TAX NEWS - JUNE 2010
South Africa Tax: Tax and your body corporate
Although 20 years and the completion of three degrees have passed since one of those beasts was dumped on my desk for the first time, they still somehow cause my knees to shake. Yet it seems as though we've all been making a mountain out of a molehill, since sectional title tax is actually fairly straight-forward - provided that you know where to find the information!
Exemption of levy income
According to Sars Practice Note 26 dated March 26 2001, the section of the Income Tax Act that covers body corporates is Section 10(1)(e), which provides for the exemption of any profits derived solely from transactions with its members. Although this section, strictly speaking, was not applicable to body corporates prior to a 1999 amendment, it has been long-standing Sars practice to apply it to body corporates.
However, a difficulty that arose from the pre-amended Section 10(1)(e) was that while it exempted all income other than investment or trade income, it also stipulated that the tax position of such a body corporates should not be worse than if it were a tax-paying entity. This not only resulted in all sorts of horrific apportionment calculations, it also had the result of creating "shadow losses" in which what amounted to domestic housing expenditure ended up being set off against investment income.
The amended Section 10(1)(e) therefore removed this anomaly and codified the rules in a manner far simpler to understand, making the tax calculations more straight-forward. In terms of the amended section, Section 10(1)(e)(i) provides for the exemption of levy income received from sectional title body corporates members; while Section 10(1)(e)(ii) allows for similar exemption in the case of shareholders in a share block company.
Taxation of non-levy income
The Practice Note stipulates that while levy income is completely exempt from tax, all other income accruing to the body corporates is taxable at the corporate rate. Such additional income includes interest on surplus funds, as well as rental income (often arising where a body corporates has attached a unit as a result of non-payment of levies due by the owner concerned).
If the expenses of the body corporates that relate specifically to the running of the complex concerned happen to exceed the levy income received, such expenses may not be set off against investment or trade income, nor will any loss be created. However, the following exceptions to this rule apply:
- Expenses incurred directly in the production of the income concerned can be claimed as deductions against such income; and
- A proportional share of any audit and accounting fees, and bank charges, may be claimed against the taxable income. The calculation is based on the proportion of non-levy income to total income.
The Practice Note specifically states that so-called "shadow losses" (as outlined above) will no longer be taken into account as from the 1999 year of assessments. However, it is silent when it comes to loss incurred directly from trading activities (e.g. where a body corporates-owned unit's direct expenses exceed its rental income). It is therefore submitted that such losses can still be carried over for set-off against future non-levy income.
Ancillary services, penalties, and "special levies"
A number of body corporates, particularly those in the hospitality industry, provide so-called "ancillary services" such as the hiring of equipment, use of gymnasium facilities, parking bay rental, etc. The Practice Note stipulates that income from such "ancillary services" do not constitute levy income and are thus subject to tax. However, any direct costs of providing such services can be claimed as a deduction against the income concerned.
Also, most body corporates raise some form of penalty for late payment, such as additional levies or interest. Such income is also taxable, since the income is regarded as being to compensate the body corporates for loss of income arising from the late payment, and not as a levy directly raised in order to cover body corporates expenditure.
However, the position is different with regard to "special levies". Although the Practice Note is silent on such levies, it is submitted that any levy that is raised in order to defray the normal costs of running and maintaining the building scheme concerned, whether termed "capital expenditure levies", "special levies", or otherwise, would fall within the ambit of the tax exemption.