What a PBO's founding document must say
The clauses SARS looks for in a South African organisation's founding document before approving it as a PBO, and what goes with the application.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa
A trust set up by a family to fund bursaries wants to be exempt from income tax. Its trust deed was drafted for estate planning, names the founder as sole trustee with the casting vote, and says that on termination the assets go back to the founder's children. As a founding document for a public benefit organisation, almost every one of those clauses is a problem.
SARS approval as a public benefit organisation (PBO) turns largely on what the founding document says. The organisation's good work does not cure a deed or constitution that lacks the required provisions. This article sets out the provisions SARS looks for, what has to go with the application, and how a firm can gather it all without the process stalling.
People: at least three, not connected
SARS says a PBO's founding document must provide that at least three persons who are not connected persons accept fiduciary responsibility for the organisation. The requirement comes from section 30(3)(b) of the Income Tax Act.
Two words carry the weight. "Fiduciary" means the persons are responsible for the organisation's assets and decisions, as trustees or directors are, not merely advisers or patrons. "Not connected" means they cannot all be, for example, members of one family. A board of three siblings fails the test however capable they are.
When reviewing a draft, check:
- that the document names, or provides for, at least three people with fiduciary responsibility;
- that the people actually appointed are not connected to each other;
- that the document deals with what happens when one leaves, so the number does not quietly drop.
Control: no single person in charge
SARS also says the founding document must provide that no single person directly or indirectly controls the organisation's decision-making.
This catches arrangements that look collective on paper but are not. A founder with a casting vote on every matter, a veto, or the sole power to appoint and remove the others controls the decisions in substance. So does a structure where the other office-bearers are employees of the founder's business. Read the voting, quorum and appointment clauses together, and ask the client how decisions are actually made.
Dissolution: where the assets go
SARS says a PBO's founding document must require that on dissolution its remaining assets go to another approved PBO, a qualifying exempt institution, or government.
The family trust in the opening example fails here as well. Assets that return to the founder's family on termination are not committed to public benefit. The clause must send them onward to one of the recipients SARS lists, and it should say so in plain terms. A clause that leaves the choice to the trustees "at their discretion" invites a question from SARS about what that discretion could include.
What goes with the application
SARS says an organisation that has existed for more than 12 months must attach annual financial statements to its PBO approval application, while a dormant organisation must submit an affidavit with bank statements.
For an organisation that has been operating for years without formal statements, this is often the longest part of the job. The statements need to cover its activities in a form SARS can read, and the firm preparing them should start from records rather than recollection. Achekam's statement templates include one for non-profits, with wording written for South African practice, which suits an organisation whose income is grants and donations rather than sales.
Gathering the documents without chasing by e-mail
An application of this kind needs signed documents from several people: the amended founding document, resolutions adopting it, identity details of the persons with fiduciary responsibility, the financial statements and, where relevant, the affidavit and bank statements.
In Achekam, staff can create, send and track requests to the client for documents, answers and confirmations in one RFI console, whichever screen the request was raised from. Raising one request per item, and per person where signatures are needed, makes it obvious which trustee has not yet signed, rather than leaving the firm to reread a thread of replies.
A request list for a typical application:
- Signed and adopted founding document, with the amendment resolution if it was changed.
- Names and details of at least three persons with fiduciary responsibility, and confirmation that they are not connected.
- Annual financial statements, or for a dormant organisation, the affidavit and bank statements.
- A description of the public benefit activities the organisation carries on.
Think about year two before approval
Approval is the start of a set of continuing duties. SARS says an approved PBO must submit annual income tax returns, send SARS all amendments to its founding document, report a change of address within 21 business days, and keep records for five years from the date the return is submitted.
That affects how the founding document is drafted now. Each future amendment has to go to SARS, so a document that tries to anticipate every change in detail will need amending often. Keep it clear and complete, but not cluttered. For the yearly duties, see keeping a PBO's approval in good order; if the organisation is a non-profit company paying its directors, also read paying the directors of a non-profit company.
The requirements in SARS's words
SARS's page on public benefit organisations explains what a PBO is, how approved PBOs are exempt from income tax and what the founding document must provide. Go through it clause by clause with whoever is drafting the client's founding document, before the board signs anything.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
