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Date: December, 2015 | Author: Clint Riddin

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Date: December, 2015 | Source:LawDotNews

"His demeanour at this time was highly aggressive, flying his arms about and it was clear to me that he had to prevent himself from lashing out at me physically” (Trustee quoted in judgment below)
The irrational, aggressive and disruptive "Nightmare Next Door" owner is regrettably a well-known and much-disliked feature of all too many residential complexes. He or she makes trouble at every opportunity, attacking other owners and the body corporate’s trustees with equal abandon. What can you do about it? In sufficiently serious cases, our courts will come to your rescue, as a recent High Court decision illustrates.

Harassment – it could be a ticket to prison …

  • The owner of a sectional title unit harassed the board of trustees in his complex to such an extent that they obtained a court order prohibiting him from raising complaints, objections and the like with the trustees in any way other than through written communication to the secretary of the body corporate.
  • Undeterred, he breached this order on at least 3 occasions, threatening for example to remove the trustees’ roof tiles (so that, he said, they could feel what it feels like to live in a unit with roof leaks), and aggressively objecting to the way a trustee was painting some plant pots. It couldn’t have helped his case that the female trustees on the board seem to have borne the brunt of these attacks, and to have felt physically intimidated on at least one occasion – as evidenced in the quoted evidence above.
  • Holding the owner to be clearly in contempt of the original court order, the Court sentenced him to 6 months’ imprisonment. It suspended this sentence for 5 years on condition that the owner “does not harass or contact any member of the Board of Trustees personally, but must address all communication regarding complaints, grievances, proposals or commentary to the secretary of the applicant in writing".
… and costly

Because it was the owner's "irrational and acrimonious behaviour" that necessitated the court action, the Court also ordered him to pay the Body Corporate’s legal costs on the punitive attorney and client scale.


Date: July, 2015 | Author: Clint Riddin

With the rise of the new MEGA Scheme comes a new world of possible problems…is Batman needed to restore or keep law and order?

Not if your scheme has well-drafted and well thought-out and appropriate management rules which developers are allowed to make in terms of section 35(2) of the Sectional Titles Act, 1986.

The concept of the mixed use scheme has many advantages, and a well-known area of central Cape Town has as its catch phrase “live, work, play.” Whilst very apt for the area that it markets, this phrase is also appropriate for a mixed used scheme, as these schemes are made up of many different aspects and uses.

They contain residential units, retail units, office space, commercial parking components, hotels with their associated rental pools and, in some of the more modern schemes, conference centres. Given these many different aspects to the Mega Scheme, the needs and wants of owners in the different components that make up our Gotham City may well be, and often are, at odds with each other.

The developer is limited in what management rules can be changed and deleted prior to the establishment of the scheme, and the details of this are best left to a new superhero, The Caped Lawyer, but additional rules can be created and the use of section 32(4) of the Sectional Titles Act to amend the manner in which owners vote, and more importantly the manner in which levies are determined, can be used to great effect.

Costs and levies are probably the biggest problem area in the Mega Scheme - Can an owner be sure that he is only paying for his fair share of expenses and not subsidising an aspect of the scheme from which he derives no benefit and never uses?

Now this aspect can get grey…think of the residential scheme which has a swimming pool and an owner who says “I never use the pool. So why should my levy contribute to it?”; or the age old lift argument where the person on the ground floor does not want to pay, but those are arguments and debates for another day and, possibly, for Spiderman to help with.

For our Mega Scheme to work efficiently, the rules need to take care of the different use types, needs of owners and their tenants, residents, clients, visitors and guests as well as to allow all owners to pay for what they use on the most fair and practical basis.

We have seen a number of models, from attempts to use the default participation quotas so as to keep the management simple, to very complex models which often miss many important aspects in the complexity of the approach and where the rules too often do not take account of the realities of that particular Mega Scheme.

Most of us agree that is best to ‘keep it simple…’ - this mantra works well. But often it is in the detailed planning and arrangements that the most elegant and simple arrangements are made. With the many computer programmes available to modern managers it is not that difficult to do the calculations required to allocate costs and prepare budgets so as to create separate cost centres for each component and to work out fair allocations based on use, number of units, and even values, rather than simply using the square metre / participation quota approach that is the default under the Sectional Titles Act. Developing and implementing a more complex approach is not a problem.

The concept of “pay as you go” is also an important aspect to remember. With the advent of smart metering, wherever possible, services such as water, electricity, gas, heating and cooling need to be measured and recovered on a metered basis. Given the high costs of utilities such as electricity and water, smart metering is a concept all Mega Schemes should now consider, even if this means a costly retrofit.

The basis of the allocation of expenses to the costs centres can also be used to determine the final levy. Some costs that are charged to sectional schemes are based on the number of units or sections in the scheme, and we often hear owners ask why they should pay more for certain administrative costs, just because their section is bigger; this is borne out by the fact that many of these costs are based on the number of sections, not the size of the unit, being the participation quota basis. Smart rules in the Mega Scheme can cater for this.

There may be parts of the common property that should be off-limits to certain owners or categories of owners, such as a swimming pool. It may be that the owner of an office section could insist that occupants of his office space be allowed to use the swimming pool, but this may be impractical for a number of reasons, especially if a cost centre approach is used to determine levies and the cost of the pool maintenance is not allocated to the office component; but as this is common property, the owner and his occupants could insist on using the pool area if it is common property.

Instead of shining a bright Bat light into the night sky to ask for help, just have a good rule under section 27A of he Sectional Titles Act which creates limited use common property and allocates rights of use of different parts of the common property to different categories of owners in the Mega Scheme; here again we need to call on our new superhero, the Caped Lawyer.

It is no coincidence that the Caped Lawyer wears a similar superhero suit to Batman when in Court, so having the correct legal and accounting advice and support in drafting the management rules and thinking carefully about who will pay for what and in what proportions is essential to ensure that the Mega Scheme does not end up like Gotham City.

Good scheme rules are all that are needed to keep law and order!


Date: July, 2015 | Author: Chris Riddin

I recently wrote about changing a body corporate’s financial year-end, especially where this is the end of February. Given the concentration of accounting and audit client work at this busy time of year-end for all sorts of entities, it still makes sense that bodies corporate consider changing their year-ends to less busy times. This opens the possibility of more competitive fees, as accountants and auditors have more resources available at less busy times and most importantly, the four-month deadline is easier to achieve.

Resulting from this article, some readers took this advice. However, in so doing some of them raised a very interesting point: What about the budget and levies?

Every body corporate must have a budget for each financial year and this budget year must run concurrently with the financial year of the scheme (PMR 31(2A)). The PMR’s require that the budget must be approved and in place before the start of the financial year (PMR 36(1)) and the members in the annual general meeting must approve this budget (PMR 31(2)). However, this all takes place some time into the new financial year, given that the annual general meeting is to be held within four months after it ends and it can only be called after the signed audited financial statements have been finalised so that they can be sent out with the notice of the annual general meeting.

The arrangements described above on their own raise a number of debates, but we can leave these for another article. After the annual general meeting the levy is determined by the trustees from this budget and owners are advised what this is to be, within fourteen days after the AGM (PMR 31(3)). So it should be clear to readers that levies are not just a continuous monthly charge and that carries on indefinitely and is just increased by a percentage each year.

The real position is that once the financial year and budget year has ended, so too have the levies that were raised for that budget year. It is a pity that the recent amendments to the PMR’s did not achieve their intended effect, which was to allow trustees to approve the new budget before end of the current financial year. Unfortunately the amendment was poorly thought through and worded, so the AGM still has to finally approve the budget. So the issue of the levies remains in limbo after the end of the financial year and pending the AGM.

In practice most schemes’ trustees do raise levies on the basis of the new budget approved by owners. In most instances, this is communicated to owners as a percentage increase on the previous monthly levy. In reality it is a new levy, applying the PQ to the total amount owners have agreed is needed to run the scheme for the year. The trustees in some schemes raise a special levy at the end of the financial year to last until the new levies approved at the AGM are implemented. Others just increase the amount of the invoices on the basis that the increased amount will be payable once the budget is approved by owners at the AGM. Whatever the approach, the result is that generally the schemes have the income needed to run their operations.

This then leads us to the problem under consideration: What if the body corporate changes the financial year from February to April or May; there are now two or three extra month of additional expenses, and where is the income needed to cover these?

The budget year has ended, and so too the financial year. Here, where the trustees need to cater for a financial year that is in effect longer than 12 months, the solution is relatively simple. The trustees should treat the expenses as unforeseen and unbudgeted and they can then use the provisions of PMR 31(4B) to raise a special levy to cover the shortfall.

The trustees may also decide to shorten the financial year so that there will befewer than 12 months, for example changing the financial year end from the end of February to the end of October in the previous year so that there are only eight months. I suggest that in this case the trustees should consider the levies for any “excess” months to be uncollectable. This should be written off, as the relevant expenses will be covered by the new levies implemented after the annual general meeting.

There are possible complications, for example when levies are not raised concurrently with financial years or are for some particular purpose, but run concurrently with the new financial year-end and the body corporate will not be out of pocket or have uncollected levy claims.


Date: December, 2013 | Author: Clint Riddin

View update


Date: 14 March 2013 | Author: Nkwinti GE (MP)
Reference: Government Notice

View amendment


Date: September, 2011 | Author: Clint Riddin
Reference: Paddocks Press: Volume 6, Issue 9, Page 2

Community schemes as a term includes bodies corporate, home owners’ associations, shareblock companies and the like. While SARS does not use this terminology itself, given the changes to legislation affecting these forms of entities, it is the most fitting way to include all these in reference to how SARS taxes these entities.

There is some confusion on which tax approach or compliance is needed but, in our view, the current practice note 8 is still the basis on which community schemes are taxed, which is as follows:

All income other than levies earned by the particular community scheme, such as interest, including interest and penalties on late payments, as well as rentals, such as rentals from cellphone and advertising companies, is taxable. Some community schemes have clubhouse and restaurant facilities, and income earned from these is also taxable. A 2008 amendment to the Income Tax Act has now made the first R50,000 earned from sources other than levies exempt.

It is important to note that a community scheme is liable to register as a taxpayer as soon as the legal entity comes into existence. Where a scheme has not yet registered, SARS has been shown to be understanding, and in certain cases has waived penalties, provided that the taxpayer “comes clean”; the scheme is then taxed from date of establishment.

Community schemes may also take advantage of the voluntary disclosure period that SARS has in place currently, but this closes at the end of November.

Part of the confusion has come about with a recent amendment to the definition of “provisional taxpayer”, which now allows a community scheme taxpayer to submit a provisional tax return only where provisional tax is payable; so, where tax is calculated to be nil, no provisional tax return needs to be submitted. However, if tax is calculated to be payable, even after the R50,000 exempt income allowance, then a provisional tax return and payment must still be submitted by the due date.

The amendment has not removed the need for annual tax returns known as IT14s to be submitted, even where these are nil. So tax compliance is still necessary, albeit with relief to an extent for a number of schemes from some of the administrative burden.

SARS has also issued a draft interpretation note that will, when implemented, replace practice note 8, removing the need to submit provisional tax returns completely, irrespective of whether provisional tax is payable or not; annual tax returns will still need to be submitted and the taxpayer will pay tax on assessment. It is important to note, however, that this is a draft interpretation note that is not yet in force. Again, this does not remove the need for a community scheme to register as a taxpayer.


Author: Clint Riddin
Reference: Paddocks Blog / Paddocks Press Newsletter

The term capital in accounting terminology usually refers to expenditure which relates to purchasing or investing in or acquiring property, plant or equipment which is then used in the production of income, in other words, to make money.

However, whilst the running of the finances of a body corporate should be based on sound financial principles and good governance, the nature of a body corporate is not to run at a profit and so no investment in assets which are used to generate income takes place; the objective is to generate reserves and funds.

To better debate the treatment of capital expenditure in the books of a body corporate, it is necessary to look at the definition of an asset, for which a number exist; but in essence it must be cash or be capable of being converted to cash or from which future economic benefits will flow.

Capital expenditure vs expense
So there are instances where a body corporate may spend money on what in some instances would be treated as capital expenditure and be shown in the balance sheet of an enterprise, in sectional title bookkeeping, the practice is to expense the transaction.

An example of this is where the body corporate electrifies the perimeter wall, in a business this would be accounted for as an asset, as it would be protecting property and plant used in the production of income, and depreciated over the useful life of the asset and the tax deduction also treated accordingly. However, in sectional title there is no income producing asset being protected.

Given the abridged definition of an asset above, it must also be noted that bodies corporate are taxed differently to business enterprises and so the treatment of expenditure which normally would be considered capital by SARS is not treated as such in sectional title, which further supports the argument as to the accounting treatment of “capital” transactions.

One of the aims in sectional title accounting is to have the funds and reserves position be as closely supported by cash in the bank as is possible; this keeps evaluating the finances and financial well-being of the scheme easy, especially for non-accounting minded owners who usually make up the majority of owners.

As an example, if a body corporate had reserves of R1 million supported by R1 million in cash and the electrification of the perimeter fence in our reference above costs R500,000 and if there are no other transactions, the bank balance after paying for the fence will be R500,000.

If the fence is capitalised to the balance sheet per business accounting practice, and depreciation is say R50,000, again in the absence of other transactions, the reserves would be decreased by R50,000 to R950,000 but the bank balance is R500,000. This often leads to the lay person questioning what has happened to the money. However, if the transaction is expensed, the reserve position is now R500,000 and so is the bank.

Having regard to the treatment of capital purchases argument, there are occasions where a body corporate will reflect capital assets on its balance sheet, for example if the body corporate owns immovable property such as a supervisor’s flat or a clubhouse. Here the normal accounting treatment of the asset will take place.

In essence, it is contended that there needs to be a departure from accounting practice in sectional title bookkeeping for good reason; whether it is because of the debate surrounding the definition of an asset, or the meeting the needs of the users of financial reports, a different approach is necessary.


Author: Clint Riddin
Reference: Paddocks Blog / Paddocks Press Newsletter

For those readers who do not understand Afrikaans, the word “gaap” means to yawn, and since some people believe accounting is boring, the reference to GAAP seemed appropriate. Why anyone would find this topic boring, however, is beyond me. The thrill of balancing is an indescribable high.

For some time now, South Africa has been aligning itself with the International Financial Reporting Standards (IFRS), which means we will soon stop using and referencing Generally Accepted Accounting Practice (GAAP).

Full IFRS compliance is very onerous and costly, and is not an appropriate accounting standard in many instances for many types of business, such as sole traders, partnerships and others. This argument can also extend to bodies corporate and home owners’ associations.

For some time, South Africa used an accounting standard that was referred to as GAAP for SMEs to give smaller entities an alternative, and it was this standard that seemed to be the best fit for bodies corporate. In August 2009, South Africa adopted IFRS for SMEs, which is similar in many ways to GAAP for SMEs and has now scrapped the local standard.

We refer to IFRS for SMEs as the “best fit” for sectional title as full IFRS compliance is seemingly not necessary, but governance and reporting aspects are key in scheme management and so a good reporting standard is necessary. However, in our view,some accounting aspects in sectional title are not applicable and so there is a need to deviate from IFRS for SMEs.

One such standard is the treatment of fixed assets and depreciation; as a body corporate is not a trading entity, and given that the tax aspects and treatment are very different, there is no need to depreciate assets. So, the full cost should be expensed when any asset is acquired or built. There are exceptions to this suggested treatment, such as fixed property.

PMR 37(1) of the Sectional Tiles Act still refers to financial statements being prepared in accordance with generally accepted accounting practice; given that this standard has been replaced with IFRS, it could be argued that all bodies corporate should have financial statements prepared in compliance with full IFRS, at great expense.

Perhaps this aspect should be amended to at the very least IFRS for SMEs. But a better consideration may be to revisit the needs of users of sectional title financial information and adopt a more meaningful reporting standard that is appropriate and informative. Another reporting standard is possible provided that the basis on which the financial statements have been prepared has been set out clearly.

Consideration should be given to aspects such as compliance with rules, proper determination of levies, and compliance with any section 39(1) restrictions or directions which may have been given to trustees by members in general meeting. Treatment of assets and what constitutes an asset should also be defined. These are just a few of the possible inclusions to a changed reporting standard.


Author: Clint Riddin
Reference: Paddocks Blog / Paddocks Press Newsletter

In the new-built property market, developers have become increasingly creative in the types of developments they design and build in order to attract buyers and investors. The original idea behind cluster schemes was aimed mainly at providing security estates, but over time this was seen as the minimum which a development should offer and lifestyle estates have become the order of the day. These lifestyle estates vary both in size and type, ranging from gentlemen’s estates of a few units on large plots to wine estates to multi-dimensional golf and equestrian estates with a few thousand units built on them. A further aspect to these large developments is that units range in price to cater for the different income levels.

Given the multi-dimensional aspects of these estates, the management and structures to support the management, need to be carefully considered to ensure that the development is a success and that the lifestyle estate becomes an attractive option for purchasers in years to come and as such insure the investment value of buying into such an estate.

History has shown where some of these developments have failed in not providing the correct management structures. Most disputes centre around the calculation of the levy, as little thought was given to this in the past. Often the prescribed management rules are the applicable determining factor in calculating the levy, which gives rise to these disputes. This is especially true where the estate contains a commercial element or where there is a mixed use element, in that owners in the mixed use development are under the impression that their levy is subsidising costs for another part of the estate, which they do not use or may not have access to.

Another factor is how the erven have been zoned in terms of the development; such as consolidated erven or a number of erven in a particular township where a local authority has as a requirement the establishment of a home owners' association. This gives rise to the situation where some erven form part of the home owners' association and then, where possible, a sectional scheme may be developed on one or more of these erven. In these circumstances, there would be a home owners' association structure and a body corporate being managed under the Sectional Titles Act. The decision also needs to be made as to what legal entity should be used for the establishment of the home owners' association being either a section 21 company or a common law association. Whatever the decision, the management aspects contained in the home owners' association needs to complement the management and conduct rules that govern the sectional scheme within the home owners' association, with specific emphasis on the levy calculation.

As VAT is applicable to home owners' associations, where the annual levy is in excess of a million rand per annum, careful structuring of the levy calculation and budgets may well prevent the HOA needing to register as a VAT vendor. Consideration should also be given to the income tax part of the levy structuring, as here too, careful tax planning could prevent SARS determining that a particular income group be deemed taxable in terms of their Practice Note 8.

To prevent disputes of the levy calculation and liability, careful thought needs to be given to the accounting structures of the estate, which includes monthly and annual financial reporting. In some instances the management structures could be too elaborate or cumbersome resulting in disputes and so a happy medium needs to be sought to ensure a well run lifestyle estate.


Author: Clint Riddin
Reference: Paddocks Blog / Paddocks Press Newsletter

We have asked one of our past students a few questions...

Marco de Oliveira, managing member of Solver Property Services

Can you tell us a little bit about yourself?
I live in Johannesburg. I have always found the property game intriguing and 7 years ago I made a career decision to move from the IT industry into Property by making use of my strong organisational, IT and financial skills.

I started working for a property development company, which provided me with insight into many of the operational, legal and contractual issues that often become problems for managing agents and Bodies Corporate once a development is handed over.

Shortly after that I was offered the opportunity to manage one of their Sectional Title developments, at which point I decided to enter the property managing industry and established Solver Property Services, where I have been a managing member for the last 5 years.

What was your motivation for enrolling in the Paddocks courses you have completed?
In my company we have always strived to offer a high quality of professionalism to go with our unique hands on style of management. In order to be the best in our field, we felt that we needed to align ourselves with the leaders in the industry. Through researching various avenues of Sectional Title training, we found Paddocks to be highly recommended by both NAMA and other peers in our field.

What did you enjoy about the courses?
All the courses I have completed were extremely well thought out. I found them not only extremely helpful in increasing my knowledge, but my skill sets too.

UCT (Law@Work) Sectional Title Scheme Management Course: I specifically enjoyed the practicality of this course. The assignments component is invaluable as it provides one with realistic case studies of situations requiring one to apply the knowledge learnt in the course. This is a definite must for anyone wanting to become a successful Managing Agent. We ensure that all our existing and future staff have this as a basic requirement.

Law of Sectional Title Meetings Course: this course certainly shed new light on how badly run Sectional Title Body Corporate and Trustee meetings can be. It teaches one the basic necessities for calling, attending and minuting meetings. The chapter on the “Chairman’s Role” was particularly useful in successfully guiding and assisting our Body Corporate Chairpersons, effectively.

Sectional Title Bookkeeping Course: although this course has a lot of elements that might seem repetitive for operating bookkeepers, there were many elements that I did not know and have now been able to apply to improve my business. Even though I felt the workshop covered too much material for such a short time, I thoroughly enjoyed the discussions and input during class as well as the excellent tutoring and experience of Clint Riddin.

How have these courses helped you?
Not only has my knowledge of the Sectional Title industry increased exponentially since completing the Paddocks courses, but it has helped tremendously in motivating me to grow Solver Property Services by effectively offering the professionalism that I envisioned with my new found confidence.

Any additional comments?
In my experience as an active Trustee, during interaction with other Trustees and during presentations for new business, I am always shocked at the high number of Managing Agencies who lack knowledge and the necessary skills to perform their duties effectively, which negatively impacts on the effectiveness of Bodies Corporate and gives Managing Agents in general, a bad reputation. I therefore encourage all prospective and existing Managing Agents to participate in such courses to make the Sectional Title industry and living, better for everyone.


Author: Clint Riddin
Reference: Paddocks Press: Volume 2, Issue 5, Page 5

It appears to be a common misconception that bodies corporate and home owners’ association are exempt from income tax and some trustees further believe that a body corporate or home owners’ association does not need to register as a tax payer. (Whilst we refer to bodies corporate in the rest of this article, the matters discussed apply equally to home owners’ associations.)

Even though levy income is exempt in terms of sections 10(1)(e)(i) and 10(1) (e)(ii) of the Income Tax Act, every body corporate is required to register as a taxpayer. The body corporate will then automatically qualify for the levy income exemption but still needs to submit provisional and annual returns. Practice note 8 issued on the 26th March 2001 by SARS sets out how bodies corporate are taxed.

Prior to 26 March 2001 SARS had only taxed a body corporate on income other than levies when the body corporate reflected a surplus in the audited financial statements. However, bodies corporate started creating deficits by effecting transfers to maintenance reserves to cover future maintenance. Whilst this is a good practice in terms of financial planning, SARS saw this as a way of avoiding tax and implemented practice note 8.

In terms of practice note 8 all income other than levies, earned by the body corporate, such as interest, including interest and penalties on late payments, as well as rentals, such as rentals from cell phone companies, are taxable. Some bodies corporate have clubhouse and restaurant facilities, and income earned from these is also taxable. These incomes are taxable irrespective of whether or not the body corporate has incurred a deficit.

Given this, a body corporate is liable to file a return as soon as they earn any form of income not considered a levy. In effect this means that all bodies corporate should register as a taxpayer as soon as the scheme is registered. Where a body corporate has not yet registered, SARS has been shown to be understanding, and in certain cases has waived penalties, provided that the taxpayer “comes clean”. The body corporate is then taxed from date of establishment.

This could have financial implications for body corporate, but the consequences of SARS catching up with the body corporate are far more severe. Firstly, the tax penalty could be as high as 200%. Secondly any request for penalties to be waived would be ignored, and thirdly, the trustees could find themselves facing criminal prosecution.

Whilst people generally do not like paying tax, it is not wise for trustees to treat the taxation of bodies corporate as they might their own tax affairs. Trustees have a fiduciary responsibility to the body corporate and any liability arising out of non-registration, or tax avoidance, could negate the indemnity afforded by the Sectional Titles Act, or any constitution in terms of a home owners’ association, and could be recovered by members from the trustees in their personal capacities.

From a practical point of view, a body corporate needs to pay 2 provisional tax payments, the first determined six months into the new financial year, the second at financial year-end. To prevent s89 quat interest, the body corporate must ensure that the provisional payments are not too low in relation to the final tax liability determined when the financial statements are prepared.

The tax return is due 60 days after the financial year-end, but SARS generally grants extensions of up to a year where the tax affairs of the body corporate are up to date. It is usually not possible for the body corporate to have audited financial statements that have been approved by the trustees within 60 days, and so it would be wise to apply for the extension timeously. Trustees must ensure that they sign the financial statements in good time, to ensure that the tax return can be submitted; SARS insists on approved and signed financial statements.

We remind all trustees that in terms of section 101 of the Income Tax Act, every taxpayer must appoint a public officer. This is an important function as this person is legally responsible for the tax affairs of the body corporate, and is possibly the first person who faces arrest should any aspect of the tax matters are not in order. In practice, the public officer is usually the person you have appointed to attend to your tax affairs.

SARS continues to be successful with tax compliance initiatives and it is only a matter of time before their focus shifts to the sectional title and cluster housing industries. Trustees are urged to ensure that the body corporate is registered as a taxpayer and that all the required returns have been submitted as soon as possible. Trustees should also not assume that a body corporate is registered as a taxpayer because the financial statements reflect a tax charge; this may be the accounting treatment and does not necessarily mean that the body corporate is registered.


Author: Clint Riddin
Reference: Paddocks Press: Volume 3, Issue 4, Page 1

You may recall from an earlier article that a body corporate, shareblock or home owners’ association needs to be registered as a taxpayer, and is taxed in terms of SARS’ practice note 8.

Against this background it appears that a gift from Trevor has been missed when analysing the 2008 budget speech. This is not the reduced corporate tax rate which is used to tax a body corporate, shareblock’s and HOA; but rather that the first R50,000 of interest income earned on investments is now exempt from tax. This exemption does not extend to interest charged on late and arrear levy payments and other income such as rental income is still taxable.

This has the effect to Section 24 explains this very clearly – “If an owner of a section proposes to extend the boundaries or floor area of his or her section, he or she shall with the approval of the body corporate, authorized by a special resolution of its members, cause the land surveyor or architect concerned to submit a draft sectional plan of the extension to the Surveyor‐General for approval.” A new floor where before there was only air constitutes an extension of floor area – without any doubt!

The Trustees have an important duty to ensure that the owners comply with all requirements of the Act / Regulations; and in the case of extensions / improvements specifically with S.44 and PMR.68. They need to disregard the whispers, the glares, the threats and other profanities – and keep focused on the responsibility they undertook (sadly often without full knowledge of the implications) when they accepted nomination as a Trustee.

Remember – when in doubt consult someone who is qualified to give you constructive and correct advice.


Author: Clint Riddin
Reference: Paddocks Press: Volume 4, Issue 6, Page 1

For many years now the tax aspect on the free or cheap accommodation afforded building supervisors as part of their remuneration packages has largely been ignored. Given SARS strides in enforcing tax compliance, it is only a matter of time before they turn their attention to this non-compliance. Trustees are also reminded of their fiducary position they find themselves in, and this extends to ensuring that all statutory aspects of the body corporate’s affairs are compliant and in good standing.

Whilst it is understood that trustees try to obtain the best possible earning potential for the employee, to ignore the fringe benefits tax will lead to obvious problems. Where there has been no fringe benefit tax calculation, it is recommended that trustees take the appropriate corrective action.

The fringe benefit to be included in gross income is the greater of the benefit calculated by applying a prescribed formula or the cost to the employer. Given that there is usually no cost as the body corporate owns the flat used by the supervisor, the formula has to be used.

The formula is set out as follows: (A-B) x C/100 x D/12; where:

  • A represents the remuneration factor as determined in relation to the tax year;
  • B represents an abatement equal to an amount of R43000, provided that the abatement is reduced to ZERO where:
    - the employer is a private company and the employee or his/her spouse controls the company or is one of the persons controlling the company, whether control is exercised directly as a share holder in the company or as a share holder in any other company; or
    - the employee, his/her spouse or minor child has a right of option or pre-emption granted by the employer or any other person by arrangement with the employer or any associated institution in relation to the employer, whereby the employee, his/her spouse or minor child may become the owner of the accommodation, whether directly or indirectly by virtue of a controlling interest in a company or otherwise;
  • C represents a quantity of 17, provided that
    - C represents a quantity of 18 where the accommodation consists of a house, flat or apartment consisting of at least four rooms; and:
    - such accommodation is unfurnished and power or fuel is supplied by the employer; or
    - such accommodation is furnished, but power or fuel is not supplied by the employer; or
    - C represents a quantity of 19 where the accommodation consists of a house, flat or apartment consisting of at least four rooms and such accommodation is furnished and power or fuel is supplied by the employer; and
  • D represents the number of full months in relation to the tax year during which the employee was entitled to the occupation of the accommodation.

As the employer is a body corporate, the abatement will not be reduced to zero and furthermore, if the supervisor’s salary is less than R43,000 per year, there is no taxable fringe benefit. If the trustees are unsure of the calculation or the processes they need to follow, they should consult their tax practioner.

Author: Clint Riddin
Reference: Clints Corner

It is important to note that a community scheme is liable to register as a taxpayer as soon as the legal entity comes into existence. Where a scheme has not yet registered, SARS has been shown to be understanding, and in certain cases has waived penalties, provided that the taxpayer “comes clean”; the scheme is then taxed from date of establishment.

Part of the confusion has come about with a recent amendment to the definition of “provisional taxpayer”, which now allows a community scheme taxpayer to submit a provisional tax return only where provisional tax is payable; so, where tax is calculated to be nil, no provisional tax return needs to be submitted. However, if tax is calculated to be payable, even after the R50,000 exempt income allowance, then a provisional tax return and payment must still be submitted by the due date.

The amendment has not removed the need for annual tax returns known as IT14s to be submitted, even where these are nil. So tax compliance is still necessary, albeit with relief to an extent for a number of schemes from some of the administrative burden.

SARS has also issued interpretation note 64 that replaces practice note 8, removing the need to submit provisional tax returns completely, irrespective of whether provisional tax is payable or not; annual tax returns will still need to be submitted and the taxpayer will pay tax on assessment. Again, this does not remove the need for a community scheme to register as a taxpayer. Interpretation note 64

To better debate the treatment of capital expenditure in the books of a body corporate, it is necessary to look at the definition of an asset, for which a number exist; but in essence it must be cash or be capable of being converted to cash or from which future economic benefits will flow.

Capital expenditure vs expense So there are instances where a body corporate may spend money on what in some instances would be treated as capital expenditure and be shown in the balance sheet of an enterprise, in sectional title bookkeeping, the practice is to expense the transaction.

An example of this is where the body corporate electrifies the perimeter wall, in a business this would be accounted for as an asset, as it would be protecting property and plant used in the production of income, and depreciated over the useful life of the asset and the tax deduction also treated accordingly. However, in sectional title there is no income producing asset being protected.

Given the abridged definition of an asset above, it must also be noted that bodies corporate are taxed differently to business enterprises and so the treatment of expenditure which normally would be considered capital by SARS is not treated as such in sectional title, which further supports the argument as to the accounting treatment of “capital” transactions.

One of the aims in sectional title accounting is to have the funds and reserves position be as closely supported by cash in the bank as is possible; this keeps evaluating the finances and financial well-being of the scheme easy, especially for non-accounting minded owners who usually make up the majority of owners.

As an example, if a body corporate had reserves of R1 million supported by R1 million in cash and the electrification of the perimeter fence in our reference above costs R500,000 and if there are no other transactions, the bank balance after paying for the fence will be R500,000.

If the fence is capitalised to the balance sheet per business accounting practice, and depreciation is say R50,000, again in the absence of other transactions, the reserves would be decreased by R50,000 to R950,000 but the bank balance is R500,000. This often leads to the lay person questioning what has happened to the money. However, if the transaction is expensed, the reserve position is now R500,000 and so is the bank.

Having regard to the treatment of capital purchases argument, there are occasions where a body corporate will reflect capital assets on its balance sheet, for example if the body corporate owns immovable property such as a supervisor’s flat or a clubhouse. Here the normal accounting treatment of the asset will take place.

In essence, it is contended that there needs to be a departure from accounting practice in sectional title bookkeeping for good reason; whether it is because of the debate surrounding the definition of an asset, or the meeting the needs of the users of financial reports, a different approach is necessary

Full IFRS compliance is very onerous and costly, and is not an appropriate accounting standard in many instances for many types of business, such as sole traders, partnerships and others. This argument can also extend to bodies corporate and home owners’ associations.

For some time, South Africa used an accounting standard that was referred to as GAAP for SMEs to give smaller entities an alternative, and it was this standard that seemed to be the best fit for bodies corporate. In August 2009, South Africa adopted IFRS for SMEs, which is similar in many ways to GAAP for SMEs and has now scrapped the local standard.

We refer to IFRS for SMEs as the “best fit” for sectional title as full IFRS compliance is seemingly not necessary, but governance and reporting aspects are key in scheme management and so a good reporting standard is necessary. However, in our view, some accounting aspects in sectional title are not applicable and so there is a need to deviate from IFRS for SMEs.

One such standard is the treatment of fixed assets and depreciation; as a body corporate is not a trading entity, and given that the tax aspects and treatment are very different, there is no need to depreciate assets. So, the full cost should be expensed when any asset is acquired or built. There are exceptions to this suggested treatment, such as fixed property.

PMR 37(1) of the Sectional Tiles Act still refers to financial statements being prepared in accordance with generally accepted accounting practice; given that this standard has been replaced with IFRS, it could be argued that all bodies corporate should have financial statements prepared in compliance with full IFRS, at great expense.

Perhaps this aspect should be amended to at the very least IFRS for SMEs. But a better consideration may be to revisit the needs of users of sectional title financial information and adopt a more meaningful reporting standard that is appropriate and informative. Another reporting standard is possible provided that the basis on which the financial statements have been prepared has been set out clearly.

Consideration should be given to aspects such as compliance with rules, proper determination of levies, and compliance with any section 39(1) restrictions or directions which may have been given to trustees by members in general meeting. Treatment of assets and what constitutes an asset should also be defined. These are just a few of the possible inclusions to a changed reporting standard.

Given the multi-dimensional aspects of these estates, the management and structures to support the management, need to be carefully considered to ensure that the development is a success and that the lifestyle estate becomes an attractive option for purchasers in years to come and as such insure the investment value of buying into such an estate.

History has shown where some of these developments have failed in not providing the correct management structures. Most disputes centre around the calculation of the levy, as little thought was given to this in the past. Often the prescribed management rules are the applicable determining factor in calculating the levy, which gives rise to these disputes. This is especially true where the estate contains a commercial element or where there is a mixed use element, in that owners in the mixed use development are under the impression that their levy is subsidising costs for another part of the estate, which they do not use or may not have access to.

Another factor is how the erven have been zoned in terms of the development; such as consolidated erven or a number of erven in a particular township where a local authority has as a requirement the establishment of a home owners' association. This gives rise to the situation where some erven form part of the home owners' association and then, where possible, a sectional scheme may be developed on one or more of these erven. In these circumstances, there would be a home owners' association structure and a body corporate being managed under the Sectional Titles Act. The decision also needs to be made as to what legal entity should be used for the establishment of the home owners' association being either a section 21 company or a common law association. Whatever the decision, the management aspects contained in the home owners' association needs to complement the management and conduct rules that govern the sectional scheme within the home owners' association, with specific emphasis on the levy calculation.

As VAT is applicable to home owners' associations, where the annual levy is in excess of a million rand per annum, careful structuring of the levy calculation and budgets may well prevent the HOA needing to register as a VAT vendor. Consideration should also be given to the income tax part of the levy structuring, as here too, careful tax planning could prevent SARS determining that a particular income group be deemed taxable in terms of their Practice Note 8.

To prevent disputes of the levy calculation and liability, careful thought needs to be given to the accounting structures of the estate, which includes monthly and annual financial reporting. In some instances the management structures could be too elaborate or cumbersome resulting in disputes and so a happy medium needs to be sought to ensure a well run lifestyle estate.