Home Owners Associations and Tax: Your obligations to SARS

By Ané de Klerk

Last month, I unpacked what bodies corporate must do to tick all of SARS’s boxes. (If you missed it, you can read it here) and, after receiving positive feedback and further questions surrounding Home Owners Associations’ (“HOA”) obligations in this regard from our readers, this follow-up article will focus on the tax obligations of HOAs.

As was the case last month, this article does not constitute financial advice, but focuses on SARS Interpretation Note 64, presenting its content in a way that is easy to read and understand.

FIRST, WHAT OBLIGATIONS DOES AN HOA HAVE TO SARS?

HOAs must lodge an application with the Commissioner at the SARS Tax Exemption Unit to qualify for exemption from income tax under section 10(1)(e)(i)(cc) of the Income Tax Act.

The commissioner will assess the application together with the HOA’s founding document and any amendments made thereto and, in doing so, pay special attention to whether:

• the HOA’s sole objective is to manage the collective interests common to all its members, which includes expenditure applicable to the immovable communal property and the collection of levies for which such members are liable;
• the HOA is prohibited from distributing its funds to any person other than to a similar association of persons;
• on dissolution of the HOA, its remaining assets must be distributed to a similar association of persons that is also exempt from income tax under section 10(1)(e).

It is important to note that an HOA must pay tax on all its receipts and accruals unless it has received approval from the Commissioner to be deemed exempt.

WHAT TO TAKE INTO ACCOUNT WHEN DETERMINING THE HOA’S INCOME TAX PAYABLE

If approved by the Commissioner, any receipts and accruals, other than levies derived by a home owners association, up to R50 000 (fifty thousand rand) is exempt from income tax.

As amounts of differing natures are paid into HOA’s accounts, it is imperative to know which of these can be declared exempt and which are always subject to income tax:

EXEMPT (ONLY IF SO APPROVED BY THE COMMISSIONER): 

• General Levies (covering the day-to-day costs of managing and maintaining the association);
• Special Levies (often raised to fund the upgrade of the association’s communal property);
• Building penalty Levies (usually levied against a member for their failure to start or complete building works on their erf within a specified period);
• Penalties levied for repairing damage to communal property as a result of building works (such as heavy construction vehicles damaging the road);
• CSOS Levies;
• Stabilisation Fund Levies (sometimes established to subsidise normal expenditure or to build a healthy reserve fund), but only if the HOA’s founding document (such as the Constitution or MOI) stipulates:

1. 1. that such a stabilisation levy fund must be created and maintained;
   2. that the stabilisation fund levies may only be used to defray expenditure of the immovable communal property governed by the HOA;
   3. that the stabilisation fund levy is a charge imposed by the HOA on the member (if it is payable as an exit levy when the member alienates their property then it must be specified that the exit levy is a liability due by that member upon alienation);
   4. how the amount payable to the stabilisation fund is to be determined.

NOT EXEMPT: 

• Fines;
• Late payment penalties/interest charged on overdue amounts;
• Rental income (for example from allowing a third party to erect a cell mast on the communal property);
• Interest earned on investments;
• Fees charged for using (not maintaining) facilities and equipment, such as the HOA’s gym or tennis courts;
• Income received for services rendered.

THE BASIC EXEMPTION

If approved by the Commissioner, the first R50 000 (fifty thousand rand) of income derived from the non-exempt types of income listed above will not be taxed. So the first R50 000 in fines, penalties, rental income, income from services rendered and interest charged and earned will not be taxed.

EXPENDITURE ATTRIBUTABLE TO INCOME 

In addition to the basic exemption, allowable expenditure attributable to the items listed as non-exempt items above must be subtracted from that income before the amount payable to SARS is determined. These include:

• Bank charges proportionate to the non-exempt income; and
• Audit fees proportionate to the non-exempt income.

THE CALCULATION

If the Commissioner has ruled that the income tax exemption applies to the HOA, its taxable income is calculated as follows:

Non-exempt income – R50 000 – allowable expenditure = taxable income.

That taxable income is then taxed at the prevailing company tax rate (28% at the date of this article).

IMPORTANT TO NOTE

In closing, it is important to note that Section 10(1)(e) stipulates that a HOA is only exempt from normal tax as long as it:

• is not knowingly a party to, and
• does not knowingly permit itself to be used as part of

any transaction, operation or scheme with the sole or main purpose to

• reduce,
• postpone or
• avoid

liability for any

• tax,
• duty or
• levy

which would have been payable were it not for the transaction, operation or scheme.

This means that the exemption does not apply to any HOA that knowingly is or becomes a party to an arrangement with the main or sole purpose of reducing, postponing or avoiding their tax liability (including their liability to pay donations tax, income tax, dividends tax, VAT and/or transfer duty).

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Specialist Community Scheme Attorney (BA, LLB), Ané de Klerk, is a Director of The Advisory, a boutique consultancy specialising exclusively in community schemes law. Her focus is legal education, which includes presenting seminars and running online and in-person training programs and courses. You can reach out to her via email at info@theadvisory.co.za to request an obligation-free quotation for assistance with better understanding HOA finances.