Tax warning for complexes and gated communities in South Africa
Update: This article has been updated with a clarification from SARS
Tax experts have reminded Homeowners’ associations (HOAs) that they must apply for tax exemption with SARS or risk being saddled with massive historical tax debts.
In 2023, the South African Revenue Service (SARS) published its latest guidelines for tax-exempt institutions, alerting Home Owner Associations (HOA) to their tax obligations.
An HOA is an association of persons formed to manage the collective interests common to all its members regarding the expenditure applicable to common immovable property. They are common fixtures in sectional title developments, gated communities and other similar setups.
HOAs are partially exempt institutions under South African tax laws—but they are still subject to some tax obligations, including the requirements to register as taxpayers, file annual income tax returns, register as employers (if applicable), and register for VAT.
Under 10(1)(e) of the Income Tax Act, body corporates, a share block company and an association of persons (like HOAs) are exempt from income tax on levy income.
This applies to various categories of levy income as long as “the true nature” of the transaction is regarded.
Crucially, however, while HOAs are partially exempt, they have to specifically apply to be exempt from income tax with respect to levy income.
According to legal experts at Tax Consulting SA, for an HOA to qualify for an exemption from income tax in respect of its levy income, an application for tax exemption must be submitted to the South African Revenue Service (SARS).
This is a once-off application that does not need to be resubmitted each year.
However, where an HOA has never obtained the necessary approval from SARS, this would create a risk that historical levies received would be subject to income tax.
SARS itself states clearly that “an association of persons will be fully taxable on all its receipts and accruals in the absence of approval by the Commissioner”.
A BusinessTech reader recently noted a case in which their HOA applied for the tax exemption much later than its incorporation. The confirmation letter included an effective start date of the exemption but no retroactive effect.
SARS told BusinessTech that, while the facts of each case will need to be reviewed individually, “the law does not make provision for retrospective approval of an application by HOAs, and focuses on the association satisfying the Commissioner that it has met all the requirements for the exemption”.
This means that any non-compliant HOA risks being held liable for income tax on all previous levies paid before the exemption was granted.
Tax Consulting said it is advisable that HOAs seek expert advice to ensure their tax-exempt status.
“Due to the frequent change in members of an HOA, it is often the case that members are unaware as to whether historical approval has been obtained,” Tax Consulting said.
“It is therefore recommended that members of an HOA perform due diligence in this regard,” and confirm with SARS whether approval has been obtained.
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