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The term PBO and NPO are terms that are synonymous with entities that are formed for public benefit and receive donations.
The two terms have always caused confusion to some extent and at Taxrek, we want all our clients informed and knowledgeable about their legal requirements and environment they operate in.
Knowledge of one's industry is the first step to understanding and becoming a leader in one's field of expertise.
PBO (Public Benefit Organisation) and NPO (Non-profit organisation) actually refers to the same type of entity, but they are registered at two different governmental institutions.
NPO must be registered with the Department of Social Development.
PBO must be registered at South African Revenue Services (SARS) beforehand, but must be registered as a NPO at least 12 months from date of PBO application to SARS.
We suggest that both registrations are made simultaneously.
The PBO status allows the taxpayer to become exempt from paying income tax and VAT on donations received.
PAYE will be payable once the entity pays remuneration to any staff members and therefore becomes an employer.
The PBA (Public benefit activity – activities or areas the entity will operate in for public benefit) must coincide with those that are prescribed by the income tax act and government gazette(s).
The entity must be registered for NPO and PBO status as soon as possible and even before any donations are received.
Donations made towards a PBO are not taxable in the hands of the donor or donee.
Certain PBO's can also apply to become a section 18A entity in conjunction with being a PBO.
This registration will allow a donor to deduct the donations it has made for income tax purposes from their taxable income, thereby reducing their income tax liability to SARS (refer to limitation thereon via Income Tax Act of South Africa).
At Taxrek, we do not suggest that a PBO entity should be a company at all (due to complex legislative requirements), but the entity should be a trust especially formed for said purpose.
These types of entities require intensive administration to ensure that they comply with the legal requirement of the law to continue being PBO/NPO.
Section 18A entities require even more administrative compliance, as donors generally donate towards certain projects and require a detailed report from the PBO/NPO on how their donations were utilised.
Tax certificates must be issued to each donor separately as to enable them to deduct the donations from their taxable income.