Responsibility as a fiduciary representing a Public Benefit Organisation

In setting up a charitable organisation, the most pressing matter is registering the organisation as an exempt institution with SARS in order to pay no or little income tax. Should an organisation qualify as a PBO, the receipts and accrual received by the PBO and qualifying trading income, will be exempt from tax under certain circumstances.

In registering the organisation with SARS, as part of the application, three unconnected persons need to accept fiduciary responsibility for the organisation and need to sign a declaration accepting their responsibilities towards SARS. A fiduciary could hold the position of a trustee, director or member of the PBO.

What is often not clearly understood, is that in accepting the responsibility as a fiduciary, a person must adhere to the requirements set out in terms of the Income Tax Act, No. 58 of 1962 (as amended) (“IT Act”). Inter alia, and are required to keep SARS informed of any changes to the organisations activities, founding documents or fiduciaries as and when they occur.

Section 30 of the IT Act is one of the sections that sets out a harsh penalty against non-compliance of the responsible parties. In terms of section 30(11):

“Any person who is in a fiduciary capacity responsible for the management or control of the income and assets of any approved public benefit organisation and who intentionally fails to comply with any provision of this section or of the constitution, will or other written instrument under which such organisation is established to the extent that it relates to the provisions of this section, shall be guilty of an offence and liable on conviction to a fine or to imprisonment for a period not exceeding 24 months.”

To date, we have not seen SARS enforce this legislation, as the Tax Exemption Unit (“TEU”) is a relatively small, non-tax revenue generating unit for SARS. Over the years, however, we have seen that the TEU have prioritised investigating abuse of management of registered PBOs, and we may see SARS investigating more PBOs to confirm their compliance beyond the submission of an income tax return and financial statements.

With SARS focusing more on the non-compliant taxpayer, we may see SARS enforcing the above section where non compliance takes place. It is therefore prudent that persons accepting the appointment as a fiduciary of a PBO should know their responsibilities.

Some of the requirements, which is set out on the written undertaking signed by a fiduciary on registration with SARS, are as follows:

1. The sole or principal object of the PBO is to carry on one or more public benefit activity (PBA), in a non-profit manner and with an altruistic or philanthropic intent.
2. No funds will be directly or indirectly distributed to any person, otherwise than in the course of undertaking any PBA. 
3. All funds will be used solely for the object for which the PBO has been established.
4. On dissolution the remaining assets will be transferred to any PBO, any institution, board or body which has as its sole or principal object the carrying on of any PBA, which are required to use those assets solely for purposes of carrying on one or more PBA listed in the Ninth Schedule to the IT Act.
5. A copy of any amendment to the constitution, will, or other written instrument under which the PBO is established will be submitted to SARS and SARS should be notified when changes are made.
6. The PBO will comply with reporting requirements as may be determined by the Commissioner for the SARS.
7. A PBO which provides funds to any association of persons contemplated in Part I of the Ninth Schedule to the IT Act must take reasonable steps to ensure that the funds are used for purposes for which it was provided.
8. Any PBO who provides funding to other PBOs will follow the requirements set out in section 18A of the IT Act when making distributions with the prescribed period.

If a person is removed or replaced as a fiduciary it is important for SARS to be advised of his/her replacement for their records to be updated.

Assisting in the management of compliance of a PBO is a wonderful opportunity to give back to the South African community at large, persons just need to ensure that the compliance of such an organisation is taken seriously.

By Sharon MacHutchon, Tax Manager
& Leonard Willemse, Senior Manager

30/11/2021