Latest / Tax Break: South African tax for professionals / Is your home owners association’s income tax treatment correct?

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Is your home owners association’s income tax treatment correct? · Tax Break: South African tax for professionals

• 0:11
  Today we are talking about homeowners associations.
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  So how are they taxed and is there anything that you should
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  be looking at in a bit more detail?
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• 0:24
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• 1:50
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  Right. So back to our topic of today.
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  We talking about the taxation of body sculpt, pirate share, block
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  companies and voluntary home owners associations.
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  The reason why we are talking about this is that Sash in
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  December last year published issue 5 of Interpretation note
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  #64 and if you compare issue 5 to issue 4, then you'll see that
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  the new version is much longer than issue 4.
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  So there's a few new things to consider in there right before
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  we go to the the technical detail of how this provision
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  works and some of the the administrative requirements,
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  let's first talk about why is an exemption necessary.
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  So if you look at bodies cooperate your share block
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  companies and in these voluntary homeowners associations, these
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  things are all, they all fall within the definition of a
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  company which is a person. So if this person receives
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  anything, including levies that were, that would form part of
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  its gross income and without Section 101E, this gross income
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  is taxable at 27%. Now thinking about why this
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  entity exists, it's really a collection mechanism or pulling
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  mechanism for members to pull funds that they're going to use
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  but for in for some purpose relating to the shade property.
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  So there's going to be inflows and then collectively they are
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  going to use this money for the for, for purposes of the of
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  their property. So if you think about about this
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  vehicle or this entity from that perspective, there's really no
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  tax event because in the absence of this vehicle that the the
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  owners or the members would have just spent the money are on
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  their own. So conceptually there's an
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  argument to say, but because it's just a pulling mechanism,
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  this, this entity shouldn't really be be picking up any tax
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  liability, especially on levies. Now I think if we if we go past
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  the point to say, but right, it is an entity, it is receiving an
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  amount, they could also be then an argument to say, but should
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  it not just be? Would it not by itself be tax
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  neutrals? In other words, the inflows and
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  outflows should be should be equal, so there's no real tax
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  problem. Now, there are some deeper
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  structural issues with this argument.
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  One of them is that if you're looking at something that's
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  being funded of a capital nature like fencing, paving, putting a
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  guard house in place, that's typically the types of expenses
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  that this these entities would incur.
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  There is no deduction for that. So you you might end up having
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  ink and inflow without the deduction for tax purposes
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  assuming that you do get the deduction.
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  So it's more operating types of of of costs.
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  You also have the potential problem that it might be the
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  debatable whether there's entity is trading or not.
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  So does it actually qualify for Section 11A deduction if we
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  assume a DARTS and the entity hernia is operating type of
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  expenses? We're sitting with a potential
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  third issue and that's that there could be a timing mismatch
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  between when the levies are collected and when they are
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  actually spent. And if you've got more
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  collections in a year then you've got spent, then the
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  entity may still end up with a tax liability.
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  So by exempting the levy income, we get the arguably the correct
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  policy outcome on these entities, right.
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  So they I've mentioned that there are three types of
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  entities. We've got bodies, corporate
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  shape block companies and associations of persons.
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  Their associations of persons we find in paragraph CC of Section
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  101E. And I think the important thing
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  about the the three types of entities is if we look at the
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  bodies corporate and the shape block companies, they are
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  automatically exempt under Section 101E.
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  So, so in other words, the the levy income that they receive
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  and we'll talk about the levies just now, the associations of
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  persons must not ever apply. So I guess that brings the
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  question, what makes home owners association different from the
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  other two? And I think the answer lies in
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  the fact that body sculpt and shape block companies are
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  governed by other legislation. So they are actually regulated
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  types of of entities, whereas your voluntary home owners
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  association is not. It's really an agreement between
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  residents of, of certain areas with a common property.
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  So I, I think that's the reason why they need to apply because
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  they, depending on how you've set up your contractual
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  arrangement, you could or may not meet the requirements for
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  the exemption, right. So how does the exemption work?
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  Levy income is fully exempt and you'll see that in the
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  interpretation note. Sash goes into a lot of detail
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  as to what is levies and what not.
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  If you've got non levy income, there's a basic 50,000 grand per
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  year exemption. Anything above that would be
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  taxable and because a portion of your non levy income is is
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  exempt, you may need to then do apportionment of your related
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  deductions that that's now the expenses relating to the non
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  levy income. Right.
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  Then moving on to and from here on, mostly focusing on home
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  owners associations. A few things that at least
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  caught my eye when I compared the different versions of
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  Interpretation Notes 64. So as I've already mentioned,
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  the body Scopate and the shape block companies have an
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  automatic exemption, so no need to apply for that, but the
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  homeowners associations must apply to the tax exemption unit
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  for the exemption. They're the reason though, if
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  you we look at the legislation, it says that the Commissioner
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  needs to be satisfied about the purpose of of the association
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  being to manage the collective interest in immovable properties
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  of of the members. The the entity must not be
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  allowed to make distributions and must not take part in tax
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  avoidance. Now I think if you read
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  paragraph seven of the interpretation out, you sort of
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  get the perception that this process of of of applying to
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  such might just be good practice.
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  But if you then look at paragraph 13, I think it is
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  clear that that's that that Sasha's position is that you
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  need to apply for the for the exemption.
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  Such will then, if it's approved to give you a confirmation
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  letter with a unique reference number.
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  The other point that is is specifically addressed in issue
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  5 is that the commissioner can back date the the the exemption
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  or so they basically start can give a retrospective approval of
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  the exemption provided that the Home Owners Association can
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  prove that it made all the requirements during earlier
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  periods and that it had all the supporting documentation.
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  Now this retrospective exemption is subject to the three-year
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  prescription limit in Section 99 of the Tax Administration Act.
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  Now what that also does is it adds a bit of complexity in the
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  sense that the prescription period runs for returns that's
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  been filed and not necessarily for the ones that's not been
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  filed. So it might also be that for
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  depending on your circumstances the effect of prescription may
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  be different. I think what this retrospective
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  exemption also does is it does it gives non compliant Dominus
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  associations an opportunity to to, to, to rectify their
• 10:36
  position. And if they have been paying tax
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  to potentially apply for the the exemption and then go and apply
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  that position to, to, to previous tax assessments and
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  potentially get the refund if they've been paying tax on the
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  on the surpluses. Something else relating to
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  story, relating to the application process that caught
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  my eye. They said publication or a
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  website newsletter. That's Ash Publishers that
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  schooled the DU Connect, the tax exemption unit Connect.
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  And what one of these newsletters mentions is that
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  there's an online tax exemption system that was launched on the
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  2nd of March 2026. So I haven't tasted it yet, but
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  it seems to be at least according to the EU Connect to
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  be up and running. And from what what what I've
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  seen in this newsletter, it looks as if these entities must
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  first register for income tax and then they can apply for the
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  exemption. Now last point that I think if
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  you if you look at what is in issue 5 that comes through very
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  clearly is that four such to to to grant their exemption.
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  You need a founding document that clearly states out the
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  purpose of, of the of the association that that permits
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  distributions and that also talks to what will happen if
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  this if, if the, the, the association comes to an end.
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  So I think when applying for the for the exemption, it's
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  absolutely critical to review your founding document to make
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  sure that it complies with requirements of Section 101E,
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  right? So let's recap and see what are
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  the take home points before we are complete this episode.
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  I think the first one is that if you are looking at any of these
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  entities, your levy income should be fully exempt provided
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  that you do have the exemption application in place for
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  homeowners association. Other than that, your non levy
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  income the the 1st 50,000 rent would also be exempt.
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  After that, your non levy income becomes taxable.
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  A second point. As I've mentioned, the
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  associations, the voluntary associations must apply for
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  their exemption, the other do not.
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  For these voluntary associations, these
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  retrospective exemption available subject to some
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  conditions like the prescription periods, etcetera.
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  I've also mentioned that the interpretation note makes it
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  very clear that your founding documents are absolutely
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  critical to the exemption if you were to apply for that.
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  So if that is something that you're looking at it, it's worth
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  reviewing your founding documents very carefully.
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  And then lastly, perhaps more from an operational perspective
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  is the fact that these applications are now online.
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  So there's a digital platform for this.
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  That's it for today's episode. I just want to remind you that
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  nothing in this episode is intended to be tax advice or a
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  replacement for fact specific tax advice.
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  Until next time, goodbye.