Because the old 10(1)(f) exemption prohibited trading, and the new 2000 laws restricted it severely, NGO’s which wished to generate revenue to sustain their activities were forced into setting up dual structures: one organisation which was tax exempt and received donor funding, and another which did the income-generating work, and then donated the funds to the tax exempt organisation.
Since 2006, Public Benefit Organisations (PBOs) have been permitted to trade without limit (but may pay tax on some of their trading income). The question is: are there any advantages to keeping the old dual structures going, or should NGO’s now keep all of their eggs in one basket?
The tax answer to this question is easy: a PBO which earns trading profits is given a ‘basic exclusion’ (which acts like a sort of a 'primary rebate') of R100 000 or 5% of gross receipts (whichever is larger), when taxable income is calculated.
‘Gross receipts’ includes all kinds of income - capital (e.g. donor funding), trading, passive, investment income etc. It follows that the greater the ‘gross receipts’, the larger the ‘basic exclusion’, and the less tax will be paid.
So a PBO which ‘earns’ R250 000 profit, but also receives donations and investment income of R5 000 000, will pay no tax on the trading profit portion of its income.
If the ‘trading’ PBO were housed in a different entity from the organisation which received the donations and passive income, it would pay tax at 29% on R150 000 of its profit.
Under this new regime, the most straightforward and most tax effective way to structure an NGO is, therefore, to keep all activities in one entity, and maximise the tax advantage.
Of course, there may be other reasons to run dual structures, but more about that another time…
Nicole Copley is an NGO lawyer who has worked in the NGO sector for 16 years, drafting and amending founding documents, obtaining tax exemptions and NPO registrations, and providing advice and assistance to NGO's countrywide. Her background is in business law, and she also drafts and vets commercial agreements for her clients.She can be reached at email@example.com