of their philanthropy during their lifetime. Others specifically want their legacy of giving to continue after death. A foundation can also be structured in such a way so as to terminate once it has fulfilled the particular purpose for which it was established.

How much capital is enough?

A foundation need not be fully funded upfront; its capital base can be built up over time. However, unless the intention is to have at least R1 million of capital ultimately invested within the foundation for the long term, it is probably not financially viable to set up a foundation due to the ongoing costs involved.

Where to get advice and assistance

Various professionals provide specialised advice, for example, lawyers, philanthropy consultants and the philanthropy service divisions of private banks. It is important that the foundation is properly structured from the outset to fulfil the donor’s vision while meeting the tax and other regulatory requirements.

Start-up costs

Initial set-up costs of a foundation are between R10 000 and R20 000. This includes the registration of a trust or NPC, as well as the various applications for tax exemption (and possible registration as a Non-Profit Organisation, which this is voluntary and more appropriate for foundations that will be fundraising from third parties).

Running costs

Annual running costs include, as a minimum, fees for:

  • the preparation of annual financial statements
  • an annual audit or review
  • preparation and submission of an income tax return.

Depending on the size and activities of the foundation, there could also be staff and other overhead costs.

There are additional ongoing requirements that need to be complied with in terms of tax approvals and registrations obtained. These are not cost prohibitive and can be outsourced.

 

Types of financial support

Grants are non-repayable funds (or products) distributed by one party to a recipient. Although the money does not have to be repaid, recipients are usually required to commit to specific outputs or outcomes, including reporting on how the money is spent and how the project is progressing.

Bequests are planned gifts of personal property through the provisions of wills or testamentary trusts. A bequest can be specific, for example, an amount of money, property, or a percentage, or residual, of a deceased’s estate. It can also be conditional. Alternatively, a testamentary trust can be created. Non-profit organisations can also be named as the beneficiaries of insurance policies or retirement funds.

Loans can be applied for by NPOs, secured against assets, and then repaid with interest. When lending money to an NPO, it is important, as with all borrowers, to ensure that the NPO has a solid track record of income and operations that reasonably position it to be able to repay its debt. This is a high-risk and short-term means of supporting an NPO, and must be entered into with careful consideration about its viability for both parties.

Equity capital is financing provided by external investors through the purchase of the shares of a company. This option is not available for charities and similar organisations, but only for registered companies. The finance is non-repayable (it is distinct from debt-financing) but external investors are granted a share in any rewards gained. This form of support is popular for social enterprises

Restricted and unrestricted support

Funders can restrict contributions to a particular purpose or project or give unrestricted funds for use at the NPO’s discretion. The latter can include organisational operating expenses, such as staff salaries and overheads. The difference is in funding a project or an organisation.

If the funding is intended for an organisation, once a thorough due diligence has been conducted and it is clear that the organisation is well managed, unrestricted support is preferable. This enables NPOs to ensure that they have the operational capacity to manage the funding efficiently and to deliver their intended results. It also enables the NPO to better leverage other, restricted funding. Unrestricted funding indicates trust – both in the NPO and in the funder’s own due diligence process – and forms the basis of a healthy ongoing partnership.   [End box]

 

Types of non-financial support

Donations of goods or products are a popular form of support. When donating goods, it is important to establish whether the NPO can make use of and/ or a ord to maintain or repair them if they are not in good working condition. Alternatively, companies and individuals can o er discounted rates on products to NPOs. 

Donations of services/pro bono work is professional work – such as bookkeeping or legal work – undertaken without payment, or at a reduced fee.

Supporting an NPO to transition into a social enterprise helps to ensure the organisation’s sustainability. A social enterprise seeks to address social issues using a sustainable business model, with pro ts always or mainly reinvested into the enterprise.

Bartering is the exchange of goods or services without the transfer of any money, for example, providing a garden-orientated NPO with accounting services in exchange for the produce it provides.

Volunteering time or expertise to an NPO can be a rewarding and educational experience for both volunteers and bene ciaries. A strong alignment between volunteers’ passions and NPOs’ needs increases the impact and sustainability of volunteerism projects. It is important, however, that volunteers are able meet the time and skill requirements of the NPOs that they intend to support.

Training and mentorships can help NPO employees or bene ciaries to develop new skills and con dence.  

With so many worthy organisations and causes in South Africa, it can be daunting to decide which ones to support. There are many considerations that should inform this decision, including ensuring alignment between the funder’s and recipient’s objectives, and how best a sustainable impact can be made. 

Finding strategic alignment

Often, the most successful initiatives are those in which there is an invested relationship between the funder and beneficiary organisation, with a common vision and goals. A meaningful partnership also facilitates the exchange of non-financial support, including the sharing of skills and knowledge.

Funders, therefore, should first look to identify ideological and strategic alignments with a prospective beneficiary organisation. For corporate funders, this alignment should be based on the nature of their own core business activities. For individual donors, the alignment may be based on a personal interest, passion or an emotional connection. In either case, alignment may be geographical or conceptual.

A further determinant is the nature of the social change in which a funder would like to invest. In order to make well-informed funding decisions, it is important that funders are aware of the different ways in which social change can be brought about by different types of organisations. Charities, community-based organisations, think-tanks, advocacy and activism-oriented organisations are all worthy causes, but each has different aims, working styles and results. For example, funding could go towards programme-based poverty relief or advocacy efforts working to influence national policy research in the socio-economic development space.

Making a sustainable impact

Investing in organisations that manage their funds strategically can help to enable greater impact, release a project or community from donor dependency and can help build capacity.

Once a funder has narrowed the pool of prospective beneficiary organisations to those that align with its interests and the nature of change it hopes to achieve, research often termed “due diligence” should be conducted. Due diligence provides detailed information about the mission and goals of a beneficiary organisation, its reach, durability and governance. It also indicates how and where funds are spent.

Due diligence  

Through due diligence, a funder learns about a prospective beneficiary organisation before entering into an agreement of support. Due diligence is a comprehensive process of researching, appraising and analysing the work of a prospective beneficiary in order to evaluate its performance and potential. This ensures that any money provided will reach its intended end destination.

Due diligence enables an assessment of how the organisation is run, the impact it has had, and the impact that new funds are likely to  have. While funders are not legally bound to engage in due diligence, it is a beneficial process for both the funder and the prospective beneficiary organisation, establishing a relationship based on transparency and accountability.

Importantly, a balance must be struck. A well-run NPO will have strong reporting systems in place and will be able to produce the necessary reports and documentation without much extra effort. However, an overly rigorous due diligence process may pose an additional burden to an often already strained organisation, and take time away from other efforts in the field. It is necessary to conduct comprehensive due diligence to minimise risk and ensure maximum impact of funds, but the process should be simple and efficient. Ultimately, due diligence appraisal must be based on common sense.

What information to collect

Vision and strategy – Conduct a thorough alignment assessment of the funder’s and beneficiary’s visions, priorities and strategies, and check whether the beneficiary’s mission is reflected in its ongoing projects and achievements.

Tax and other legal considerations – Review the legal and charitable status of the proposed beneficiary. Copies of the organisation’s registration documents, founding constitution or trust deed will establish whether the prospective beneficiary is registered as a NPO, non-profit company, or trust. If desirable, proof of a section 18A-approved PBO should be requested, including details of any restrictions on the NPO’s activities. Corporate and government donors should also confirm the organisation’s BBBEE rating and beneficiary category percentages.

History and track record – Check whether the prospective beneficiary organisation has a history of success, including tangible achievements that demonstrate impact. This includes a record of serving its beneficiaries with integrity. If the prospective beneficiary is a new organisation, investigate whether sufficient financial, infrastructural, leadership and capacity systems are in place to ensure its ongoing competence and sustainability.

Financial health – Request the organisation’s financial statements for the past three years (or for as many as are available). It is also necessary to ascertain how the organisation intends to use any donations received. Note that, while overhead cost and expense ratios do provide necessary information, it is important to contextualise this. Low overheads do not necessarily indicate organisational efficiency or effectiveness; rather, organisations that invest more in infrastructure may be better able to support successful programme delivery. The overall due diligence assessment should provide clarity in this respect.

Governance and executive leadership – It is important to carefully review how an organisation is managed and how it conducts and monitors its affairs. It is crucial that the governance and leadership structures in place are sufficient for the nature, purpose, size and capacity of the organisation. Also review the size, structure and qualifications of the organisation’s board and minutes from board meetings. 

Staff skills, morale and capacity – Assessing staff skills, tenure and morale can reveal organisational and capacity gaps. Consider whether the amount of proposed work is realistic in relation to the amount of funding being granted and whether the time and resources required for administrative tasks, including monitoring, evaluation and reporting, have been taken  into account sufficiently.

Monitoring and evaluation – Ensure that the organisation has a system in place to measure its results and assess what outcomes have been achieved through its projects and services, as well as how their evaluation processes compare with similar organisations. Review any formal evaluations that have been conducted.

How to collect information

Much of the due diligence will be conducted via research and analysis of documentation, which will either be provided by the organisation or will be publicly available. To make a comprehensive assessment, however, it is advisable to complement this technical aspect with personal interaction. A site visit enables a potential funder to get to know staff and to witness how a project works and who it affects.  Engaging with direct and indirect beneficiaries of the organisation’s programmes and other relevant stakeholders often provides further clarity on how the organisation connects, collaborates and communicates.

A holistic process – Aim to build a holistic organisational story through various stages of information gathering. Once the organisation has submitted a written proposal and provided its founding, registration and reporting documentation, and independent research has been conducted based on publicly available information, consider speaking to staff and beneficiaries to fill any gaps in information and provide a more complete picture. 

Look beyond management – It is important to gain insight from staff who understand and are directly involved in implementing and managing project operations. Ask to see field notes and other documentation that detail challenges experienced on the ground. Talking to staff with varied levels of authority will also provide useful information about the leadership of the organisation, as well as its overall effectiveness.

Consider context – Understanding the environment and broader context in which the organisation operates is crucial for establishing realistic expectations and outcomes.

Enhancing impact

Share findings and acknowledge shortcomings – A well-conducted process of due diligence reveals both positive and negative findings that, if shared with the prospective beneficiary organisation, can be useful for its development and growth. It is beneficial for each party to acknowledge organisational shortcomings and engage in a collaborative process to address these.

Plan together – Once a beneficiary has been selected, both parties should agree on the specific objectives of the funding and project, and how progress against these will be measured. The amount of funding, how the funds will be spent, reporting deadlines, consequences of unmet milestones, and any other terms and conditions of the funding should be clarified and agreed upon.

If an organisation is effective and its projects are working, funders should continue providing support, as far as possible. This saves time, since the funder will not need to go through the beneficiary selection process afresh. It also builds stronger partnerships and is likely to maximise impact.

Determine an exit strategy – A transparent and mutually agreed exit strategy will ensure that the beneficiary is not overly dependent on this source of funding and remains sustainable  once the funding period ends.  If the donation serves as a financial lifeline, it is particularly important for both parties to engage in planning the exit strategy,  to ensure that the organisation does not collapse when the funding ends. Achieving developmental results is complex and takes time, so funding periods of three to five years is preferable.

Monitor and evaluate – Monitoring the beneficiary throughout the period of support is highly recommended. This monitoring should, however, be conducted in an undemanding but authentic manner that allows the funder to understand the impact of the financial investment, and motivates the beneficiary to be self-critical and improvement-oriented. If the funder remains engaged with the beneficiary beyond the initial stage of granting funding, it will help to foster a more collaborative and sustained relationship.

Fostering a partnership

These suggestions are intended to provide information on the process of selecting a beneficiary organisation, but they are not exhaustive. Ultimately, effective due diligence should provide a basis for communication and increased transparency. The process should foster understanding, mutual trust, commitment to shared values and goals, and help to transform the standard funder-recipient relationship into a partnership that provides value to all parties.

 

The South African Constitution, aimed at ensuring the quality of life and potential of all citizens, enshrines the rights to a healthy and protected environment and access to education, land, housing, healthcare, food, water and social security. The non-profit sector plays a crucial role in assisting government to deliver the full spectrum of social support services needed to help realise these rights.

Legal framework

There are various types of non-profit structures, including non-profit companies, trusts, voluntary associations as well as community-based and non-governmental organisations, which serve communities across South Africa. To be recognised as legal entities, these must be registered.

Non-profit companies are required to register with the Companies and Intellectual Property Commission in terms of the Companies Act 71 of 2008. Non-profit trusts are governed by the Trust Property Control Act 57 of 1988. Other organisations may choose to register as non-profit organisations (NPO) in terms of the Non-Profit Organisations Act 71 of 1997 (‘the NPO Act’) with the Department of Social Development (DSD).

The NPO Act, which regulates standards of accountability, transparency and governance for NPOs, defines a NPO as a trust, company or other association of persons that is established for a public purpose and does not operate at a profit (i.e. its income and property are not distributable to its members or office bearers, except as reasonable compensation for services rendered).

While voluntary, NPO registration enhances credibility and creates a separate legal personality for an organisation, enabling it, for example, to open a bank account. Registration is also often a prerequisite for accessing various forms of funding. Once registered, in order to retain their status, NPOs are required to comply with the mission and objectives set out in their registered constitutional documents and to submit annual reports to the NPO Directorate.

The South African Revenue Service’s (SARS) Income Tax Act provides for tax exemption for NPOs. However, this does not take effect automatically: a registered NPO must apply separately to SARS for tax exemption. If the application is granted, the NPO will be registered by SARS as a Public Benefit Organisation (PBO), with or without Section 18A approval.  Registering as a PBO is a more rigorous process than registering as an NPO and, once registered, PBOs must operate strictly within the limits of the approval granted by SARS. There are currently more than 15 200 registered Section 18A PBOs in South Africa. 

The national NPO database  

In 2015, the DSD released its Report on the State of South African Registered Non-profit Organisations – a report from the national NPO database which provided a comprehensive overview of the non-profit landscape in South Africa. The report found that:

  • The national NPO database almost doubled in 2014/15, from 65 633 to 136 453 registered organisations. Ninety-three percent of all NPOs in South Africa were registered as voluntary associations, 6% as non-profit companies and 1% as non-profit trusts. Since the release of this report, the DSD NPO Register grew to more than 165 000 registered NPOs.
  • Gauteng was home to the most registered organisations in the country (32.3%), followed by KwaZulu-Natal (19.2%), Limpopo (10.4%) and the Western Cape (10.2%).
  • The largest NPO sectors in South Africa were social services (with 54 392 registered NPOs), development and housing (with 28 534 registered NPOs), religion (with 16 703 registered NPOs) and health (with 11 966 registered NPOs).

 

NPO income

Trialogue’s annual research provides insight into corporate social investment, as well as how NPOs are accessing and using corporate funding. In 2016, NPOs reported receiving 15% of their income from South African companies, 13% from foreign independent donors, and 12% from the South African Government.  Fifty nine percent of NPOs indicated that their income had increased from the previous year, while 27% experienced decreased income.

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Over half of NPOs experienced an increase in self-generated income. Over 45% also experienced increases in foreign independent donations, investments, trusts/foundations and private individual donations. The largest decreases in income were from intermediary NPOs, the South African National Lottery and companies. 

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Broad-based Black Economic Empowerment

BBBEE status is an important factor for NPOs, particularly when engaging government or applying for public and/or private sector funding. Companies can earn BBBEE points by contributing to causes that promote enterprise and supplier development, skills development and socio-economic development (SED). If a company contributes to these through an NPO, the company will only earn BBBEE points if the NPO complies with the requirements set out in the Codes.

NPOs are subject to the same BBBEE regulations and Codes as other entities in South Africa. As they have no beneficial ownership, they are considered ‘specialised enterprises’ and the ownership element of their BBBEE Scorecard is adjusted to measure management control only.

Under the revised BBBEE Codes, which came into effect in 2015, entities with an annual turnover of less than R10 million are Exempted Micro-Enterprises (EMEs) and are deemed to have a Level 4 status. Most NPOs in South Africa fall into this category. An entity with a turnover of between R10 million and R50 million is a Qualifying Small Enterprise (QSE), which is also deemed a Level 4, provided it meets certain measurement criteria set out in the Specialised Qualifying Small Enterprises Scorecard.

If an EME or QSE has at least 75% black beneficiaries, it is elevated to Level 1 status, and to Level 2 if it has at least 51% black beneficiaries. A turnover or income of over R50 million excludes any exemptions and all targets set out in the Specialised Generic Scorecard must be met.

Trialogue’s research conducted in 2016 found that NPOs most commonly source corporate funding from the SED element of the BBBEE Scorecard, with 79% of NPO respondents accessing SED funds. The proportion of NPOs accessing skills development (24%) and enterprise and supplier development (13%) funds appears to have fallen since 2015.

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