Section 10(1)(e)(i)(aa) of the Income Tax Act 58 of 1962 (ITA) provides that any levy received by or accrued to a body corporate established in terms of the Sectional Titles Act 95 of 1986 from its members is exempt from income tax. Section 10(1)(e)(i)(bb) states similarly in relation to share block companies.
In the case of body corporates and share block companies, the general view is that the exemptions apply automatically given the wording in sections 10(1)(e)(i)(aa) and (bb). Paragraph 5.1 of SARS’ Interpretation Note 64 (Issue 4) (IN64) corroborates this “automatic exemption” and states as follows:
“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.”
Accordingly, to the extent that a property association is not a body corporate established in terms of the Sectional Titles Act 95 of 1986, it can be asserted that this automatic exemption does not apply to such property association. The question then arises as to whether this exemption automatically extends to property associations.
Section 10(1)(e)(cc) of the ITA provides that “associations of persons” shall be exempt from normal tax as contemplated below:
“(e)(i) any levy received by or accrued to—
(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;” [Our underlining]
Most property associations would fall within these provisions to the extent that they are established to manage the collective interests of their members, which members pay levies for purposes of expenditure applicable to common immovable property. It should be noted that Section 10(1)(e)(i)(cc) of the ITA is worded differently in the sense that it provides that the “Commissioner must be satisfied” that certain requirements have been met for the relevant exemption to apply. It is not entirely clear whether these words require an upfront application to SARS or whether an alternative approval mechanism is envisaged. This is particularly the case when one compares the wording in section 10(1)(e)(i)(cc) to the wording used in section 30 of the ITA which explicitly refers to an “approval process” in the case of public benefit organisations.
Nevertheless, SARS’ is of the view that “associations of persons” contemplated in section 10(1)(e)(i)(cc) of the ITA must first apply to SARS to obtain approval in relation to being exempt from normal income tax under that section. Paragraph 5.2 of IN64 thus states as follows:
“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)... It will be determined on application whether the [relevant] requirements have been met. Additional conditions may be prescribed to ensure that the above requirements are met.”
Accordingly, a property association is not automatically exempt from income tax on its levies received (as is the case with a body corporate). While there is some debate, SARS’ view is that these associations must first apply to SARS to obtain approval for the exemption under the relevant section of the ITA.
In order to apply to SARS for income tax exemption in terms of section 10(1)(e)(i)(cc), the property association will be required to complete and submit an EI1 “Application for Exemption from Income Tax application” form to SARS, together with supporting documents including the founding documents of the property association (i.e. its memorandum of incorporation or its constitution). IN64 states that the following should be included in the founding document:
- the sole object of the association of persons must be to manage the collective interests common to all its members, which includes expenditure applicable to the common immovable property and the collection of levies for which such members are liable;
- the association of persons is not permitted to distribute its funds to any person other than to a similar association of persons;
- any amendments to the founding document of the association of persons must be submitted to the Commissioner;
- on dissolution of the association of persons, 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 critical that property associations are compliant with section 10(1)(e)(i)(cc) of the ITA should they want to apply for the exemption. Furthermore, property associations that have not applied for tax exemption would be well advised to seek advice to consider their circumstances and regularise their tax affairs (if necessary).