In our view

Businesses pretending not to make profits are guilty of a moral offence - CAPE TIMES 15 Nov 2011

By Shelagh Gastrow.

IT EMERGED over the weekend that a R41 million Lotto grant was given to a non-profit arts and culture organisation that employs the daughter of Professor Alfred Nevhutanda, chairman of the National Lotteries Board. The massive award to Makhaya, which promotes South African arts and culture overseas, has prompted some uncomfortable questions for Nevhutanda, a prominent Limpopo ANC member. He apparently left the lottery's distribution agency for arts, culture and heritage to become board chairman just a month before the award was made, and only weeks before his daughter was hired as a fundraiser at Makhaya.


Besides the obvious concerns around alleged familial connections between lottery officials and funding recipients, which could constitute a criminal offence under the Public Finance Management Act, another key issue emerges. That is, the conflict created when a business that makes profits is registered as non-profit organisation (NPO) in order to access donor money and possibly avoid tax. As an NPO, Makhaya has accessed massive lottery funding but also raises money by charging fees for its services (R5 million for event sponsorships), which must be profitable.

Half of Makhaya's staff are based in Serbia and it would be interesting to know if any Lotto money went to Serbia to pay their salaries and whether its board members are unpaid and voluntary (as they should be in a non-profit). Sars keeps a beady eye on people who try to get away with masquerading as a non-profit in order to raise donor money and avoid tax. There is a special offence under the Income Tax Act for "non-profits" that are really just fronts for commercial enterprises. If a company is not eligible for non-profit status or has obtained public benefit status fraudulently, Sars can retrospectively levy tax on all its receipts as if they were income, apart from any criminal consequences that could follow.

The acid test for a public benefit organisation (PBO) is if its sole or principal objective is a public benefit activity In the case of Makhaya Arts & Culture, which probably has PBO status from Sars, it mast have indicated that it was runniag activities of a cultural nature. Hcwever, if it is really just an event management company specialising in cultural themes, this could be a very fine line. Sadly, there are many ways in which alleged non-profits can conceal their commercial purmse.

The real test is the nature of their principal or sole objective, and whether they distribute their profit. Distribution can be through payment of excessive remuneration, 'wallies and exaggerated bonuses. The essential character d a nonprofit is non-distribution - income should be directed to the objectives of the organisation. In our collective interest, it is critical that non-profits and PBOs conduct themselves with integrity. Faking it as an NPO dissipates resources from the lottery and other donors and denies deserving organisations access to these funds.

In addition, this behaviour undermines fundraising for real causes and the willingness of the public to give. The government understands that non-profits need to generate income and they are legally able to do this if it is made from activities that are aligned with the objectives of the organisation. However, if Sars learns that income-generation activities have become the priority of the organisation (rather than service delivery), it can withdraw the tax-exempt status. Income-generation has to be bona fide and subordinate to the main purpose of the organisation.

Sars also recognises that some non-profits have established "for profit" businesses to assist in resourcing them. But if, for example, you are an organisation opposed to gender violence and you set up a biscuit factory to provide you with funds, anything over R150 000 will be subject to tax as the business has nothing to do with the principle objective of your NPO. Organisations that have established themselves as non-profits but which are, in reality, operating as businesses, could face fraud charges and the courts have the discretion over penalties, ranging from a fine to imprisonment.

In addition, all people involved with such organisations, including board members, could face legal action. Trying to avoid tax and take donor money by masquerading as a non-profit is not just a legal offence though, it is a moral offence against the poor and vulnerable members of our society who depend on the good work done by legitimate NPOs. Gastrow is executive director of Inyathelo, the South African Institute for Advancement. Income should be directed to the objectives of the organisation