In this, our last letter of the year, we:
- deal with the upcoming NPO register clean up (!) in some detail, with practical tips;
- discuss whether the PBAs SARS classifies organisations under matter; and
- give some practical advice on filing objections with SARS.
We also introduce our theme for the next few letters:
Governance: Why and How
“Governance” is a word more likely to produce a (politely stifled) yawn than any excitement or interest. It does not sound like fun and many founders of organisations and those who go on to lead them treat it as an irritation and a hindrance, something that is a boring waste of time and money when there are (surely) more interesting and impactful things to do with funds and energy.
In fact, good governance (which entails putting in place systems, limits and controls and a rigorous, ongoing adherence to them) is a crucial component of building an organisation which makes an impact, attracts support, draws in good board members and staff, and survives in the long term. Passion and drive are important for success but governance is the ‘yin’ to passion’s ‘yang’ – it is the foundation-stone and the central support. I may be getting a bit poetic here, but really believe that good governance is like the soft rain which falls all night, nourishing and feeding.
It is hard enough to build a sustainable organisation which achieves its objects over the long term and survives in a world of ever-changing demands and pressures with good governance mechanisms in place – try to do it without a firm support structure, and you will find the work, the dreams and the people start to fray, to come apart at the seams, and rupture under strain.
This view of the fundamental importance of governance is one we have arrived at after long years of experience with organisations. Over our next few letters, we will examine some of the important components of governance, and open spaces for conversation and learning. If you have any stories to share, and suggestions to make about topics and issues to discuss under the heading of ‘governance’ be sure to let us know on email@example.com or go to our website, and send us your suggestion in the ‘contact form’ on www.ngolawsa.co.za.
Alert: Clean-Up of the NPO Register Cometh
Initially promised to be implemented in 2020, but delayed because of the impact of Covid-19, the long-overdue update of the NPO register (restoring confidence in the register’s credibility by removing non-compliant NGOs) will be effected as follows:
- From 3 November 2020, the Minister of the Department of Social Development (‘DSD’) launched an awareness campaign called ‘Know your NPO status’ designed to encourage all NPOs registered with DSD to check on their status, update details and lodge any annual reports which are due.
- From 1 April 2021 (and also from 1 July 2021- typo suspected in the DSD notices, but we have not been able to obtain clarification): organisations which were granted NPO status between 1998 and 2012 and which owe reports will be de-registered.
- From 1 October 2021: organisations with outstanding reports with registration dates 2013 – 2015 will be deregistered.
- From 1 April 2022: organisations which were registered between 2016 and 2019 but which owe reports, will be de-registered.
Please note that the ‘order of attack’ is not based upon the date that reports are due from, but date of registration as an NPO, beginning with those who were registered first and then working forwards. In the period 1 April 2021 to end September 2021, DSD typo notwithstanding, we conclude that they will begin their work with those registered in 1998, which should mean that those who are registered in 2010, for instance, have a few more months to get things straight.
The lack of consequence for non-filing of reports over the past eight or ten years has meant that many organisations have become complacent. The time for complacency is over, and all organisations which wish to retain their NPO status and who owe reports, need to get moving now. In our experience with catch-up reports, there is often a bit of back and forth with DSD, as there may be registration details which need to be updated and it is often the case that the organisation gave up filing because of administrative/documentation issues along the way. So please allow for a couple of extra months to get things right. We suggest that you plan to have all outstanding reports filed 6 months before the applicable deadline, to allow for these sorts of issues, and also because the deluge of reports landing at DSD is likely to affect turnaround times in processing the reports.
If you are not sure of your organisation’s compliance status and/or need help in getting outstanding reports lodged, please let firstname.lastname@example.org know, as we have a team who are experienced with these reports and able to assist and advise.
Some practical tips from ngoLAW for getting NPO reports up to date
- File reports in date order, starting with the oldest one due;
- If you are lodging reports online, make sure that the login password is being sent to a current email address, or you will not be able to lodge reports. Email email@example.com to find out whose email address is on record. The link to the form to change the email address is http://tcn.org.za/wp-content/uploads/2019/08/FORMS.pdf
- Make sure the accounting officer puts their practice number on the financial reports;
- For any changes in board members bearers, send the following:
Voluntary associations Signed Minutes of meeting and signed attendance register reflecting clearly changes in board members Trusts New letters of authority and copy of signed Deed of Assumption NPCs New CoR39
- If the online system is not useful to you, courier physical reports to DSD at NPO Directorate, Department of Social Development, HSRC Building, 134 Pretorius Street, Pretoria 0001 (phone number 012 312 7500).
PBAs: Do they matter?
(This discussion is a follow-on from a topic of a previous brief, ‘Mission-Drift in Time of Covid’. To access that newsletter, please go to our website https://ngolawsa.co.za/16-june-2020-letter-six-from-lockdown/)
If you have an organisation which has a much-coveted exempting letter from the SARS Tax Exemption Unit (TEU), you may have noticed that, after all the careful crossing of blocks on the Ei1 form choosing the public benefit activities (PBAs), the letter you receive does not tell you which one of them did the job and convinced SARS to grant you the status.
Now we know that the TEU does record which PBAs you are approved under because we sometimes need to ask them and we are quite often surprised at which ones did get the approval, as they are not necessarily those we would have said best described the work of the organisation. The big question is whether this matters?: you have the PBO (and, possibly 18A) status and, so long as you continue to carry out your stated objects and your activities are also PBAs on the list (even if they are different from the ones SARS has you down for) what difference does this make?
The strict legal answer to this question is that it does not matter. As an approved PBO:
- you must have a sole object of carrying out one or more PBAs;
- all of your activities must be carried on in a non-profit manner and with altruistic/philanthropic intent;
- none of your activities may be designed to enrich your board or employees (except via reasonable remuneration for services rendered; and
- all activities must be to benefit the general public or a sector of the general public.
The organisation must abide by (and its founding document must contain) the rules set out in section 30 of the Income Tax Act and one of those is that when the founding document is amended, the updated document must be sent to SARS TEU for their records.
So, if the change to your founding documents includes a change in your objects, and if this means that some PBAs are added to (or taken away from) the list which you initially applied under, one would hope that the TEU would note this change along with the amended document.
But aside from this obligation to file copies of amended founding documents, the law does not anywhere state that approved PBOs must only carry out the PBAs for which they have actually been approved by SARS, just that:
- they must carry out their own objects; and
- their activities must be PBAs
[**NOTE here: there is of course a distinction between PBAs on the second part of the Ninth Schedule, which get you 18A status, and those which appear on the first but not the second part. But your SARS letter will have very clearly stated whether the organisation has 18A status and, if so, you must be sure that your PBAs are all on the 18A-qualifying part II of the list**]. But, aside from keeping between these lines, we have advised clients that it does not really matter if you started out with homework clubs but are now doing curriculum development, or with ECD centres but are now training teachers, or with sustainable agricultural projects but are now also dealing with teen pregnancy issues. NGOs are on the ground and things shift, new needs emerge, more effective strategies are implemented.
However, recent correspondence with SARS TEU on this issue of changing PBAs has alerted us to a technical tax issue which may arise and which you might need to bring to the attention of your financial team and accountants, being: If your organisation is doing any ‘trading’ (charging fees, selling things or services) one of the grounds on which the income from this commerce will be treated as tax-exempt is if you can show that the activity generating the income is ‘integral and directly related’ to your sole object (and the profit margin is small and its not unfair competition for taxpayers). So, a school charging school fees, a conservation area renting co-advertising space to sponsors, old-age homes charging (state-pension aligned) rental and levies – all of these would pass the test and be treated as non-taxable trading income, provided that they are in line with the objects set out in your founding document. However, it seems that SARS may have an internal policy of looking at the source of trading income, comparing it to the PBAs which they have on record for you, and then assessing the organisation to tax if the activity producing the income is not on their (internal) list of PBAs.
In our view, this approach is incorrect in the law as you do not have to carry out your approved PBAs, but only your objects which are PBAs. This may sound like a small distinction to make (and you would not be blamed for yawning in this part of the newsletter) but it could become important factor if tax is levied and you have to object to (and appeal against) this assessment to tax.
Which leads us to the next important topic:
Objections to SARS: – get them right the first time
If SARS has any issues with tax returns lodged by an organisation, they will make these clear in the assessment that they issue. For instance, in the sort of case we have already discussed, your accountant may record as non-taxable trading income fees received from parents who send their children to your ECD centre. SARS has you down as carrying out the PBA of training ECD teachers at your registered private college, but have not noted (despite your amended MOI lodged) that you are also running an ECD centre (at which your trainee teachers gain practical experience). SARS therefore issues an assessment indicating that you owe tax on the (small) profit generated on the ECD centre fees (and, possibly, only because you did not anticipate the tax, so have not carefully allocated to the ECD centre all of its tax expenses).
The next step in the process is filing an objection with SARS on the form they provide, setting out why you think the assessment is incorrect and that you should not be taxed. Now, this objection form is a simple-looking thing to fill in, there is a deadline to lodge it by and often the organisation’s CFO or accountant either panics or takes it too casually, just puts the grounds for their objection on the form in a way that makes sense to them (sometimes without consulting anyone else) and then quickly shoots it off to SARS. If the grounds stated on the objection are not compelling or legally sound, SARS will reject the objection and you move on to the next stage of the process, which is appeal or alternative dispute resolution.
It is often only at this stage that lawyers or other people with specific expertise get involved, only to discover that the reasons which were set out in the initial notice of objection are not, in fact, legally sound. And the very big issue, at this stage, is that you are not permitted to change the grounds of your objection, even if it is not relevant or helpful and you do have other, perfectly good, grounds upon which you could have relied.
In the cases we have had this year where we were called in after an (incorrectly framed) objection was lodged, the SARS officials we have dealt with have been gracious and have accepted and listened to these new arguments but, were it not for this discretion they have exercised in our favour, the organisation concerned would have been significantly out of pocket, and at a time when funding sources are rather thin on the ground.
CONCLUDING ADVICE: It is very important that all objections lodged with SARS are dealt with at the right level, that those with specific expertise (and fresh eyes!) are called in, and that the objection is correctly framed so that it does not limit the future grounds of appeal.
PRACTICAL TIP: Have a ‘standing order’ in place that any SARS assessment which is adverse is not dealt with at the same level as the initial return was, but is escalated to senior management to call on appropriate expertise.
To brighter times ahead
Keep the questions coming and send us suggestions for future topics – visit our website, hit the ‘contact’ tab, and enter your question into the ‘Contact Form’ space provided.
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We will be closed for the holidays from noon on 15 December until 6 January 2021 and we wish you all safe and happy holidays with peace, joy and protection for yourself and those you love.
Godspeed to those working so hard to find (and roll out) an effective vaccine, so that we can hug each other again!
Stay safe, keep calm and carry on- A Luta Continua!
Nicole, Lize, Bandile, Janice, Lisa and Dorothy
Resources and perspectives:
Always insightful and challenging: Marcus on moving forward in this season of inhibiting fears! Does your organisation have FOGO?
New name, same passion: Ziyo (formerly CMDS) with some practical advice for the times: Now is the time for good cash flow management and projections