Non-profit organisations can minimise the impact of dividends tax

Non-profit organisations need to apply for exemption from paying dividend tax before 1 April 2012 or they might unwittingly lose out. So says Anna Vayanos who heads the BoE Private Clients Philanthropy Office, who says that this is another potential t

“Exemption from this new dividends tax will not be automatic and organisations need to take the required steps to notify either the companies in which they hold shares or a regulated intermediary like their asset manager of their tax exempt status prior to the dates on which these companies declare dividends.”

She says the dividends tax would only impact those organisations that hold shares in public or private companies.

“These days, many organisations have investments in public and private entities as part of their long-term sustainability strategy.

“We are at a time when South African organisations are experiencing huge fundraising pressures, particularly in the wake of a number of European Governments slowing down in funding or ceasing to fund South African organisations. This has made it even more crucial for NPOs to have a sustainability strategy which most commonly involves building-up and investing reserve funding.

“Organisations that have successfully built up reserves usually rely on all or part of the income generated to cover operating and/or project costs. In difficult economic times, many are forced to dip into capital as well to cover a delay in the receipt of funding or to cover budget shortfalls.”

“ Our recent study into the philanthropy practices of High Net Worth Individuals, The Giving Report 2010, showed that only 29% of this donor grouping provides funding for operating costs (http://www.thegivingreport.co.za/) leaving many organisations to find the funds to cover these from other sources such as investment income.

She says the appropriate investment of the reserve was also crucial, not only to ensure the needs of the organisation are properly met, but also to ensure compliance by the board of its fiduciary duty. And the board also needs to ensure that the investment of the funds does not fall foul of the tax exemption that such investments usually enjoy.

Vayanos says NPOs should seek out financial and investment advice from asset managers that have the necessary expertise in investing for the NPO sector.

“Interestingly, there is a common misconception that the fiduciary duties of the Board require the investment of NPO funds in cash alone whereas in many instances, particularly in an inflationary environment the fiduciary duties actually require some exposure to growth assets, such as equities.”