Charity Law

Country Reports: Sub-Saharan Africa


The International Journal
of Not-for-Profit Law

Volume 3, Issue 1, September 2000


Legal and Fiscal Framework

PACT has published a “Report on the Enabling Environment for the Ethiopian NGO Sector” which was written by Jeffrey Clark, Lisbeth Loughran, and Daniel Bekele. PACT has kindly given ICNL permission to publish relevant excerpts from the report, which are reproduced here. The entire report is accessible on the PACT web site at

The report stresses that while there has been significant progress in the development of a supportive legal and fiscal enabling environment, much work needs to be done. New legislation is necessary to provide a more modern legal framework and eliminate outdated control mechanisms (e.g., annual re-registration) contained in the legislation adopted in 1966 and applicable today. The climate for such legislation is now much better than it was, due in part to the successful adoption of the Code of Conduct for NGOs.

The two excerpts that follow deal 1) with the registration process in today’s more NGO-friendly political climate; 2) with the influence the Code of Conduct has had on the current climate; and 3) on the prospects for change. <![endif]>

The act of registering for NGOs has receded as a continuous issue as the process has become relatively transparent and routine. At the time of the last enabling environment review, frustrations with the NGO registration process dominated consultations. Virtually every conversation centered on registration and the despair associated with it within the sector.

Today, registration has largely evaporated as a central concern. The criteria for registration are widely recognized and respected as being transparent and fair—if unnecessarily burdensome in some cases—by most players. The requirements for registering are disseminated and adhered to by officials at the Ministry of Justice. Not a single assertion of political bias in the awarding of registration status was heard by the review team. Indeed the possibility that a particular civic education NGO recently de-registered had been denied official status for political reasons was roundly dismissed by numerous well-informed observers. “There is no credibility to the idea that their closure was in any way political. That idea is just nonsense,” one NGO sector leader stated. That sentiment was common and reflective of a new sense of confidence with the NGO community.

Registration for NGOs has become a bureaucratic requirement that is understood, accepted and met without particular resistance or trepidation. The annual re-registration for many groups appears to be impressively quick and straightforward as long as requirements for certified audits and similar standards are met.NGO officials are largely comfortable with the process and the Ministry of Justice administrators seem relatively efficient at overseeing it.

Serious frustrations remain with the registration process. It frequently takes too long to have an initial registration application approved; the bureaucratic requirements for the filing of various associated documents are numerous and consume inordinate time and resources. Registration is on an annual basis, rather than multi-year or indefinite as found elsewhere, and thus requires a yearly commitment of time on the part of NGO officials that seems unwarranted. This is particularly true when paired with the effort required to obtain project approval agreements with federal and regional governmental agencies once registration itself is achieved.

Another issue is that there is no effective mechanism for appealing decisions on the granting of registration to NGOs or of the revocation of registration status beyond the Ministry of Justice. The court system, which works at a glacial pace at best, is administered by the Ministry.

The withering away of registration as a continuous issue results from changes on both the government and NGO sides of their relationship: greater efforts at self-regulation on the part of the NGO sector; more streamlined registration procedures; and, better communication and greater general agreement on the need for a partnership to meet common development goals. The mid-1990s naming of the Ministry of Justice as the coordinating regulatory agency for NGOs was not smooth or easy—in fact, it was the opposite—but the designation of the Ministry appears in hindsight to be logical and sound. The consolidation of registration authority into a single entity within the government in fact has been positive for the NGO sector and has contributed to making the registration process far more transparent and consistent than was the case.

There is more space for NGO operations now that processes are in place.

Senior NGO official

NGO leaders told the review team now that there is a system in place at the Ministry of Justice, the system works. They appreciate the clarity of that system and the elimination of many ambiguities previously hampering the registration process. (This sentiment was echoed strongly by micro-finance groups in reference to the National Bank of Ethiopia, their coordinating agency within the government: the Bank, it was asserted, offers clear guidelines for micro-finance schemes that are quite straightforward in their implementation.)

Perhaps most critical to the altered interaction surrounding registration has been a steady enhancement of skills within responsible Ministry offices. Concurrently, there has been a change in attitude that moved from notably negative and narrowly legalistic, in particular toward advocacy or civic education NGOs, to a more understanding stance with the appointment of a new Minister of Justice in 1997. A contributing factor to these developments was the impact of donor- and international NGO-sponsored study visits abroad where comparable NGO registration systems were examined. (Pact has been a major sponsor of such tours.) Simple exposure to and interaction with a broad range of NGOs also made a major difference.

A final element has been the attention devoted to increasing the understanding of the NGO sector by government officials shown by bilateral donor agencies and an ad hoc grouping of Western ambassadors. The ambassadors, under the leadership of the British envoy, have established a forum for NGO leaders and senior government officials, led by the Minister of Justice, to meet on a regular basis in an ongoing dialogue on legal and operational issues…

Adoption of the Code of Conduct by the NGO sector has sent a positive signal about its ethical underpinnings to critical observers, provided evidence of ability of the sector to impose self-regulation, and spurred consultation and collaboration within the community. Over the years, the NGO community in Ethiopia has been little noted for the collaborative stance of its members in working together or speaking with a united voice. Suspicions and rivalries inflamed by the competition for scarce resources have dominated inter-sector relationships. A sense of common purpose has been elusive. These underlying dynamics appear to be shifting, however. The effort to formulate and adopt the NGO Code of Conduct has spurred a positive turnaround that sees the formation of networks and forums increasingly frequent. Greater cohesion of the sector gives hope that more effective advocacy work around critical public policy issues can be realized and that the sector can become more assertive and proactive.

The struggle to forge consensus around what the Code should attempt to accomplish and produce a document that would have substance and impact but also enjoy wide acceptance was long and hard. However, organizations not used to working together—nor particularly inclined to—dedicated themselves to the task and stuck to agreements on how to collectively formulate the Code over a two year period of time. The Ad Hoc Committee which drafted the NGO Code of Conduct saw its long efforts rewarded when the manifesto was approved in March of 1999 with an initial 165 signatories (soon joined by fifteen additional groups, then others).

We need to be under scrutiny. It enforces transparency and the Code makes a major contribution to that end.

Veteran NGO sector leader

South Africa

The Taxation of NPOs in South Africa- Rapid Change After a Decade of Lobbying

Karen Nelson
The Non-Profit Partnership

1. Introduction

On 19 July 2000 nearly a decade of lobbying for a more enabling environment for non-profit organisations (NPOs) in South Africa, resulted in the promulgation of an Income Tax Laws Amendment Act (“the Amendment Act”)[1] which introduces a new tax framework for NPOs in South Africa. Undoubtedly, the outcome of this phase of the NPO Tax Lobbying Campaign will have far-reaching effects on the non-profit sector.

The Campaign was, and continues to be, driven by an unwavering belief that tax incentives can influence charitable giving. This, coupled with an even stronger conviction that the tax framework within which the South African non-profit sector has had to operate in the past was archaic and restrictive, resulted in what seemed an impossible task of convincing those in government charged with controlling state coffers to effectively part with a portion of the revenue pie!

The good news is that this has to a certain extent been achieved subject to the content of the schedules referred to below. As a result of the Campaign a much broader category of NPOs may enjoy tax exempt status; and more NPOs should be able to issue receipts for the deduction of donations from income tax. Thus, in theory, these organisations should be able to attract larger donations on the basis of the deductibility of such donations.

This paper focuses on the legislative history of the Amendment Act[2] and will highlight certain pertinent provisions and the impact thereof on NPOs in South Africa.[3]

2. The History of the Amendment Act
2.1 The Historical Context of the NPO Tax Campaign

During the past few years NPOs have been hard hit by funding constraints. A contributory factor is the decrease in foreign funding directly to the sector. It seems as if NPOs in post-apartheid South Africa are regarded as less deserving of international donor funding than their pre-1994 counterparts. Many have had to scale down their activities and some have been forced to close down. Never before has it been more critical for the Sector to lobby for an enabling environment, particularly one that promotes and encourages financial sustainability. A more comprehensive package of tax benefits – exemptions for a broader cross-section of organisations and more attractive incentives for donors – would be a positive step towards creating this enabling environment.

It became increasingly obvious that if the Sector is to survive this financial crisis, innovative funding strategies would have to be devised. Historically, such innovation was restricted by the parameters of the out-dated and restrictive legislative tax framework. It was within this context that the NPO Tax Lobbying Campaign needed to gain momentum and claw its way up the priority list of both the Sector and the Government.

2.2 An Overview of the Campaign

The Tax Campaign has its origins in The Independent Study into an Enabling Environment for NGOs. The Development Resources Centre commissioned this project in 1992 to help create an enabling environment for NPOs. The Independent Study covered four areas of concern of which the taxation of NGOs was one. This exercise brought lawyers and many different kinds of NGOs together for the first time in local NGO history to examine the legal and fiscal framework within which the non-profit sector operated. There is no doubt that it represented “the birth” of the Tax Campaign.

The next significant event in the life-cycle of the Campaign was the commissioning of the 9th Interim Report of the Katz Commission of Inquiry. The Katz Commission was convened to investigate certain aspects of the South African tax structure; its 9th Report focused specifically on the taxation of NPOs.

The Report was informed by written submissions to the Katz Commission Sub-Committee by NPOs and other interested parties, and also drew extensively on international experience. The Report was released in May 1999.

With the release of the Report it became crucial for the non-profit sector to organise itself in such a way so as to take advantage of this ideal lobbying opportunity. It was at this stage that the Non-Profit Partnership (the Partnership), with the necessary mandate from the Sector, took over the reigns of the Campaign from the South African National NGO Coalition (SANGOCO).

This marked the beginning of a new phase in the Campaign. A phase that would require focused lobbying efforts – aimed at both the Sector, to garner support for the Campaign, and the relevant Government role players, to achieve the desired policy change: a more favourable fiscal dispensation for NPOs.

In October 1999 the Partnership, together with the Development and Legal Resources Centres presented a collated submission, supported by more than 40 letters of endorsement, to the Portfolio Committee on Finance at the public hearings in Parliament of the Katz Commission Report. In February 2000 the Portfolio Committee released its Draft Report on the Katz Commission Report in which it to a large extent supported the recommendations of the Katz Report and the Non-Profit Partnership’s submission.

2.3 Impact of the Campaign

Perhaps the first sign of a real policy breakthrough came with the announcement of certain Budgetary proposals affecting NPOs. Following the recommendations of the Katz Commission, the Minister of Finance proposed the incorporation into the Income Tax Act of a generic definition of “public benefit organisations”, to replace the previous category of tax exempt entities limited to “religious, educational and charitable organisations” and funds providing funds to such organisations. The intention being that such a definition would extend the benefit of exemption to a broader range of organisations. Furthermore, it was proposed that the benefit of deductibility of donations should also be extended to a broader range of entities, and the limits applied to the deductibility of donations by individuals be raised to match the limits applied to companies.

The proposed tax concessions were widely welcomed as a first step towards assisting NPOs in becoming financially sustainable. However, these policy proposals were just that – proposals. To have any impact on the Sector they needed to be translated into good practical law. At that stage of the Campaign it was decided that consultation and negotiation with the South African Revenue Service (SARS) would be the appropriate strategy to drive the process forward.

Recognition should be given to the political support from within the Ministries of Finance and of Welfare, which under the apartheid Government had been far less receptive to the role of civil society and the importance of creating a tax-friendly environment for their operations. Initial contact with SARS revealed a willingness on their behalf to involve the non-profit sector in the drafting of the legislation which would give effect to the Budgetary proposals. This presented the Sector with a hereto unheard of opportunity to directly impact fiscal policy and facilitate positive change!

What followed was an intense period of negotiations between SARS and the Partnership in collaboration with the Legal Resources Centre which provided the necessary technical expertise for the negotiation process.

The outcome of this phase of the Campaign was a Bill tabled in Parliament on 14 June, promulgated on 19 July as an Act of Parliament, with which we are substantially satisfied.

In terms of the new law, yet to come into effect, a basic framework has been established that should reflect the needs of the contemporary non-profit sector. This new law repeals the previously archaic tax framework which failed to recognise the shift in emphasis of activity from charity to upliftment and development.

When the outstanding schedules to the Amendment Act are finalised the provisions of the Act will come into effect, and the new law should result in a much broader category of NPOs qualifying for exemption from a range of taxes and duties, the most important being exemption from Income Tax.

Furthermore, the benefit of the deductibility of donations which previously applied only to donations to formal educational institutions and funds, should be extended to a limited number of other categories of activities. Although initially limited, these will be incrementally increased. The limits of deductibility were also increased so as to make donations to the approved categories of organisations even more attractive for the donor.

Undoubtedly, further refinement of the law will be necessary as and when the provisions become subject to judicial interpretation and perhaps even before. The new framework however, represents a definite improvement in the fiscal policy as it applies to the non-profit sector in South Africa and should assist the sector in becoming more financially viable.

3. Key Provisions Highlighted [4] 3.1 Tax Exempt Status[5]

The General Framework

The new law introduces a generic definition of “public benefit organisation” (PBO) which replaces the previous formulation in terms of which only religious, educational and charitable organisations, and funds providing funding to such organisations, qualified for tax exemption. The definition provides that eligibility for exempt status depends on a PBO carrying on a “public benefit activity”; a defined term which does away with the historical distinction between “funds” and “institutions”. A schedule of activities “which is of a philanthropic or benevolent nature”, will be determined by the Minister of Finance with reference to “the needs, interests and well-being of the general public”.[6]

A PBO, apart from engaging in an approved public benefit activity, must furthermore comply with several procedural requirements. Some may argue that these requirements place too onerous a burden on PBOs, but for now, the codification of requirements is to be preferred over the former arbitrary imposition thereof. In the past, conditions and requirements which by law were imposed on funds, were in practice applied to institutions seeking exemption. The decision to grant tax exemption fell entirely within the discretion of the Commissioner for Inland Revenue and in practice such exemption was granted on a case-by-case basis. Within the new framework, if all the requirements are met, the Commissioner is obliged to approve the PBO for tax exemption; in accordance with the Katz Commission recommendations, objective eligibility criteria imposed by statute have replaced the subjectivity of the old system.

Specific Provisions Highlighted – Important Improvements

  • Distinction between Institutions and Funds

The old law drew an artificial distinction between “institutions” qualifying for exemption and “funds”. Several legislative restrictions were imposed on funds, which in practice were arbitrarily applied to institutions as well.

The Amendment Act abolishes this artificial distinction and the definition of “public benefit activity” now covers the provision of funds to approved PBOs and associations of persons carrying on public benefit activities, whether approved for tax exemption or not.

  • Trading Activities

In the past income tax exempt funds were by law prohibited from trading, but as was the practice with many of these fund-specific requirements, this prohibition was imposed on exempt institutions as well.[7]The new allows for tax exempt trading activity, within certain stipulated parameters provided for in the Amendment Act. Accordingly, the new law exempts from tax, income derived from economic activities conducted by a PBO within the ambit of one or more of the following tests:

  • A de minimus rule/”mechanical test”: Gross income from trade, up to a maximum of the greater of 15 per cent of gross receipts or R25 000
  • The “relatedness test”: Income derived from “related” trading activities, mainly directed at cost recovery and which do not cause unfair competition in relation to taxable entities.
  • Certain “Unrelated trading activities”: these are permitted if of an occasional nature and substantially carried out with voluntary assistance without remuneration.
  • Specifically exempted activities: Income derived from certain trading activities or business undertakings approved by the Minister.

In the context of the funding crisis, the self-financing capability of the non-profit sector is of critical importance to its long-term viability. The taxation of the business/ trading activities of PBOs plays a crucial role in the development of financial sustainability. The extent to which PBOs are taxed on their income from economic activities in many cases makes the difference between closure and continued existence of the organisation.[8] Therefore, whilst the new formulation of trading rules may not be ideal, they do to the extent that trading income is exempted from tax, encourage a move amongst PBOs towards financial sustainability; something which under the old law was impossible for most PBOs to achieve.

  • Provision of Funds to Non-Exempt PBOs

The old law prohibited funds from making donations to non-exempt organisations. This restriction severely hampered the activities of NPOs operating at grass- root level; which in turn caused real problems within the Sector as community based organisations are key role players in development.[9] The Amendment Act permits tax exempt PBOs to donate funds to “non-approved”[10] PBOs which carry on a public benefit activity, provided the funding PBO takes reasonable steps to ensure that these funds are used for the purpose for which they were provided.

This amendment is a definite improvement on the old system and should assist community based projects to gain access to both funding and other support, perhaps affording such projects a chance to become financially viable at some point in the future.

3.2 Tax Treatment of Donations to PBOs

It has long been argued that the tax deductibility of donations is an important incentive for donors. The argument is not that tax incentives alone will convert the taxpayer from miser to philanthropist, but rather that it encourages continued support and influences the amount of the gift.

So, whilst the liberalisation of tax incentives will hardly guarantee an upsurge in private giving, some commentators[11] argue that it does impact then non-profit sector’s ability to retain a meaningful degree of independence while co-operating with government in the pursuit of joint objectives, for example poverty relief, job creation and community development.

It is in this context that the broadening of the provisions dealing with the deduction of donations is regarded as a significant improvement and is expected to have a definite impact on the Sector.

General Framework

The old law provided that only donations made to certain types of educational institutions[12] and educational funds qualified for deduction from income tax; under the new law these institutions and funds will continue to enjoy this benefit. The new law is intended to broaden the ambit of this benefit to approved PBOs which carry on particular public benefit activities determined by the Minister of Finance for the purposes of this provision.[13] In his Budget Speech, the Minister announced that the old provisions would be initially extended to:

  • pre-primary schools that offer an approved educare programme;
  • primary schools;
  • organisations mainly involved in preventing HIV infection or providing care to those whose livelihoods have been impoverished by AIDS;
  • children’s homes providing care to abandoned, abused or orphaned children;
  • organisations mainly involved in caring for destitute aged persons.

The new provisions admittedly do not live up to the expectations of the Sector, neither do they go as far as the Katz Commission Report recommended. Therefore the sector will continue to argue for a broader application of this benefit. However it acknowledges the danger, identified by Parliament’s Finance Committee, in pursuing “too broad a category too early [as this] could result in the withdrawal of such privileges at a later stage once fiscal effects are determined. Such uncertainty can only damage the sector.” [14]

The Limits of Deduction

The Amendment Act also introduces an increase in the limit of the deduction that applies to individuals. The old law permitted individuals to deduct donations up to a limit of R500 or 2 per cent of net taxable income, while companies were allowed to deduct up to 5 per cent. As from 1 March 2000, both individuals and companies qualify for the increased limit of the greater R1 000 or 5 per cent of net taxable income.

Donations to “Funding PBOs” and the 75% Distribution Rule

The old law required all funds to distribute 75 per cent of net revenue. The Amendment Act does away with this requirement except insofar as it applies to that amount of donations received by funding PBOs which have qualified for tax deductibility.

4. Transitional Measures

The Act makes provision for transitional measures which should ease the administrative burden on both PBOs and SARS. Where the constitution of a PBO applying for exempt status does not strictly comply with the requirements of the Act, the person acting in a fiduciary capacity may give the Commissioner a written undertaking that the PBO will comply with the relevant provisions. This undertaking is valid for 5 years during which period the PBO will be deemed to comply with the requirements of the Act. After 5 years all PBOs must ensure that their constitutions in fact comply with all the relevant provisions.

5. Conclusion- The Way Forward

We have by no stretch of the imagination reached the end of the Campaign; what we have now is a basic foundation onto which we must continue to build good law and sound practices. This, we believe, will be best achieved by ongoing consultation and working together with the key role players as identified; and, perhaps more importantly, the education of our constituency with regard to the changes in the law and the resultant responsibility of compliance with the requirements introduced by these changes.

We are encouraged by an initiative of SARS, still in its discussion phase, to forge closer ties with the Department of Welfare (NPO Directorate) and the establishment of a specialised unit within SARS which will deal with exemptions as well as the handling of assessments and other fiscal matters affecting PBOs

The ultimate goal is to facilitate a process of change which will result in a tax structure which encourages rather than inhibits, the development of the non-profit sector and for South Africa to become an international model of tax reform in NPO circles.


[1] Act 30 of 2000.

[2] The author is indebted to the other members of the Tax Campaign Technical Team – the collaborative initiative between the Legal Resources Centre and the Non-Profit Partnership mandated to negotiate and interface with SARS on behalf of the Sector :

Mary Honey, Legal Resources Centre: NPO Legal Support Project, Cape Town and
Richard Rosenthal, an attorney practising in Cape Town and specialising in Non-Profit Law,

for providing accurate details of the lobbying process prior to the author’s involvement and for their comment and suggestions, resulting in a more accurate report.

[3] For a legal analysis of the Act, see Simon, K. “Draft Tax Legislation in South Africa,” IJNL Volume 2, Issue4.

[4] See Simon for a detailed analysis and discussion.

[5] Section 10(1)(cN) grants the exemption & section 30 regulates the process of exemption.

[6] The Act, insofar as it deals with the taxation of PBOs, will only come into effect once this schedule is finalised and publicised.

With reference to the phrase “philanthropic or benevolent nature” it is perhaps worth mentioning that when the Act was promulgated this phrase read as follows; “philanthropic and benevolent nature”. The Technical Team felt that this was too onerous a test as the terms have slightly different meanings. SARS has agreed to amend the phrase accordingly.

[7] Honey, M. “New Tax Laws for South African NPOs”, Legal Resources Centre: NPO Legal Support Project.

[8] Klingelhofer, S. & Frye, J. “Global Perspectives on Not-for Profit Law” (ICNL) 1996 at

[9] Honey, Ibid.

[10] A term used in the Explanatory Memorandum to the Amendment Act which refers to organisations not approved for tax exempt purposes.

[11] Salamon L. & Anheier H., The Emerging Sector: An Overview (1994), p108-109.

[12] Universities and Colleges, the latter category very narrowly defined.

[13] This schedule of activities has yet to be finalised. See also fn 6, where a separate schedule is mentioned.

[14] Portfolio Committee on Finance “Draft Report on the Katz Commission Report” February 2000.