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The International Journal
of Not-for-Profit Law

Volume 12, Issue 2, February 2010

A publication of the International Center for Not-for-Profit Law

Table of Contents

Letter from the Editor

Sub-Saharan Africa Country Reports

Special Section

Introductory Overview
International Center for Not-for-Profit Law

Ethiopia
Debebe Hailegebriel

Kenya
Faith Kisinga Gitonga

Liberia
Cecil B. Griffiths

Rwanda
Gloria Tengera

Sierra Leone
Emmanuel S. Abdulai

South Africa
Ricardo Wyngaard

Uganda
Livingstone Sewanyana

Zimbabwe
Otto Saki

Article

South Africa's King III: A Commercial Governance Code Determining Standards of Conduct for Civil Society Organizations
Peter S.A. Hendricks and Ricardo G. Wyngaard

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Editorial Board

South Africa

Ricardo G. Wyngaard1

I. PROVISIONS OF THE GENERAL LAWS

General Framework

  1. propaganda for war;
  2. incitement of imminent violence; or
  3. advocacy of hatred that is based on race, ethnicity, gender or religion, and that constitutes incitement to cause harm.

The South African Constitutional Court has been careful in limiting this particular right. The following quotation summarises the court’s regard for the context of this right:2 ”This is because of the critical need, for the South African community, to promote and protect human dignity, equality, freedom, the healing of the divisions of the past and the building of a united society. South African society is diverse and has for many centuries been sorely divided, not least through laws and practices which encouraged hatred and fear. Expression that advocates hatred and stereotyping of people on the basis of immutable characteristics is particularly harmful to the achievement of these values as it reinforces and perpetuates patterns of discrimination and inequality. Left unregulated, such expression has the potential to perpetuate the negative aspects of our past and further divide our society.” 3

The Constitutional Court has confirmed on more than one occasion that the right to freedom of expression is not absolute. It can be limited in terms of the limitations clause. It can also be limited in instances of competing rights, including the right to dignity and other state interests.

Right to equality - Section 7 of the Bill of Rights identifies equality as one of its three basic values that enshrine the rights of people in South Africa. The other values are dignity and freedom. Section 9 (commonly referred to as the equality clause) of the South African constitution deals with equality and lists detailed grounds which may result in unfair discrimination.

Sixteen grounds are set out in section (9) (3) of the Bill of Rights on which the state is prohibited to unfairly discriminate. The clause also applies horizontally amongst persons in terms of clause 9 (3) which require “no person” to unfairly discriminate directly or indirectly against anyone on those grounds. Section 9 imposes a further duty on the state to prevent or prohibit unfair discrimination.

Limitations Clause -

36. Limitation of rights

  1. The rights in the Bill of Rights may be limited only in terms of law of general application to the extent that the limitation is reasonable and justifiable in an open and democratic society based on human dignity, equality and freedom, taking into account all relevant factors, including-
    1. the nature of the right;
    2. the importance of the purpose of the limitation;
    3. the nature and extent of the limitation;
    4. the relation between the limitation and its purpose; and
    5. less restrictive means to achieve the purpose.
  2. Except as provided in subsection (1) or in any other provision of the Constitution, no law may limit any right entrenched in the Bill of Rights.

In the matter of Christian Education South Africa v. the Minister of Education the Constitutional Court found that the overall assessment as required in the Limitation Clause may vary from case to case. It quoted with approval the following finding from an earlier ruling; “In essence, the Court must engage in a balancing exercise and arrive at a global judgment on proportionality and not adhere mechanically to a sequential check-list. As a general rule, the more serious the impact of the measure on the right, the more persuasive or compelling the justification must be. Ultimately, the question is one of degree to be assessed in the concrete legislative and social setting of the measure, paying due regard to the means which are realistically available in our country at this stage, but without losing sight of the ultimate values to be protected . . . Each particular infringement of a right has different implications in an open and democratic society based on dignity, equality and freedom. There can accordingly be no absolute standard for determining reasonableness.”4 The Court concluded that: “To sum up: limitations on constitutional rights can pass constitutional muster only if the Court concludes that, considering the nature and importance of the right and the extent to which it is limited, such limitation is justified in relation to the purpose, importance and effect of the provision which results in this limitation, taking into account the availability of less restrictive means to achieve this purpose.”5

Types of Organizations

There are three kinds of civil society organisations in South Africa, namely:

Any of these CSOs can register in terms of the Nonprofit Organisations Act of 1997, provided that those CSOs comply with a number of requirements listed in that Act. In essence, the founding document of such CSOs must contain prescribed information (including the name, objectives, non-profit distribution constraint, governance structures, etc) and narrative and financial reports must be submitted to the Directorate for Nonprofit Organisations on an annual basis.

II. ESTABLISHMENT, REGISTRATION

Purposes

The CSOs can generally be established for lawful purposes. The Nonprofit Organisations Act defines a nonprofit organisation as a trust, company or other association of persons established for a public purpose and the income and property of which are not distributable to its members or office-bearers except as reasonable compensation for services rendered. The Prevention of Organised Crime Act, 1998 (Act 121 of 1998, is a law of general application which prohibits people or legal entities from knowingly receiving gifts and donations that originated from unlawful activities.

Registration as Voluntary vs. Mandatory Requirement

The common law governs the establishment of voluntary associations in South Africa.Unregistered groups or voluntary associations are permitted to act collectively. Registration in terms of the Nonprofit Organisations Act is voluntary. There no sanctions and penalities for carrying out activities through an unregistered organisation.

Registration or Incorporation Requirements

Founders of voluntary associations, nonprofit trusts and non-profit companies may include individuals, legal entities, foreigners and minors. There are generally no restrictions as to who can serve as a founder of a voluntary association.

A voluntary association can, in terms of common law be established with a minimum number of three founders. There is no minimum number of founders or initial members required for the establishment of a non-profit trust. It can legally be established with only one founder. Legally two different persons are required to ensure the establishment of a non-profit trust as the initial founder cannot be the same person as the initial trustee. The Companies Act of 1973 requires at least seven members to establish a non-profit company and at least two directors. The two directors can be part of the seven members. This is because the non-profit company is deemed to be a public company. The new Companies Act of 2008 which is not yet in operation requires at least three directors when setting up a non-profit company – no members are required.

The NPO Act does not specify a minimum number of founders when CSOs want to register in terms of that Act.

No.

Voluntary Association: The voluntary association is established in terms of common law. This can be done through a verbal or written constitution. In order for a voluntary association to have body corporate status, the founding document must provide that it; firstly, has perpetual succession, secondly, the capacity to acquire certain rights apart from the rights of the members forming it and no member has any rights by reason of his membership to the property of the association, and thirdly, the right to hold property in its own name. (Molotlegi and Another vs. President of Bophuthatswana 1989 (3) SA 119 (B))

Non-profit Trust: A trust must be registered in terms of the Trust Property Control Act in order to legally exist. This involves the submission of a written trust deed which serves as the agreement between the initial founder(s) and the initial trustee(s). The application is made to the Master of the High Court. There are fourteen offices situated in South Africa. The initial trustees also complete and sign an acceptance of trusteeship form containing their details and commitment to serve as trustees. As a matter of practice the Master’s office has required pro forma letters issued by auditors or accounting officers to accompany the application for registration. Revenue stamps in the amount of R100-00 must be paid with the application for registration.

Non-profit Company: The non-profit company represents the more complex process of registration in respect of the three entities. The process is started with the reservation of a name for the company in the prescribed form. Once reserved, the Memorandum and Articles of Association together with a number of prescribed forms must be lodged with the Registrar of Companies. A minimal prescribed fee must accompany the application for registration. The Registrar’s office (the Companies and Intellectual Property Registration Office - CIPRO) is based at a central location, Pretoria.

Nonprofit Organisations Act: CSOs wanting to register in terms of this Act complete the prescribed application form and ensure that their founding documents contain the required clauses. As mentioned above, the founding document of such CSOs must contain prescribed information (including the name, objectives, non-profit distribution constraint, governance structures, etc). There are no fees involved.

Voluntary Association: The voluntary association is established in terms of common law and establishment is not dependent upon authorization by a public office.

Non-profit Trust: The Master of the High Court.

Non-profit Company: The Registrar of Companies [also known as CIPRO – the Companies and Intellectual Property Registration Office.

Nonprofit Organisations Act: The Director of Nonprofit Organisations as designated in terms of the NPO Act.

Voluntary Association: Not applicable.

Non-profit Trust: No. Registration ordinarily takes about three weeks if the application is fully compliant.
Non-profit Company: No. Registration ordinarily takes about three months if the application is fully compliant.
Nonprofit Organisations Act: Yes, two months, but this is not happening in practices as CSOs may wait six months and longer to get registered.

Voluntary Association: Not applicable.

Non-profit Trust: Only if the application does not comply with the requirements of the legislation or the practice requirements of the Master’s office.

Non-profit Company: Only if the application does not comply with the requirements of the legislation or the prescribed requirements of CIPRO.

Nonprofit Organisations Act: The Director for Nonprofit Organisations may refuse to register a nonprofit organisation that does not comply with the requirements listed in the Nonprofit Organisations Act. For example, if the required clauses listed in the Act are not contained in the founding document of the organisation, the director may refuse to register the organisation. The Director cannot refuse to register a nonprofit organisation based upon arbitrary grounds.

Voluntary Association: Not applicable.

Non-profit Trust: This is not a requirement in terms of the Trust Property Control Act, but the exercise of this function can be regarded an “administrative function” which would require the Master’s office to provide reasons in terms of the Promotion of Administrative Justice Act of 2000.

Non-profit Company: This is not a requirement in terms of the Companies Act of 2003, but the exercise of this function can be regarded an “administrative function” which would require the Master’s office to provide reasons in terms of the Promotion of Administrative Justice Act of 2000.

Nonprofit Organisations Act: The NPO Act makes provision for the appointment of an Arbitration Panel to consider appeals received from CSOs that were either denied registration or that were de-registered.
May an applicant organization appeal from such a denial to an administrative body or independent court?

Voluntary Association: Not applicable.

The organisation would be able to approach an independent court in terms of the provisions of the Promotion of Administrative Justice Act to have an administrative decision reviewed if it disagrees with the decision of the Master of the High Court, the Registrar of Companies or the Director or Nonprofit Organisations.

No.

CSO Registry

Is there a registry of CSOs? Yes. This is maintained by the Directorate for Nonprofit Organisations which is based within the Department of Social Development. The registry containing the name of the organisation, its office-bearers, its contact details and registration status are available on the internet. The website portal does not contain other information like the founding documents or financial and narrative reports of organisations. These can be requested from the Directorate of Nonprofit Organisations.

Foreign Organizations

Foreign CSOs may incorporate as external companies in terms of section 21A of the Companies Act. In essence this means that the foreign CSO will be incorporated as a nonprofit company although it would be making use of its own founding document from its country of origin. The foreign CSO will have to comply with the requirements listed in section 21 of the Act. The new Companies Act will require foreign companies carrying certain activities in South Africa to be registered as an external company and to maintain an office in South Africa.

III. SUPERVISION AND ENFORCEMENT

Regulatory Authorities

Which agency or agencies have regulatory authority over CSOs?

Voluntary Association: Not applicable.

Non-profit Trust: The Master of the High Court may, in terms of section 16 of the Trust Property Control Act request the trustees to account to the Master’s office for the administration and disposal of trust property. The Master may also appoint a fit and proper person to do an investigation into the administration and disposal of trust property.

Non-profit Company: The Registrar of Companies has some regulatory powers to ensure that companies comply with the provisions of the Companies Act. These regulatory powers relate to all companies and not only non-profit companies.

Nonprofit Organisations Act: The Directorate for Nonprofit Organisations has been established in terms of the Nonprofit Organisations Act. The functions of the Directorate include: facilitating the process for developing and implementing policy; determining and implementing programs, including programs to ensure that the standard of governance within nonprofit organisations is maintained and improved; and liaising with other organs of state and interested parties.

Internal Governance

What do the laws provide regarding the internal governance and structure of the CSO? What governing bodies and officers are required? Does the law impose constraints relating to the self-governance of a CSO (e.g., the right of the government to attend meetings of the CSO, the right of government to appoint or approve board members, or requiring the CSO to notify the government in advance of internal meetings, etc.)?

The Trust Property Control Act is not intrusive of the internal governance affairs of non-profit trusts. The Master authorizes trustees to act in their capacity as trustees. Existing trustees ordinarily ‘nominate’ new trustees to serve in that capacity. The Master’s office will then authorize such nominated trustees by issuing letters of authority. It is uncommon for the Master’s office to refuse the authorization of trustees of non-profit trusts. Government is not given the right to attend meetings of CSOs or to require prior notification of internal meetings. No significant constraints are placed on the self-governance of non-profit companies. The Companies Act would regulate certain aspects of the internal governance of a company, but only if the company’s own founding documents do not make provision for such aspects.

The NPO Act requires that certain information must be reflected in the founding document of a registered NPO, but it does not prescribe the governance structures of CSOs.

Reporting

The Trust Property Control Act does not require the submission of annual reports to the Master’s office. The Master of the High Court may call upon the trustees to account for their administration and disposal of the trust property and to deliver any book, record, account or document relating to the trust to the Master. This power is only exercised in exceptional circumstances. The Companies Act of 1973 places more emphasis on nonprofit companies having to report to their members and updating prescribed information with the Registrar of Companies.

Registered nonprofit organisations must in terms of the Nonprofit Organisations Act annually submit narrative and financial reports to the Director of Nonprofit Organisations. The narrative reports must contain the prescribed information which include the activities carried on by the organisation during the reporting period, the number and kind of meetings held, any changes to its governance structure and information on the number and composition of board and staff members. These reporting requirements are universal to all registered nonprofit organisations.

All nonprofit organisations that are approved as public benefit organisations must annually submit tax returns to the Tax Exemption Unit of the South African Revenue Service (SARS). These returns can be submitted electronically. Organisations are not required to submit supporting documents with the tax returns, but are required to keep records of relevant supporting documents should it be required. The tax return forms are the same for all organisations that are approved as public benefit organisations.

Nonprofit organisations that are not approved public benefit organisations are taxed at the same rate as commercial taxable entities. An organisation may be a registered nonprofit organisation in terms of the NPO Act, but that does not grant beneficial tax status to such an organisation. The process of applying for public benefit organisation status under the Income Tax Act is separate from the registration process under the NPO Act.

State Enforcement and Sanctions

The biggest challenge with reporting is faced by the Directorate for Nonprofit organisations. The majority of organisations that are registered in terms of Nonprofit Organisation’s Act are community-based organisations. Some of these organisations have not complied with the reporting requirements. The Directorate is required in terms of the Act to notify organisations that are non-compliant and to give one month’s notice to comply. If the organisation fails to adhere to the notice, the Directorate may deregister the organisation. An organisation that has been deregistered may follow the appeal procedure laid down in terms of the Nonprofit Organisation’s Act. Once that process has been exhausted can an organisation approach an independent court. The Directorate has already deregistered a number of organisations that have not complied with their reporting requirements. De-registration does not result in an organisation losing its legal status. It remains in existence as a nonprofit legal entity and it can still carry on activities, but it is no longer regarded as a registered nonprofit organisation. It would, however, lose any benefits linked to that status – for example, funding from government.

Sanctions are also available in terms of the Income Tax Act for those public benefit organisations that do not comply with the provisions of that Act. The Commissioner of SARS must issue a compliance notice in the event of an organisation not complying with the conditions laid down in the Act. Failure to adhere thereto can result in a loss of tax benefits. The Income Tax Act allows for a process to object and appeal against a decision of the Commissioner to withdraw approval status as a public benefit organisation. SARS has not experienced significant problems in relation to non-compliance and has not withdrawn the tax benefits of public benefit organisations.

Dissolution, Winding Up, and Liquidation of Assets

The voluntary dissolution process can ordinarily be initiated by the CSO itself. Involuntary dissolution can ordinarily take place in terms of the procedure laid down in the Insolvency Act. In such cases the creditors of CSO may apply to court for an involuntary liquidation of a CSO that is presumed to be insolvent.

Other Constraints

Are CSOs subject to government harassment (e.g., frequent inspections, requests for documentation, etc.)? Does the government provide adequate protection to CSO representatives in the face of threats and violence? Has government established GONGOs that threaten the independent space for CSOs?

In my view that this has not happened in South Africa.

IV. CSO ACTIVITIES

General Powers

CSOs are not forbidden from carrying on any activities or exercising the general rights and powers of juridical entities.    

Expressive / Advocacy / Public Policy Activities

CSOs in South Africa not prohibited from criticizing the government or advocating for politically unpopular causes. There are no legal restrictions or governmental harassment for such activities. CSOs that are involved with causes that are unpopular from a government’s perspective may ordinarily not attract significant funding support from government. CSOs have been involved with the processes of drafting of laws and lobbying for legislation and government policies. CSOs that have tax exemption cannot use their resources to support, oppose or advance the activities of any political party.           

Communication and Cooperation

Are CSOs permitted to contact and cooperate with colleagues in civil society, business and government sectors, both within and outside the country? Or are there any restrictions on this kind of activity (e.g., requiring advance notice of international cooperation, restricting travel, prohibiting conferences, etc.)? Does the law or government impose restrictions on participating in networks or on accessing the Internet or world wide web? If so, what are they?

None.

Seeking / Securing Funding

  1. Foreign Funds: There are no special rules for domestic CSOs to receive foreign funding.
  2. Economic Activities: South African CSOs are permitted to carry on commercial activities. This can be done by the CSO itself or through a for-profit subsidiary.
  3. Government Funding: South African CSOs can compete for government funds in the context where objective criteria for funding are laid down.
  4. Other Constraints: In my view does not impose any other constraints on the ability of CSOs to seek and secure funding. The practices on the part of government departments and development funding agencies have however impacted on the ability of CSOs to secure funding.

V. TAX LAWS

Tax Treatment of CSO Income

Tax exemption is granted according to the category of CSO. The two main requirements are, firstly, that CSOs must be public benefit organisations (PBOs), and secondly, CSOs must carry on public benefit activities. As mentioned above, the process of applying for public benefit organisation status under the Income Tax Act is separate from the registration process under the NPO Act. To be recognized as a public benefit organization, an organization must, amongst other, meet the following criteria:

In addition, income generated through business activities (in excess of certain limitations) is taxable.      

Customs Duties

Certain products may receive a partial or full rebate of custom duties even though CSOs in general may not import products free of custom duties. Examples of qualifying products are those designated for educational, charitable, cultural and welfare organisations or purposes. The availability of a partial or full rebate for customs duties depends, in most cases, on both the nature of the import products and on the legal form or status of the importing organisation. Certain goods for persons with disabilities and indigent persons may also receive rebates.

Donor Incentives

Donors are entitled to deductions – a maximum of ten percent of their taxable income. The same percentage and requirements apply to both individuals and corporate donors. The main requirements that must be complied with in order to make deductible contributions include:

Administrative Spending

There are no limits on administrative expenses. However, CSOs that are approved PBOs are not allowed to pay employees or office-bearers excessive remuneration, having regard to what is generally considered reasonable in the sector and in relation to the service rendered.

VI. CONCLUSIONS

Priority Issues

The Financial Action Task Force and the Eastern Southern Africa Anti-Money Laundering Group recently published a report entitled: Mutual Evaluation Report - Anti-Money Laundering and Combating the Financing of Terrorism (the report). The report concludes that South Africa has not assessed potential risks of terrorist financing posed within the non-profit sector and recommended that NPOs should be compelled to register in terms of the Nonprofit Organisations Act and the Directorate for Nonprofit Organisations should be given the power to sanction office-bearers, impose fines and freeze accounts of NPOs that are in violation of oversight measures.

It is not clear whether the South African government will support this initiative.

Government Rationale

If civil society is confronted with legal barriers of the kind described in the Defending Civil Society report, how have the legal impediments been justified by the Government (e.g., as related to national security, counter-terrorism, harmonization and coordination of NGO activities, etc.)?

Civil society in South Africa is by and large not confronted with legal barriers described in the Defending Civil Society Report. The main barrier to entry pertains to the delay the registration process provided for in the Nonprofit Organisations Act. Organisations can wait to up to six months and longer before getting registered in terms of the NPO Act. The implication for community-based organisations that are established as voluntary associations is the inability to open a bank account – and consequently receiving funding. This is largely due to a lack of resources allocated to the Directorate to implement its legislative mandate.

Financial Crisis

How has the global economic crisis affected civil society in your country, if at all?

No research study has been done on the effect of the global economic crisis on CSOs in South Africa, but newspaper reports have already pointed towards increased strain on CSOs. A number of CSOs have reported a reduction of financial support and the inevitable cutting of expenditures. Some CSOs are also facing possible closure due to the global economic crisis.

Strategic Responses

What concrete steps can be taken to improve the laws, or their administration and enforcement, in order to strengthen / defend civil society?

The laws are generally not big obstacles for CSOs in South Africa. In comparison to other countries, South Africa’s legislation in relation to CSOs are generally well drafted. The challenge comes with the effective implementation thereof. The agencies responsible for the implementation of the respective legislation are generally under-resourced. For some institutions it would be beneficial to review their effectiveness since coming in to operation – or since South Africa became a democratic country.

Notes

1 Ricardo G. Wyngaard has provided legal advice, training, and assistance to the nonprofit sector since 2000. He has participated in a number of legislative reform and research initiatives on nonprofit legislation and is currently running a solo law practice focusing on nonprofit law and governance (www.nonprofitlawyer.co.za).

This paper is made possible with the generous support of the American people through the United States Agency for International Development (USAID). The contents are the responsibility of the authors and do not necessarily reflect the views of USAID or the United States Government.

2 Islamic Unity Convention v Independent Broadcasting Authority and Others CCT36/01

3 Ibid p. 45

4 S v Manamela and Another (Director-General of Justice Intervening) 2000 (5) BCLR 491 (CC) at paras 32 and 33.

5 Para 31

 

 
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