A Home Owners Association (HOA) is an association of persons formed for managing the collective interests common to all its members, regarding the expenditure applicable to the common immovable property.
Although HOAs are partially exempt from Income Tax, they still have the following tax obligations:
To register as a taxpayer;
To file annual income tax returns;
To register as an employer if they have employees earning above the tax threshold; and
To register for VAT (subject to complying with the VAT registration requirements).
Section 10(1)(e) of the Income Tax Act exempts from income tax the levy income of a body corporate, a share block company and an association of persons. It also provides a basic exemption for these qualifying entities.
Below is an extract of Section 10(1) (e) of the Act.
Section 10(1)(e)
- Exemptions.—(1) There shall be exempt from normal tax:
(e) (i) any levy received by or accrued to:
(aa) any body corporate established in terms of the Sectional Titles Act, 1986 (Act No. 95 of 1986), from its members;
(bb) a share block company as defined in the Share Blocks Control Act from the holders of shares in that share block company; or
(cc) any other association of persons (other than a company as defined in the Companies Act, any co-operative, close corporation and trust, but including a non-profit company as defined in that Act) from its members, where the Commissioner is satisfied that, subject to such conditions as he or she may deem necessary, such association of persons:(A) has been formed solely for purposes of managing the collective interests common to all its 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
(B) is not permitted to distribute any of its funds to any person other than a similar association of persons:
Provided that such body, company or association is or was not knowingly a party to, or does not knowingly permit or has not knowingly permitted, itself to be used as part of any transaction, operation or scheme of which the sole or main purpose is or was the reduction, postponement or avoidance of liability for any tax, duty or levy which, but for such transaction, operation or scheme, would have been or would become payable by any person under this Act or any other law administered by the Commissioner; and
(ii) any receipts and accruals other than levies derived by a body corporate, share block company or association contemplated in subparagraph (i), to the extent that the aggregate of those receipts and accruals does not exceed R50 000;
Qualifying entities
Bodies corporate
The Sectional Titles Act provides for separate ownership of a unit in a development scheme. Generally, the buildings and land of the development scheme are divided into sections and common property. A unit refers to a particular section and an undivided share in the common property associated with that section.
A body corporate is established to take responsibility for the enforcement of Rules and for the control, administration and management of the common property for the benefit of all owners.
Membership of the body corporate is compulsory and is linked to ownership in the development scheme. The members are required to contribute levies to meet the costs of the common property.
Share block companies
The Share Blocks Control Act defines a share block company as follows:
“ ‘[S]hare block company’ means a company the activities of which comprise or include the operation of a share block scheme;”
The same Act defines a share block scheme as follows:
“ ‘[S]hare block scheme’ means any scheme in terms of which a share, in any manner whatsoever, confers a right to or an interest in the use of immovable property;”
The main object of a share block company is to operate a share block scheme in respect of immovable property owned by it. A shareholder that owns a share in a share block company acquires the right of use and occupation of a specific unit or portion of the immovable property owned by the company. The shareholder does not become the owner of the specific part of the immovable property.
A share block company must establish a levy fund to which the shareholders contribute. The levy fund is used to defray expenditure relating to the repairs, upkeep, control and management and administration of the company and of the immovable property for which it operates the share block scheme as well as the payment of rates and other local authority charges for services. It is compulsory for the members to contribute to the levy fund. On disposal of a share, the new member automatically becomes a contributor to the levy fund.
Association of persons
An association of persons includes:
• a “non-profit company” as defined in section 1 of the Companies Act; 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.
The Commissioner must be satisfied that the association of persons:
• has been formed solely for purposes of managing the collective interests 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 accepts the responsibility to control and manage the financial and administrative affairs pertaining to the common immovable property on behalf of its members.
An association of persons may include home owners’ associations, and associations formed to control and manage the maintenance, security or appearance of the immovable property common to the members. These associations of persons take responsibility for the collection of levies and payment of expenditure for the common immovable property.
Membership of the association of persons is linked to the ownership or occupation of a particular unit or portion of the property. Members may include residents or owners of a particular residential area such as security estates, complexes or gated communities or tenants of a shopping centre or mall.
Non-qualifying entity
Time-share exchange entities
Under a time-sharing arrangement members of the public obtain the exclusive right to use or occupy a property for a specified period each year. The owners of timeshare points do not own the common immovable property and are not responsible for expenditure such as maintenance, repairs and improvements or bond repayments, relating to the property.
An entity selling time-sharing interests in holiday accommodation to members of the public not implemented under the Sectional Titles Act or the Share Blocks Control Act is not a qualifying entity and will not qualify for exemption under section 10(1)(e).
Basic exemption and effective date
The basic exemption applies to all the receipts and accruals other than levy income of the qualifying entities. The basic exemption of R50 000 is applied to the total receipts and accruals, excluding the levy income, which are taxable and not to each separate source of income.
Application for exemption
Bodies corporate and share block companies
A body corporate or share block company is not required to apply for exemption under section 10(1)(e)(i)(aa) or (bb) respectively. These entities are not registered at the TEU for income tax, but are required to register at a branch office and submit annual income tax returns even if they are unlikely to have an income tax liability. The levy income exemption and the basic exemption are applied on assessment.
Association of persons
An association of persons must lodge an application with the Commissioner at the TEU to qualify for exemption from income tax under section 10(1)(e)(i)(cc).
An association of persons will be fully taxable on all its receipts and accruals in the absence of approval by the Commissioner.
Prohibited transactions, operations or schemes
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 otherwise payable by any person under the Act or any other Act administered by the Commissioner.
The denial of the relief will apply only if the entity was knowingly a party to such an arrangement. This rule will apply irrespective of whether the entity itself or any other person, for example, a shareholder or unit holder, benefitted from the reduction, postponement or avoidance of any applicable tax, duty or levy. The type of tax, duty or levy that has been so reduced, postponed or avoided may arise under the Act, for example, donations tax, income tax, or dividends tax, or under any other Act administered by the Commissioner, for example, value-added tax or transfer duty.
A second article will discuss the determination of taxable income.