By Erika Petersen-Holmes, Partner in the Corporate & Commercial department
For many non-profit organizations, sourcing donations and funding is an on-going battle.
The Broad-Based Black Economic Empowerment (“BEE”) legislation has brought more complexity for NPO’s to deal with, particularly as most corporates now prefer to channel their donations to those NPO’s that qualify both as “SED Beneficiaries” in terms of the BEE Codes and as “public benefit organisations with section 18A status” for tax purposes.
The Codes of Practice published in October 2014 in terms of the BEE Act provide that:
•NPO’s with an annual total revenue of R10 million or less qualify as exempted micro-enterprises (“EME”) and are deemed to have an automatic level 4 status and only an affidavit is required;
•NPO’s with an annual turnover exceeding R10 million but less than R50 million, should use the Specialized Qualifying Small Enterprise (“QSE”) Scorecard, which measures all the elements on the scorecard other than ownership;
•NPO’s with an annual turnover exceeding R50 million should use the Specialized Generic Scorecard, which measures all the elements on the scorecard other than ownership.
For NPO’s that are either EME’s or QSE’s, if 75% or more of its beneficiaries are black people, it is deemed to have an automatic level 1 status level and if at least 51% (but less than 75%) of its beneficiaries are black people, it is deemed to have an automatic level 2 status level.
Socio-Economic Development Contributions
For a donor to obtain socio-economic development (“SED”) points on its scorecard, it must make SED contributions to beneficiaries. SED Contributions must be for the objective of facilitating income generating activities for targeted beneficiaries. The definition section of the BEE Codes states that the objective of SED Contributions must be the promotion of sustainable access for the beneficiaries to the economy and it lists programmes such as development programmes for women, youth, HIV/Aids sufferers, education programmes, community training, skills de elopement, and programmes supporting arts and culture. This list is wider than the “facilitating income generating activities for beneficiaries”.
SED contributions can take the form of grants, payment of direct costs, guarantees or security for loans, preferential terms or prices for supply of goods or services or training and mentoring.
If the NPO that has more than 75% black beneficiaries, the full value of the SED contributions is counted for BEE purposes, while if the NPO that has less than 75% black beneficiaries, only the proportion which benefit black beneficiaries is counted for BEE purposes.
It is critical therefore, that each NPO establishes and obtains suitable evidence of its:
• racial composition of its beneficiaries;
•objective of its programmes and the actual use of its funds.
PBO’s and Section 18A Status
An NPO that meets the requirements of section 30 of the Income Tax Act can apply to SARS for registration as a tax-exempt public benefit organisation. Its trust deed or constitution must comply with stipulated requirements in order to apply. This registration may be back-dated to the date of the PBO’s establishment, provided it meets certain criteria. Once registered, all its receipts are tax-exempt (other than receipts from trading activities, and then only in certain circumstances). In addition, the PBO is exempt from transfer duty, donations tax and capital gains tax. Some PBO’s also qualify as “welfare organizations” for VAT purposes, which provides them with very favourable VAT treatment.
In addition, if the PBO carries out certain listed activities, it may also apply for Section 18A status, which entitles it to issue tax-deductible receipts to its donors.
For more information on the above, please contact:
Partner in the Corporate & Commercial department
+27 82 453 8818