By Clint Riddin

Clint RiddinIn recent issues of Paddocks Press we visited the new Interpretation Note 64, which deals in detail with how SARS taxes a property community scheme. A new development in these schemes, particularly retirement schemes, is an exit levy that is payable when a unit is sold, and a “capital” contribution that is paid to the scheme based on a formula usually contained in the rules.
The idea behind this form of levy is to build reserves to assist with the future maintenance of the scheme, and to prevent levies escalating to the extent that, over time, owners can no longer afford the levy.
The question now arises as to whether this income is taxable or not. In reading Interpretation Note 64, the preamble defines a levy as follows:

“Levy” or “levy income” is the amount received or accrued from the members for the purposes of funding expenditure relating to their collective interests.

No distinction is made as to the type of levy, just that the levy is applied to the collective interest of members. So, it can be argued that any exit levy that is used to build a fund, that is applied in the collective interests of the members of a community scheme, would fall into this definition. Therefore, in terms of the exemption afforded by Interpretation Note 64, these levies are exempt from income tax.

A further reading of the interpretation note also addresses the issue of capital gains tax. Even though the lump-sum payment is only made on the sale of a unit occurring, so while there is no certainty on the point, my view is that exit levies are very unlikely to be taxed as capital gains, SARS views this transaction as a levy transaction. In fact the interpretation note goes on to say that there are very few instances where capital gains would be triggered.

Article reference: Paddocks Press: Volume 7, Issue 9, Page 2

Clint Riddin of Clint Riddin & Associates is a sectional title accountant specialised in accounting, income tax and secretarial services to bodies corporate.This article is published under the Creative Commons Attribution license

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1 Comment.

  • Awie Bosman
    02/04/2019 16:48

    Are entrance levies legal if a new rule is made by the Body Corporate prescribing that existing owners must insert a clause when selling their properties prescribing that the purchaser must pay an entrance levy of say 1% of the Municipal valuation of the property sold?