August 7, 2024 Financial Management, Sectional Title Management

By Ané de Klerk

It is said that “Taxes” are one of only a couple of sure things in life and, while most people are well aware of their personal tax obligations (presumably because it is not many’s favourite way to spend hard earned funds), in practice we have found that there is often more confusion regarding the tax obligations of bodies corporate and the manner in which this is to be calculated.

Back in November 2018, the South African Revenue Service (“SARS”) attempted to address the confusion in a document it published entitled Interpretation Note 64. The main purpose of the Interpretation Note is to unpack Section 10(1)(e) of the Income Tax Act, which exempts levies paid by members and received by or accrued to a body corporate from income tax. While this article does not constitute financial advice, in an attempt to present its content in a simple and easy-to-read fashion, I have set out the most important aspects of the Interpretation Note below.

FIRST, WHAT OBLIGATIONS DOES A BODY CORPORATE (BC) HAVE TO SARS?

BCS MUST:

1. register at a SARS branch office;
2. submit annual tax returns (even if they are unlikely to have any income tax liability); and
3. pay income tax to SARS if it is due.

BCS DON’T HAVE TO:

1. register at the SARS Tax Exemption Unit, nor
2. apply for exemption under section 10(1)(e) (as both the levy income exemption and the basic exemption discussed in this article is applied by SARS automatically);
3. submit provisional tax returns, nor
4. make provisional tax payments (as bodies corporate are not regarded as provisional taxpayers).

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

According to section 10(1)(e) of the Income Tax Act, any receipts and accruals, other than levies derived by a body corporate, up to R50 000 (fifty thousand rand) is exempt from income tax.

As amounts of differing natures are paid into Bodies Corporate’s accounts, it is imperative to know which of these are exempt and which are subject to income tax:

EXEMPT: 

• Administrative Fund Contributions levied
• Reserve Fund Contributions levied
• Exclusive Use Contributions levied
• Special Levies
• CSOS Levies

NOT EXEMPT: 

• Fines
• Late payment penalties/interest charged on overdue amounts
• Rental income (for example from letting parking bays to residents)
• Interest earned on investments
• Fees charged for using (not maintaining) facilities and equipment, such as laundry facilities
• Income received for services rendered

THE BASIC EXEMPTION

A basic exemption of R50 000 (fifty thousand rand) applies to all bodies Corporate. This means that the first R50 000 of income derived from the non-exempt types of income listed above will not in fact 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

A body corporate’s 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 body corporate 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 body corporate 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).

Courtesy: The Advisory - Community Schemes Specialists

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 [email protected] to request an obligation-free quotation for assistance with better understanding sectional title finances.

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Visit: www.theadvisory.co.za, or 

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