Ninth Interim Report of the Commission of Inquiry into certain
Aspects of the Tax Structure of South Africa

(Katz Commission)

FISCAL ISSUES AFFECTING NON-PROFIT ORGANISATIONS (NPOs)

2. MOTIVATION FOR BENEFICIAL TAX TREATMENT OF NPOs

2.1  The Sub-Committee received and considered a large number of motivated submissions made on behalf of individual NPOs, and from certain umbrella bodies and organisations representative of the NPO sector (e.g. the South African National NGO Coalition [SANGOCO]); and of the Grantmaking sector (e.g. the South African Grantmakers' Association [SAGA]). A schedule of the submissions received is attached (Annexure A). In addition, the Sub-Committee had the benefit of several written submissions from international agencies and authorities, including the United States International Center for Non-for-Profit Law (ICNL); the Charities Division of Revenue Canada; the Australian Association of Philanthropy; and a variety of religious organisations.

2.2  Whereas these sources and submissions differ in their emphasis upon particular needs and objectives, there is virtual unanimity of opinion and authority regarding the importance and justification for retaining the privileged tax status of NPOs and extending the ambit and reach thereof.

2.3  Cognisance was also taken of the extremely difficult financial conditions that are currently being experienced by NPOs, many of which are compelled to seek alternative funding sources and means of generating donation and "earned" income. These circumstances can be attributed not only to prevailing economic conditions, but also to a certain measure of defection by overseas donors who, ironically, are less motivated to support a post-apartheid society than they were in respect of the beleaguered NPO sector prior to South Africa's transition to democracy. These circumstances have exacerbated fiscal anomalies and have sharply focused the restrictive nature of present fiscal legislation with particular reference to so-called "trading income", and other endeavours by NPOs to secure the survival of their operations.

2.4 It is apparent that a great many countries recognise the desirability of supporting NPOs by granting them some degree of preferential tax treatment and donor incentives, although the eligibility criteria, the benefits available, and the fiscal methodology differ in many instances. However, there is a broad consensus in the international community regarding the justification for such beneficial treatment. Factors which are most frequently cited include the following:

1. NPOs are seen to be a relatively cost-effective means of delivering social and developmental services in a manner which relieves the financial burden which otherwise falls upon the State;

2. as civil society initiatives, NPOs are seen to promote important values in society, including voluntarism, self-responsibility, and participative democracy; and

3. in societies such as South Africa where there exist gross disparities of income and wealth, NPOs represent an important mechanism for encouraging philanthropy and promoting greater equity and redistributive policies.

9)  Acknowledgement is also made for the summary of comparative law and practice in a number of other countries, which are derived from a publication by Johns Hopkins University in association with John Wiley Inc. entitled, "The International Guide to Non Profit Law" (Lester M. Salamon: 1997).