By Clint Riddin

Clint RiddinWe continue to look at the taxation of community schemes in terms of SARS’ new Interpretation Note 64, which has replaced SARS’ Practice Note 8 – the document that was used as the basis for taxing these types of entities. As explained in the last edition, the term community scheme is an all-inclusive term for a body corporate, home owners’ association, shareblock scheme and the like.
We have established that a community scheme must register as a taxpayer and that certain income is deemed exempt from tax by SARS; automatically for a body corporate. However, a home owners’ association or shareblock company would have to apply for exemption when registering as a taxpayer, given that the memorandum of incorporation or the constitution provided that surpluses were not paid back to members.

In terms of Practice Note 8, all income other than levies, earned by the body corporate or home owners’ association, such as interest (including interest and penalties on late payments), as well as rentals, such as those from cellphone companies and advertising companies, was taxable. Some bodies corporate have clubhouse and restaurant facilities, and income earned from these was also taxable. A 2008 amendment to the Income Tax Act also made the first R50,000 earned from sources other than levies exempt.

Practice Note 8 allowed a small deduction against taxable income. A proportionate share of accounting, audit fee and bank charges in the ratio of taxable income in relation to total income. Actual expenses incurred to earn other income could also be deducted from the taxable income. An example of this would be the electricity expense on a cellphone aerial. The deduction could not be made where the expense was recovered, however. Another example was where the body corporate rented out the supervisor’s flat; the levy applicable to this flat was deductible from the taxable rental income. After these deductions, the community scheme was taxed at 28% for years of assessment ending April 2008 onwards.

The new Interpretation Note 64 does not differ in any way to Practice Note 8; the same provision is used to tax community schemes. The differences come in the administration of the tax. Practice Note 8 called for a community scheme to submit provisional tax returns, even where no tax was payable. Interpretation 64 has now done away with the need for a scheme to submit a provisional tax return, whether tax is due or not. A community scheme will only submit their annual tax return, an IT14; and once assessed, pay tax on assessment. This means that the tax payable, if any, must be paid within 30 days of the assessment.

This change is a milestone in assisting schemes with tax compliance, bringing down the costs, and making it easier and more efficient.

In the next and final edition, we will look at a practical example of the effects of the new Interpretation Note 64, as well as some other tax types and whether these are applicable.

For further reading visit the SARS website, Click on ‘whats new’ on the left hand side menu.

Article reference: Paddocks Press: Volume 7, Issue 5, Page 2

Clint Riddin of Clint Riddin & Associates is a sectional title accountant specialised in accounting, income tax and secretarial services to bodies corporate.