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LAWS AND REGULATIONS GOVERNING NON-PROFIT ORGANISATIONS IN SOUTH AFRICA

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During its first 10 years of democracy South Africa has seen a fundamental transformation of the environment in which non-profit organisations operate. The apartheid era was characterised by major deficiencies in the legislative framework applicable to non-profits such as mandatory registration in order to fundraise1 and tax benefits which were very limited and which very few NGOs qualified for and the failure to recognise the legal existence of associations whose objectives were declared unlawful by the State2. In the early nineties, the creation of an enabling legislative environment for civil society was identified as a priority and various initiatives to promote reform were set in motion.
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by philani on August 04th, 2010 at 08:04 am
so self determined in terms of skills knowledge and so enthusiastic to pass to one another. It will be done by identifying skills that are within our targeted. There is a high population on unemployment when its comes to our youth, is one of largest crisis facing our country
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LAWS AND REGULATIONS GOVERNING NON-PROFIT ORGANISATIONS

IN SOUTH AFRICA


“INTERNATIONAL CHARITY LAW: COMPARATIVE SEMINAR”

BEIJING, CHINA
October 12-14, 2004

I. INTRODUCTION
During its first 10 years of democracy South Africa has seen a fundamental transformation of
the environment in which non-profit organisations operate. The apartheid era was characterised
by major deficiencies in the legislative framework applicable to non-profits such as mandatory
registration in order to fundraise1 and tax benefits which were very limited and which very few
NGOs qualified for and the failure to recognise the legal existence of associations whose
objectives were declared unlawful by the State2. In the early nineties, the creation of an
enabling legislative environment for civil society was identified as a priority and various
initiatives to promote reform were set in motion.

II. PROVISIONS OF THE GENERAL LAWS.

A. Consistency and Clarity of the Laws.
South African law is made up of common law (previous decisions of the superior courts, in the
past often influenced by English law, and rules set down by the old Roman-Dutch authorities)
and statutory law (Acts of the national and provincial legislatures and governmental
regulations). The law is not codified and must be sought in court decisions and individual
statutes.

South Africa currently has a myriad of laws that govern the non-profit sector. These laws apply
at national level. The legal framework can best be explained by dividing it into 4 primary layers.
At the bottom common law and statutory law recognises voluntary associations, trusts and
section 21 companies as the legal entities available to non-profit organisations. These three
kinds of entities may then register as Non-profit Organisations in term of the Non-profit

1 Fundraising Act 107 of 1978
2 Bamford, “The Law of Partnership and Voluntary Association in South Africa”, Third Edition, Juta, 1982
p 121
Charity Law Template

© ICNL, 2004

Organisations Act3. The third layer of regulation allows entities already registered as Non-Profit
Organisations to register as Public Benefit Organisations under the Income Tax Act. This
entitles Public Benefit Organisations to a broad range of tax benefits, including income tax
exemption. Finally Public Benefit Organisations can apply for the right to receive tax-deductible
donations. These Public Benefit Organisations receive so-called donor deductible status.

B. General Constitutional and Legal Framework.
South Africa held its first democratic national election on 27 April 1994 and the Constitution
came into force on 4 February 1997. The Constitution, inter alia, provides for the following: a
common citizenship for all South Africans; the creation of a sovereign and democratic
constitutional state; a Parliament consisting of a National Assembly and a National Council of
Provinces (representing the provinces at the national legislative level); nine provinces with
defined legislative and executive powers; and an independent judiciary.

Most significantly, the Constitution includes a Bill of Rights which enshrines the fundamental
rights enjoyed by all persons and groups4. These fundamental rights cover equality, privacy,
property, freedom of expression and freedom of association as well as a number of socio-
economic rights, for example, the rights to housing and education. The Constitution binds
private persons as well as the State5.

The fact that the right to freedom of association guarantees individual’s freedom to establish, to
join or take part in the activities of an association is of great significance to civil society in South
Africa. This allows individuals to associate with others in order to achieve a common objective
and the state may in principle not prevent the establishment of associations.6 Currently there
are no statutory provisions in place that allow the government to ban an association. The
Internal Security Act 74 of 1982 was amended by the Abolition of Restrictions on Free Political
Activity Act of 1993. The amended Act however still sets out the offences of terrorism and
sabotage, and this may certainly have an impact on associational freedom, even though the Act
no longer explicitly provides for the banning of associations.7


3 Non-Profit Organisations Act 71 of 1997
4 Consitution of the Republic of South Africa Act 108 of 1996, Chapter 3
5 The Constitution has vertical and horizontal application. Du Plessis v De Klerk 1996(3)SA 850 (CC)
6 De Waal, “The Bill of Rights Handbook”, Second Edition 2000, page 345
7 De Waal, “The Bill of Rights Handbook”, Second Edition 2000, page 346
2


C. Types of Organisation.
There are three different legal structures for non-profit organisations in South Africa namely
voluntary associations, trusts and section 21 Companies.

Voluntary Associations
There is no office of registry for voluntary associations and the only requirement to form a
voluntary association is an agreement between three or more people to achieve a common
object, primarily other than the making of profits.8 The agreement may be verbal or written. It is
however customary, but not required, for the agreement to take the form of a written
constitution. The voluntary association is a common structure for small or informal community-
based initiatives. It is a product of the common law and is not regulated by statute. This can be
confusing since the common law is not easily accessible and sometimes conflicting.

From the aspect or legal personality, voluntary associations may be classified as:
a.) Corporate bodies under the common law known as the “universitas”; and
b.) Those which remain unincorporated at common law, the non-corporate associations.9
When deciding how to classify voluntary associations the court will consider the constitution of
the organisation, and its nature, objects and activities. In order to be classified as an
“universitas” three main elements must be present namely that the association must continue as
an entity notwithstanding the change in membership, the association must be able to hold
propetry distinct from its members and finally it must be clear that no member has any rights by
reason of his membership to the proprerty of the association.10 If all of these requirements are
met the “universitas” has legal personality.

Trusts
A trust is formed when ownership of property is tranfered to another party to be administered for
the benefit of certain persons or the achievement of a particular goal. The property may be
transferred by written agreement, testamentary writing, or court order. The person who
administers the trust property is called a trustee.11 A court official, called a Master, has

8 Bamford, “The Law of Partnership and Voluntary Association in South Africa”, Third Edition, Juta, 1982,
page 117
9 Bamford, “The Law of Partnership and Voluntary Association in South Africa”, Third Edition, Juta, 1982,
page 126
10 Bamford, “The Law of Partnership and Voluntary Association in South Africa”, Third Edition, Juta, 1982,
page 128
11 Trust Property Control Act 57 of 1988, Section 1
3


jurisdiction over a trust if the majority of the trust property is situated in his jurisdiction.12 The
Master is the custodian of trust instruments, oversees the appointment of trustees and polices
the proper performance of the trustees’ duties with respect to the trust property. Trusts are
governed by common law and the Trust Property Control Act.
Trusts may be established for private benefit or public purpose and the purpose of the trust is
set out in the organisation’s trust deed. A Trust lacks legal personality, and it technically holds
property in the name of its trustees.
Section 21 Companies
The Companies Act13 provides for an “association not for gain in terms of section 21.” These
organisations which are commonly called “section 21 companies” must have at least seven
members, each of whom undertakes a guarantee commitment in the event of the financial
failure of the institution (although such commitment may be of a purely nominal nature). An
incorporated association must register with the Registrar of Companies.14The records of the
Registrar are open to the public. Section 21 companies possess legal personality.

D. Purposes.
A voluntary association must be established for a purpose primarily other than the making and
division of profits.15 It is possible for the association to conduct subsidiary activities to make
some profits, as long as the main objective of the association is not the acquisition of gain.16

Trusts are generally flexible structures that can be used for a variety of purposes. For example a
trust may be created to provide for the education of a specific family or a trust may be created
whereby trustees are given a wide discretion to use the trust assets for a general purpose, such
as a charitable purpose. The purpose of a discretionary trust must be lawful and sufficiently
certain. If a trust has a mainly charitable purpose, the fact that it has a subsidiary purpose
which is not charitable, will not invalidate it.17


12 Trust Property Control Act, Section 3
13 Companies Act, No. 61 of 1973
14 Companies Act, No. 61 of 1973, Section 63
15 Bamford, “The Law of Partnership and Voluntary Association in South Africa”, Third Edition, Juta, 1982,
page 117
16 Huey Extreme Club v McDonald t/a Sport Helicopters [2004] JOL 12875 (C), par 20
17 Cameron, De Waal, Munch, “Honore’s the Law of Trusts”, Fith Edition, Juta, 2002
4


Section 21 companies may be established for the promotion of religion, the arts, sciences,
education, charity, recreation, any other cultural or social activity, or communal or group
interests.18

E. Registration or Incorporation Requirements.
There is no office of registry for voluntary associations and the only requirement to form a
voluntary association is an agreement between three or more people too achieve a common
object, primarily other than the making of profits19

The Trust Property Control Act, No. 57 of 1988 together with the common law determines that
the first trustees must lodge the trust deed with the Master of the High Court.20Trustees can
only act in their capacity as trustees once authorised thereto in writing by the Master and unless
they are specifically exempted they are obliged to furnish the Master with security. 21

Section 21 companies must be registered with the Registrar of Companies in Pretoria. The
registration process is complex and a section 21 company must comply with a number of
prerequisites. It must be clear that the organisation intends to apply its profits or any other
income in promoting its main object and that it prohibits the payment of dividends to its
members.

F. Charitable Organisation Register.
A register of all organisations registered as Non-Profit Organisations under the Non-profit
Organisations Act is maintained by the Non-profit Organisations Directorate. Registration in
terms of the Non-Profit Organisations Act is voluntary. To be eligible, the organisation must be a
trust, company, or other association of persons established for a “public purpose.”22 A
qualifying organisation may not be “an organ of state,” 23. The Directorate issues a certificate
and registration number for qualifying organisations. To retain this status, the organisation must
submit narrative and financial reports to the Directorate, which also has the power to cancel

18 Companies Act 61 of 1973, Section 21 (1) (b)
19 Bamford, “The Law of Partnership and Voluntary Association in South Africa”, Third Edition, Juta, 1982,
page117
20 Trust Property Control Act, No 57 of 1988,section 4
21 Trust Propety Control Act, No 57 of 1988, section 6
22 Non-Profit Organisations Act 71 of 1997, Section 1(1)(x)
23 Non-Profit Organisations Act 71 of 1997 , Section 12
5


registration for non-compliance with the law. In practice, however, the Directorate has limited
capacity to implement the law. The registration takes place free of charge.

If the application does not meet the requirements for registration deteremined in the Act, the
Directorate will give the organisation a period of one month to correct their application. If the
requirements are still not met the Director can refuse registration. The organisation can lodge
an appeal against this decision of the Director with the arbitratoin tribunal constituted in terms of
the Act.24

The register of Non-Profit Organisations is open to the public. All documentation lodged with the
Directorate, such as the constitutions, financial and narrative reports of the organisations will
also be available for public inspection. 25 This is however of limited value since the documents
must physically be inspected at the offices of the Directorate in Pretoria.

G. General Powers.
The powers of a voluntary association are determined in its constitution. The powers given to
the voluntary association in its constitution can be the same powers given to a corporate body,
such as a company.26

The trust deed of discretionary trusts usually accords the trustees the widest possible powers to
enable them to achieve the objects of the trust. Trusts do not have separate legal personality
and therefore act through their trustees. These powers granted to the trustees may include the
powers to sell, let, mortgage and encumber the trust property, both movable and immovable; to
invest trust funds, to borrow money, to open and operate banking accounts and employ staff.27

24 Non-Profit Organisations Act 71 of 1997, Section 22
25 Non-Profit Organisations Act 71 of 1997, Section 25
26 Rosenthal and Walton, “Memorandum prepared for the Legal Resources Centre – Guidelines to
Section 21 Companies, Trusts and Voluntary Associations”, 1998, page 14
27 Rosenthal and Walton, “Memorandum prepared for the Legal Resources Centre – Guidelines to
Section 21 Companies, Trusts and Voluntary Associations”, 1998, page 11
6



Section 21 companies generally have the same wide powers to carry out their objects and
purposes as any other company. These powers can include the power to purchase movable
and immovable property, to invest company funds in any way, to borrow money, to open and
operate bank accounts and to employ staff.28

In the event that an organisation was to act beyond the scope of its objectives, an interested
party could bring a High Court application. In principle it may be possible for intended
beneficiaries of non-profit organisations to seek action against a non-profit organisation, if they
are acting contrary to the founding documents. No examples of successful actions of this nature
could however be found.

H. Membership Organisations.
No special rules exist for non-profit membership-organisations. The powers of organisations to
appoint, remove or exclude members are generally provided for in their founding documents.
Similarly organisations have the ability to determine the procedures for a member to join or
resign from the organisation, and these are set out in their founding documents.

III. GOVERNANCE.

A. Structures
Different governance structures are in place for voluntary associations, trusts and section 21
companies.

The constitution of a voluntary association usually provides for the appointment of a
management committee, who are given executive powers to manage the association. The
constitution should provide for the election of members to the various offices, including
chairperson, treasurer etc and for the holding of meetings and the procedures to be followed at
those meetings including the quorum required and the manner in which votes are taken.29


28 Rosethal and Walton, “Memorandum prepared for the Legal Resources Centre – Guidelines to Section
21 Companies, Trusts and Voluntary Associations”, 1998, page 2
29 Rosenthal and Walton, “Memorandum prepared for the Legal Resources Centre – Guidelines to
Section 21 Companies, Trusts and Voluntary Associations”, 1998, page 15
7


A trust is governed by its board of trustees. The trust deed of will provide for the appointment of
a board of trustees. Trustees may not act until they have been authorised to do so by the
Master of the Supreme Court.

A section 21 company has a two-tiered governance structure consisting of the members and
directors. A section 21 company must have a minimum of 7 members and they exercise their
powers in the general meeting. For example they have the power to appoint and remove
directors, amend the founding documents of the company. A minimum of two directors must be
appointed. Directors are usually given broad executive authority. The memorandum and
articles of association of the company should provide for the election of members to the various
offices.

One of the requirements for registration under the Non-Profit Organisations Act is that an
organisation must set out in its founding documents the organisational structures and
mechanisms for its governance.30

Section 30 of the Income Tax Act also imposes other conditions on the governance and
operations of Public Benefit Organisations. For example, the organisation’s constitution must
provide that there are at least three unrelated persons with fiduciary responsibility for the
organisation and no single person may directly or indirectly control the decision-making powers
relating to the organisation.31

B. Accountability
Members of governing boards of non-profit organisations must adhere to the legal obligations
imposed on them by the founding documents of the organisation, the common law and the
legislation governing the organisation. These legal obligations may differ for voluntary
associations, trusts and section 21 companies.

All board members must exercise the following legal obligations when acting for the organisation
they serve:
• Act in good faith and in the best interests of the organisation ;
• Not allow personal interests to conflict with the interests of the organisation;

30 Non-Profit Organisations Act 71 of 1997, Section 12 (2) (h)
31 Income Tax Act 58 of 1962, Section 30(3)(b)(i).
8


• Not act beyond the powers of the organisation or the limitations placed on such powers in
terms of the founding documents;
• Exercise the degree of skill that may be reasonably expected from such a person of his/her
knowledge. It is however important to note that members are not required to have
exceptional intelligence and will not be liable for mere errors of judgement;
• Apply her/his mind to decisions & exercise an independent discretion; and
• Give intermittent, not continuous attention to the affairs of the organisation.32

There is no particular Act setting out the legal obligations of members of governing bodies of
voluntary associations. The legal obligations of these members are to a large extent contained
within the constitution of the voluntary association. The common law provides us with further
principles applicable to voluntary associations. The members have a duty to act in good faith
towards one another.33 The members have a duty of care to the association and other members
as they accept the responsibility of managing the affairs of the association.34In matters where
there is a conflict of interest between the association and one of its members, the interests of
the association must be protected35. Members of a voluntary association can become
personally liable if they have act beyond the scope and limits of the constitution, or if they
conduct the affairs of the association in a reckless or fraudulent manner.

The Trust Property Control Act stipulates that the trustees must act with care, diligence and
skill which can be reasonably expected of a person who manages the affairs of another36 and
also that they must exercise an independent discretion.37 If any trustee fails to comply with a
written request by the Master or to perform any duty imposed upon him by the trust deed or by
law, the Master or any person having an interest in the trust property may apply to the high court
for an order directing the trustee to comply with such request or to perform such duty.38
Beneficiaries who have suffered a loss as a result of breach of trust are entitled to bring a
damages claim against the trustees for breach of trust.


32 Wyngaard R, Legal Obligations of Members of NPO Governing Bodies, LRC Information Series No6,
2001
33 Rowles v Jockey Club of SA & Others 1954 (1) SA 363 (AD) at 365
34 Mkhando & Others v Mangwende NO 1977 (1) SA 851 (RAD) at 854
35 ECA (SA) & another v BIFSA (1) 1980 (2) SA 506 (W) at 509
36 Trust Property Control Act No 57 of 1988, section 9
37 Estate Gouws & Registrar of Deeds 1947 (4) SA 403 (T).
38 Trust Property Control Act No 57 of 1988, Section 19
9


Directors of a section 21 company have certain fiduciary duties in terms of the Companies Act.
This entails that they must exercise their powers in the best interest of the company and may
not place themselves in a position in which their personal interests conflict with those of the
company. If a director fails to exercise the degree of care and skill which may reasonably be
expected of a person of his or her experience, he or she may be liable to the company for any
loss it may suffer as a result.

South Africa does not have history of members of governing bodies of non-profit organisations
being held liable for breach of their fiduciary duties.

There have been a number of initiatives to develop codes of ethics to improve the governance
in the non-profit sector. None of the codes have been widely adopted and applied in the sector,
and this has impacted on their usefulness.

There a currently no private sector organisations that help monitor charitable organisations in
South Africa.

IV. DISSOLUTION, WINDING UP, AND LIQUIDATION OF ASSETS.
The dissolution of a voluntary association is governed by its constitution. The constitution can
restrict the transfer of assets of a dissolving voluntary association to a non-profit association
having similar objects. A voluntary organisation may also be involuntarily dissolved by an order
of the High Court by an application by an interested party. In such a case, the association’s net
assets will be awarded to an organisation having a similar purpose.

The dissolution of a trust is governed by its trust deed. The trustee, or a interested party, may
petition the court to vary trust provisions or terminate the trust altogether in certain situations.
These situations include where the terms of the trust hamper the achievement of the founder’s
object, prejudice the interests of trust beneficiaries, or are against the public interest39.

The Companies Act provides that upon dissolution and settlement of all outstanding liabilities of
section 21 companies, any remaining assets must be transferred to an association(s) or an
institution(s) having the same object as the dissolving company40. The transferee entity is

39 Trust Property Control Act No 57 of 1988, Section 13
40 Companies Act 61 of 1973, section 21(2)(b)
10


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