The International Journal
of Not-for-Profit Law

Volume 3, Issue 2, December 2000

Ghana

National Conference Adopts New National NGO Policy

By Paul Opoku-Mensah and Emmanuel Akwetey

A draft national policy on strategic partnerships with NGOs providing a coherent framework for the management of NGO-Government relations has been adopted in Ghana. Proposals forming the basis of the national policy were endorsed after thorough deliberations at a national conference held on 25 – 26 October 2000. Representatives of the government and NGOs worked together to develop the proposals for this policy. Between November 1999 and October 2000, a National Consultative Group which constituted of the two actors oversaw the preparation of an issues and concept paper on which extensive consultations with stakeholders were held at local and national levels in August and October 2000.

The policy provides a framework that specifically:

• Recognizes NGOs as strategic partners in national development and democratization;
• Creates an enabling legal, institutional and democratic environment for NGOs to contribute effectively to national development; and
• Institutionalizes a framework for consultations and collaboration between government, NGOs and other stakeholders on policies affecting operations in the non-profit sector.

One of the major provisions of the policy is the establishment of an autonomous and independent National Commission on NGOs (NCNGO), which will be responsible for the implementation of the national policy. It will have both policy-related and administrative functions. Administratively the NCNGO will combine and perform the registration, monitoring and co-ordination functions hitherto performed by separate public agencies. In a major departure from similar proposals presented by government in 1993 and subsequently rejected by NGOs, the proposed NCNGO:

• has a multi-stakeholder membership (comprised of government, NGOs, donors, especially private corporate firms, and beneficiary communities);
• includes a higher percentage of representation of NGOs compared to other stakeholders; and shall elect its Chairman from among its membership.

Although the policy is yet to be formally approved by government and aspects of the implementation need to be worked out in detail, there is no doubt this is an important landmark in the history of NGO-government relations in Ghana. More specifically, it represents a coherent institutional framework for NGO-government relations that acknowledges and addresses the concerns of both government and NGOs, and has the potential to aid the development of a vibrant NGO sector in the country.

A detailed analytical review of the policy will be appearing in the next issue of IJNL.

South Africa

I) New Tax Law for South African NPOs in the Making

By Mary Honey

Background

It is widely accepted that tax benefits for non profit organisations (NPOs) constitute a key component of an enabling environment for NPOs and assist to mobilise additional civil society resources that are essential for participatory democracy and development.

During 1999, the lobby for better tax benefits for NPOs received a major boost from the Katz Commission. The Ninth Interim Report of the Commission of Inquiry into certain aspects of the Tax Structure of South Africa (the Katz Report) recommended improvements to the tax framework. The Katz Report was presented to the Parliamentary Portfolio Committee on Finance during October 1999. The Committee held public hearings and then published its own report that essentially supported the recommendations of the Katz report. These events accelerated the process of reforming and amending the current tax framework for NPOs.

The new legislation is contained in the Taxation Laws Amendment Act No 30 of 2000, as amended, which was promulgated on 19 July 2000, in Government Gazette 21390. However the new law has not yet come into operation and various regulations and schedules or “lists” which will give critical content to this new legislation are still being drafted and then must be gazetted.

As in most countries, South African law recognises two principal benefits for NPOs, namely: income tax exemption and donor deductions. This document discusses the differences between the existing, but soon to be repealed law (the old law) and the Act (the new law) under these two headings.

Old Law

Income Tax Exemption

In terms of Sections 10(1)(f) and 10(1)(fA), of the Income Tax Act 58 of 1962 as amended, (“the Act”), certain NPOs are exempt from the payment of income tax, namely:

1. Religious, charitable and educational institutions of a public character (Section   (1)(f)); and
2. Any fund the sole object of which is to provide funds for any religious, charitable or educational institution contemplated in Section 10(1)(f) above, (Section 10(1)(fA)).

Donor Deductions

A donor deduction is a right available to donors to deduct from their taxable income, limited amounts representing philanthropic contributions for the benefit of eligible institutions. Section 18A of the Act restricts the benefits of donor deductibility to:

1. Universities, colleges and educational funds (as defined); and
2. A deduction of taxable income, not exceeding:
   • in the case of individuals, R500.00 or 2% of taxable income; and
   • in the case of companies, 5% of taxable income.

   Ancillary Exemptions

Organisations which are exempt from income tax in terms of the provisions of Section 10 generally also are eligible for a range of other tax benefits, including those relating to stamp duties, marketable securities tax, transfer duty, estate duty, donations tax, value added tax and regional service levies.

Donations Tax

Should an NPO not be exempt from income tax in terms of Section 10 of the Act, South Africans are obliged to pay donations tax of 25% on the capital amount of the donation (Section 54-56 of the Act).

The deficiencies of this current framework results from the statutory formulation of the law itself and the narrow manner in which it has been interpreted and implemented by the South African Revenue Services coupled with the lack of case law challenging the Commissioner’s decisions. Consequently most South African public benefit organisations involved in work that addresses the developmental needs of South African society are excluded from the benefits of exemption from income and other related taxes and donor deductibility. By way of example, one of the main categories for exemption was the section 10(1)(f) “charitable” exemption. The Commissioner does not consider NPOs involved in development and job-creation projects as charitable. It has interpreted charitable as meaning soup-kitchen-handout or welfare type work.

New Law

The purpose of the new law is to regulate in a more systematic way and extend the ambit of the tax benefits for NPOs.

Income Tax Exemption

The new law creates a new category of “Public Benefit Organisation” (Section 30), which will qualify for income tax exemption (Section 10 (1)(cN)).

A Public Benefit Organisations (PBO) is defined as any organisation of a public character:

• which is a section 21 Company, Trust or Association; and
• the sole object/s of which are to carry on one/more Public Benefit Activities in a non-profit manner and subject to certain trading restrictions. (section 30(1)).

The Minister, by notice in the Government Gazette, shall determine as a Public Benefit Activity any “activity which is of a philanthropic or benevolent nature, having regard to the needs, interests and well being of the general public” (section 30(2)).

The definition of Public Benefit Activity includes the provision of funds to a defined PBO and an association of persons carrying on a public benefit activity. Gazetted Public Benefit Activities must be incorporated into the Act within a period of 12 months.

Thus the Minister can progressively add, but not subtract, Public Benefit Activities to the list. This list is intended to be broad and to include existing and most other NPOs operating for public benefit.

The new law requires all NPOs to actually apply for a tax exemption. This is different from the old law. Previously, some NPOs, namely, Section 10(10(f) “religious, charitable and educational institutions of a public character” were considered tax exempt whether or not they applied for approval or confirmation of their tax exempt status.

If an NPO falls within the definition of PBO, the Commissioner shall “approve” a PBO as exempt from income tax provided it complies with various requirements, (Section 30(3)), namely:

• Conditions still to be prescribed by regulation; and
• Submission of a copy of the founding document which provides for the following:
  • Three unconnected persons must accept positions of fiduciary responsibility;
  • It is required to utilise its funds solely for its sole object;
  • Surplus funds may only be invested in certain prescribed investments;
  • Investments (other than business undertakings and trading activities) acquired by way of donation, bequest or inheritance may be retained in the form so acquired;
  • On dissolution, it must transfer its assets to similar approved PBOs;
  • It may not trade except under certain circumstances set out in the Act;
  • It is prohibited from accepting donations which are revocable or conditional under certain circumstances;
  • It must furnish SARS with copies of any amendments to its constitution;
  • It must not be party to a tax avoidance scheme;
  • Remuneration to employees, office bearers, members or other person must not be excessive;
  • It must conform to certain reporting standards;
  • Where the PBO provides funds to non-approved PBOs, it must take reasonable steps to ensure that the funds are used for the purpose for which they have been provided;
  • It must be registered in terms of section 13(5) of the Non-Profit Organisations Act.

Donor Deductions

Exempt PBOs that carry on any Public Benefit Activity – which is determined by the Minister for the purpose of this section 18(A) may also qualify for donor deductions.

The first activities which will qualify are:

1. Already exempted categories, namely formal secondary and tertiary education and training institutions;
2. Further categories announced in the Budget speech, namely:
3. pre-primary schools that offer an approved educare programme;
4. primary schools;
5. organisations mainly involved in preventing HIV infection or providing care to those whose livelihoods have been impoverished by AIDS;
6. childrens’ homes providing care to abandoned, abused or orphaned children; and
7. organisations mainly involved in caring for destitute aged persons.

The annual limits for individuals and companies have now been equalized and are R1000.00 or 5% of annual taxable income, which ever is the greater.

Importantly, this increase in the amount of the deduction takes effect from 1 March 2000.

Transitional or Interim Provisions

The transitional provisions of the new law state that a previously exempt NPO which:

• applies for tax exempt status within one year of the new law coming into operation; or
• submits a written undertaking, as provided for in section 30 (4) of the new law, will continue to enjoy tax exemption until written notification by the commissioner of its decision;

provided that within five years from the date the new law takes effect or when an NPO amends its founding document, whichever happens first, it submits a copy of its founding document to the Commissioner.

The new law states that should the founding documents of a PBO not comply with the requirements of the new law, it has five years from the date the new law takes effect to amend its documents, provided that a person in a fiduciary capacity gives a written undertaking that, in the interim, the PBO will comply with the provisions of the Act, (Section 30(4)).

Status of the New Law

The new law was passed in July 2000. However, excepting the increase in the amount of the section 18(A) donor deduction limit which takes effect from 1 March 2000, the new law is still to come into operation on a date to be fixed by the President by proclamation in the Government Gazette.

The new framework legislation is in place. The Schedules of Public Benefit and Donor Deductible Activities, which are key to extending tax benefits to a broader spectrum of NPOs, are still to be finalised. It is intended that these schedules will be gazetted and the new law will come into effect at the same time, probably early in 2001. Also the new framework creates a sound foundation for ongoing negotiations with the Commissioner regarding further refinements and improvements to the law.

Notable Improvements in the New Law

• The new law clarifies and simplifies the old law. The new law substitutes the more contemporary concept of Public Benefit for the old fashioned notion of charity.
• The new law obliges the Commissioner to grant tax exemption to a PBO that meets its requirements.
• The new law grants minimal discretion to the Commissioner. Should the Commissioner wish to impose conditions, it must do so by regulation. This represents a decided improvement on the old law.
• The new law provides a flexible means to update and modernise the list of Public Benefit and Donor Deductible Activities. The new law provides that the Minister shall publish lists of both Activities in the gazette. However within one year the lists must be incorporated into the Act. So the Minister may add to but not subtract from the list.
• The new law abolishes the strange distinction between institutions and funds. The distinction between funds and institutions in the old law was considered complicated and unnecessary. In the new law, the provision of funds to a defined PBO or association of persons carrying on a Public Benefit Activity is considered to fall within the definition of Public Benefit Activity.
• The 75% distribution requirement. The old law requirement that income tax exempt funds distribute 75% of their annual revenue has been abolished except in the case of funds which also qualify for a section 18A donor deduction.
• Trading restrictions. The old law prevents income tax exempt funds from trading. In practice, the Commissioner imposed this trading restriction on income tax exempt institutions as well. The new law prohibits PBOs from trading except under certain circumstances which are prescribed in Section 30(3)(b)(iv), namely:
  • A de minimis rule which provides that gross income from trade may not exceed the greater of 15% of gross receipts or R25 000.00.
  • Related trading activities, substantially the whole of which are directed towards costs recovery and which do not cause unfair competition in relation to taxable entities.
  • Unrelated trading activities which are of an occasional nature and which are substantially carried out with voluntary assistance without compensation.
  • A list of undertakings or activities which the Minister may approve having regard to certain criteria set out in Section 30(2)(b)(iv)(dd).
• Donations by exempt PBOs to unregistered organisations carrying on a Public Benefit Activity are permitted. The old law prohibits income tax exempt funds or institutions from donating to non-exempt organizations. This creates a real difficulty for the NPO sector as support to the grass root level is key for development. The new law enables income tax exempt PBOs to donate funds to non-exempt associations carrying out a Public Benefit Activity provided that the exempt PBOs takes reasonable steps to ensure that the funds donated are used for the purpose for which they have been provided. This provision is a decided improvement on the old law.
• The ancillary or related tax exemptions are intact. In terms of the new law, PBOs which are exempt from income tax are still eligible for a range of other tax benefits, namely, those related to exemption from stamp duties, marketable securities tax, transfer duty, estate duty, donations tax.

What Should NPOs Do about the New Law

The new legal and regulatory framework is not yet complete and not yet in force, so it is a little early to say.

However, it is clear that the new law requires tax exempt NPOs to be registered in terms of the NPO Act. So NPOs that anticipate retaining or obtaining tax exempt status which are not currently registered in terms of that Act, whether they are established as Voluntary Associations, Trusts or section 21 Companies, could register as NPOs now, during this interim period.

II) Update on Developments

In mid-January the South African Revenue Service (SARS) gazetted the proposed lists of public benefit activities for income tax exemption (see below) and for the deductibility of donations (see below). During the present comment period SARS is accepting comments from the general public (until February 15).

The Nonprofit Partnership and the Legal Resources Centre have sent out notices about the comment period and are urging significant participation from NGOs with experience in providing various types of services that might be classified as public benefit activities. Workshops will be conducted to further facilitate discussion. For further information on the NPP initiative, please contact Albert Dlwengu (albert@npp.org.za) or Ricardo Wyngaard (ricardo@lrc.org.za). NPP wil be holding an international conference to discuss tax issues affecting NPOs in late March 2001.

The lists and other information about the process for making comments are available on the SARS website at www.sars.org.za. A special email address is available for comments pbo@sara.gov.za.

The proposed lists of activities for income tax exemption and tax deductibility are as follows:

South African Revenue Service
Draft Public Benefit Activity List
Income Tax Exemption

1. Welfare and Humanitarian 

1. The care, treatment or rehabilitation of the sick, disabled
   or those otherwise physically or mentally challenged;
2. The care or welfare of abandoned, abused or orphaned children in a home;
3. The caring of destitute aged persons;
4. ]Disaster or poverty relief without the expectation of anything in return;
5. The provision of basic human necessities to the poor;
6. The care and welfare of abused persons.
7. The prevention of HIV infection or the providing of care (including counseling and distribution of educational material in this regard) to those whose livelihoods have been impoverished by AIDS;
8. Conflict resolution, the promotion or protection of civil or human rights, or the promotion of peace or justice, in an impartial and unbiased manner;
9. The promotion of reconciliation, mutual respect and toleration between the various peoples of South Africa;
10. Primary health care education;
11. Blood transfusion services;
12. Provision of nursing care for the terminally and critically ill;
13. The provision of professional services (including, but not limited to legal and health services) for the benefit of indigent or disadvantaged persons, either free of charge, or at an affordable charge representing less than cost or market tariffs;
14. The upliftment of indigent or disadvantaged persons or communities  excluding the granting of loans or other assistance for business purposes;
15. The promotion of the protection and safety of the general public;
16. The provision of residential care for aged persons, being persons over the age of 60, in a home where at least one meal a day and nursing services are provided;
17. The lending of support and giving of advice to persons, or their respective families, suffering from physical or mental illnesses;
18. The promotion, protection or stability of family or marital life;
19. Rehabilitation of prisoners;
20. The prevention, rehabilitation and care of persons suffering from an addiction to a dependence-producing substance;
21. Building and equipping of clinics and community halls for the benefit of  indigent and disadvantaged persons or communities;

 2. Housing  

1. Promoting of access to land, housing or infrastructural development for the benefit of indigent or disadvantaged persons or communities;
2. The development, construction, upgrading or conversion of housing units (or the procurement thereof in order to let or sell such units on a regular basis), for the benefit of indigent and disadvantaged persons; being part of a community, the average income of the majority of the adult members not exceeding R2000 per month.
3. The development, servicing or upgrading of stands for purposes of the activity contemplated in (b) above;

3. Education

1. Pre-primary school education providing an approved educare program;  excluding entities the sole purpose of which is the provision of day care facilities;
2. The provision of education by a school which enrolls learners in one or more grades from grade 0 to grade 12;
3. The provision of tertiary education at a Technical College, Technikon or  University or such similar tertiary educational institution providing any formal course of study or training at which a recognised tertiary qualification is obtained;
4. Basic adult education, including literacy and numeracy education;
5. Training for unemployed, disadvantaged or indigent persons to enable them to obtain employment;
6. The provision of bridging classes to enable a person to enter a tertiary  educational institution as envisaged in 3(c) above;
7. Career guidance and counseling services provided to persons attending  educational institutions as envisaged in 3(b) and (c) above;
8. Building and equipping of schools and classrooms (for utilization by approved Public Benefit Organisations conducting approved educational activities) for the benefit of indigent and disadvantaged persons or communities;

4. Religion

The promotion and/or practice of religion which encompasses acts of worship, witness and community service based on a belief in a deity and a recognised creed.

 5. Cultural  

1. The promotion of or engaging in the arts, including art, drama, dance, music and literature;
2. The promotion of the culture and custom of various languages and ethnic groups;
3. The promotion, and engaging in philosophical activities;
4. The establishment and maintenance of museums, including art galleries and libraries.
5. The protection and preservation of national monuments, areas of historical interest, and national heritage sites;
6. The provision of youth leadership programs, including adventure camps aimed at improving self confidence, group dynamics, leadership and communication;
7. The organising and hosting of national or international cultural events;

6.  Conservation, Environment and Animal Welfare

1. The conservation, rehabilitation or protection of the natural environment, including flora, fauna or the biosphere;
2. The prevention of the ill treatment of animals, including the care of animals.

7.  Research  

Scientific, technological, industrial, medical and agricultural research;

8. Sport  

1. Amateur sport or recreation carried on as a pastime without compensation;
2. The co-ordination, development and administration of a specific sporting code, as envisaged in (a) above;
3. The organising and hosting of national or international sporting events.

South Africa Revenue Service
Draft Public Benefit Activity List
Deductibility of donations  

1. The care or welfare of abandoned, abused or orphaned children in a home;
2. The caring of destitute aged persons;
3. The prevention of HIV infection or the providing of care (including counseling and distribution of educational material in this regard) to those whose livelihoods have been impoverished by AIDS;
4. Pre-primary school education providing an approved educare program;  excluding entities the sole purpose of which is the provision of day care facilities;
5. The provision of education by a school which enrolls learners in one or more grades from grade 0 to grade 12;
6. The provision of tertiary education at a Technical College, Technikon or  University or such similar tertiary educational institution providing any formal course of study or training at which a recognised tertiary qualification is obtained;
7. Basic adult education, including literacy and numeracy education
8. Training for unemployed, disadvantaged or indigent persons to enable them to obtain employment;
9. The provision of bridging classes to enable a person to enter a tertiary  educational institution as envisaged in 3(c) above;
10. Building and equipping of schools and classrooms (for utilization by approved Public Benefit Organisations conducting approved educational activities) for the benefit of indigent and disadvantaged persons or communities;