VAT and your residential levies

By Cliff Watson, Associate Tax Director, Grant Thornton Johannesburg

The VAT Act was recently amended and changed the VAT implications of residential property levies paid to Home Owners Associations (HOAs).

The history
People living in residential complexes managed by sectional title body corporates were generally not required to pay VAT on the levies paid, as the services rendered by these body corporates to their members were generally exempted from VAT.
The main reason provided for exempting such services, was that the body corporate paid the collective municipal rates to the municipalities on behalf of the individual members of the sectional title complex and then recovered these amounts individually from the members which would have created a situation where VAT was charged on something that was, at that stage, exempted from VAT (now zero rated).

However, the situation changed in 2006, when sectional title body corporates were no longer obliged to pay over the collective municipal rates of the sectional title owners and the owners paid their individual rates directly to the municipalities. This change did not affect the body corporates’ VAT exemption status as it was argued that the service supplied by the sectional title body corporate to the members is not a business enterprise per se, but more a cost sharing arrangement.

As HOAs essentially provided the same services as the sectional title body corporates, an anomaly was created as the services by HOAs were never exempted from VAT. This was due to HOAs never being required to pay the collective municipal rates to municipalities. This anomaly continued until 2013 when the Minister of Finance announced in the budget speech that it would be corrected.

The new VAT treatment
From 1 April 2014 the services by HOAs to any of its members are also be exempt from VAT.

The VAT Act now allows, subject to certain limitations, that any association of persons formed solely for purposes of managing the collective interests of residential property use or ownership of all its members, may exempt the levies charged in respect of expenditure related to the common immovable property of such members, from VAT.

The negative effect of this amendment is that if such an association only supplies these exempt services to its members, the association will be required to deregister as a VAT vendor. This will create a deemed VAT liability payable to SARS on all the assets that are left in the association. SARS does however allow this liability to be paid over a six month period, without any penalties or interest being levied.

The association may however request that the exemption should not apply to it and then choose to remain registered for VAT and charge VAT on the levies recovered from its members.
How will this affect you?

In essence, there should be a decrease in the levies charged by HOAs, which should be passed onto its members. However, with the association no longer being able to claim the VAT on expenses, in addition to the added deemed VAT liability mentioned that may have to be recovered from members, either through a once-off special levy or over time, the benefit of a reduction in the levies may only be felt in the future.