Tax Compliance for Complexes in South Africa
Homeowners' associations (HOAs) are required to seek tax exemption from SARS, otherwise, they may be burdened with substantial historical tax liabilities.
In 2023, the South African Revenue Service (SARS) released new guidelines for tax-exempt institutions. These guidelines inform Home Owner Associations (HOA) about their tax obligations.
An HOA is a group of people who manage shared interests for all its members. They focus on spending related to shared property. HOAs are often found in sectional title developments, gated communities, and similar places.
Incorporated HOAs have founding documents. They are public benefit organizations and are partly exempt from taxes. However, they still have some tax obligations. These include registering as taxpayers and filing annual income tax returns. They must also register as employers if needed and register for VAT.
According to section 10(1)(e) of the Income Tax Act, certain groups do not pay income tax on their levy income. These groups include body corporates, share block companies, and associations of persons, such as homeowners' associations (HOAs).
This applies to different types of levy income as long as we consider “the true nature” of the transaction.
Importantly, while HOAs are partly exempt, they must apply to be exempt from income tax on levy income.
To get an income tax exemption, an HOA must apply. They need to submit a tax exemption application to the South African Revenue Service (SARS).
This is a one-time application. You do not need to submit it again each year.
Nonetheless, if an HOA has never secured the required authorization from SARS, there's a potential risk that past levies collected could be liable to income tax.
SARS says that a group of people will be taxed on all their income and earnings. This will happen unless the Commissioner gives special approval.
A recent case showed that the HOA applied for a tax exemption much later than when it was formed. The confirmation letter stated the start date of the exemption but did not allow for retroactive benefits.
Under the current tax laws, SARS allows public benefit organizations, like HOAs, to apply for exemptions. It is now possible to apply for the exemption to be based on historical information as well.
However, you need to send a written request to the commissioner. This request is for approval to apply to assessment years before the approval date.
Retrospective approval as a PBO will be given only if the Commissioner is sure the organization met the requirements.
HOAs should get expert advice to keep their tax-exempt status.
Because HOA members change often, they may not know if past approvals have been granted.
It is recommended that HOA members do their homework. They should check with SARS to see if approval has been obtained and that their tax affairs are in order.
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