Mohamed Raees Hussain | Attorney – Legal Division
For individuals residing within homeowners associations (“HOAs”) in South Africa, understanding the tax implications and the applicable exemptions is crucial to managing their collective interests efficiently. In this regard the Income Tax Act 58 of 1962 (“the Act”) offers a valuable provision under section 10(1)(e) which grants income tax relief to certain entities, including HOAs.
A HOA refers to an entity that manages the collective interests in immovable property with its primary purpose being to oversee the maintenance, administration, and management of the property. HOAs are typically established to ensure the smooth functioning and well-being of the property and its residents.
Section 10(1)(e) of the Act specifically addresses the tax treatment of levies received or accrued by HOAs, body corporates, or share block companies. It states that “the amount received or accrued to any, body corporate, share block company, or association of persons by way of any levy as defined in Section 1 of the Sectional Titles Act 95 of 9071, in respect of a unit owned by any person for the purpose of defraying expenditure incurred or to be incurred by that body corporate, share block company, or association of persons in the conduct of its affairs” is exempt from income tax.
To gain a clear understanding of how this income tax exemption applies to HOAs, it is necessary to refer to interpretation note 64 issued by the South African Revenue Service (“SARS”):
What entities qualify for this exemption?
- Body Corporates
- A body corporate is established to take responsibility for the enforcement of rules providing for the control, management, administration, and use and enjoyment of the sections in a development scheme (sectional title) and the common property for the benefit of all owners.
- A body corporate is a qualifying entity unless it is a party to a prohibited transaction, operation, or scheme.
- Share Block Companies
- The Share Blocks Control Act, 59 of 1980, defines a share block company as; ‘a company the activities of which comprise or include the operation of a share block scheme’.
- This Act further defines a share block scheme as; ‘any scheme in terms of which a share, in any manner whatsoever, confers a right to or interest in the use of immovable property’.
- A share block company must establish a levy fund to which the shareholders contribute for the defraying of expenditure relating to repairs, upkeep, control, management and administration of the company and the immovable property.
- A share block company is a qualifying entity unless it is party to a prohibited transaction, operation, or scheme.
- Associations of Persons
- An association of persons includes:
a ‘non-profit company’ as defined in the Companies Act, 71 of 2008, and a voluntary association of members founded on a basis of mutual agreement, whose intent and objectives are usually set out in a formal founding document.
- An association of persons includes:
- In terms of an association of persons, the Commissioner (SARS) must be satisfied that the association:
- has been formed solely for the purposes of managing the collective interest common to members, which includes expenditure applicable to the common immovable property of such members and the collection of levies for which such members are liable, and
- is not permitted to distribute any of its funds to any person other than a similar association of persons.
- An association of persons that satisfies these requirements is a qualifying entity unless it is party to a prohibited transaction, operation, or scheme.
What qualifies as levy income?
- General levies, and special levies.
- Building penalty levies, which is imposed on a member for failing to commence or complete building activities within a certain period.
- Stabilization fund levies, which is sometimes established to subsidize day-to-day expenditure and to provide a reserve for future capital improvements or unforeseen expenditure on the common property.
What doesn’t qualify as levy income?
- This would include fines and late payment penalties.
When does the exemption not apply?
- The exemption under section 10(1)(e) does not apply to a qualifying entity that is a party to a transaction, operation, or scheme, the sole or main purpose of which is or was to reduce, postpone or avoid any tax, levy, or duty, payable by any person under the Act or any other Act administered by the Commissioner for SARS.
- The denial of the relief will only apply if the entity was knowingly a party to such an arrangement.
What is the process to apply for the Basic exemption?
- The basic exemption will apply to all receipts and accruals other than levy income of the qualifying entity.
- Body corporates and Share block companies are not required to apply for the exemption which will be applied on assessment.
- Association of persons must lodge an application with the Commissioner at the Tax Exemption Unit (“TEU”) to qualify for exemption from income tax under section 10(1)(e).
What is the applicable Rate of Tax?
- Qualifying entities are excluded from the definition of ‘provisional taxpayer’ and are not required to submit provisional tax returns or make provisional tax payments.
- Qualifying entities fall within the definition of a ‘Company’ in section 1(1) of the Act and are therefore treated as companies for income tax purposes and will be liable to pay tax at the rate applicable to companies.
In summary, qualifying entities are still required to register for income tax purposes despite being exempt; only levy income of qualifying entities is fully exempt from income tax; and whilst body corporates and share block companies qualify for an automatic exemption from income tax, association of persons are required to apply for approval.
This exemption provides valuable income tax relief to body corporates, share blocks, and association of persons that meet the specified criteria and therefore, understanding the Income Tax exemption provided by SARS is essential for HOAs to make the most of their collective property ownership.
*The above is for general information purposes and should not be construed as advice*