On 13 November 2018 the South African Revenue Service (SARS) published the fourth issue of Interpretation Note 64, which seeks to provide guidance on the application and interpretation of Section 10(1)(e) of the Income Tax Act (58/1962).


Section 10(1)(e) exempts from income tax the levy income generated by a body corporate, a share block company or an association of persons. It also provides these qualifying entities with a basic exemption from income tax on receipts and accruals outside levy income, to the extent that the aggregate of the income does not exceed R50,000. The interpretation note clarifies that this exemption is applied to the total receipts and accruals, excluding the levy income, which are taxable and not to each separate source of income.

Qualifying entities

Body corporates, share block companies and associations of persons referred to in Section 10(1)(e) are qualifying entities, provided that they are not party to a prohibited transaction.

Body corporates Those living in complex developments or flats will be familiar with body corporates which govern the separate ownership of individual units (eg, the particular section and the undivided share in a common property) within a development scheme consisting of buildings and land.(1)

Body corporates were established by the Sectional Titles Act (95/1986) to enforce the rules of a particular development scheme, and the members of the body corporate (ie, the individual owners of the units) must pay levies as a contribution to the costs incurred in the running of the common property in the development scheme.

Share block companies Share block companies are less renowned than body corporates but also involve immovable property and levies.(2) They are defined in the Share Blocks Control Act (59/1980) as "a company the activities of which comprise or include the operation of a share block scheme". 'Share block schemes' are defined in the same act as "any scheme in terms of which a share, in any manner whatsoever, confers a right to or an interest in the use of immovable property".

Shareholders that own shares in a share block company acquire the right to use and occupy a specific unit or portion owned in the share block but are expected to contribute to the levy fund established by the share block company. Similar to body corporates, the levies contributed by shareholders are used to maintain and administer the immovable property as well as the share block company itself.

Associations of persons Although it may seem simple to qualify as an association of persons, the exemption will be applicable only to:

  • 'non-profit companies', as defined in the Companies Act (71/2008); and
  • as set out in the interpretation note, a "voluntary association of members founded on a basis of mutual agreement whose intent and objectives are usually set out in a formal founding document".(3)

SARS also clarifies in the interpretation note that a 'company', as defined in the Companies Act, as well as any cooperative, close corporation or trust, are specifically excluded as associations of persons and do not qualify for the exemption.

In order to qualify as an exempt association of persons in terms of Section 10(1)(e)(i)(cc) of the Income Tax Act, the commissioner must also be satisfied that the association has been formed solely to manage the collective interests that are common to its members and that the association of persons cannot distribute any of its funds to any person other than a similar association of persons.

Also pertaining to immovable property in some respects, associations of persons as contemplated in this section will manage the expenditure and financial and administrative affairs applicable to the common immovable property of its members by collecting levies from said members. The interpretation note highlights that homeowners' associations are often included as qualifying entities, as well as associations formed to control and manage the maintenance, security or appearance of the immovable property common to the members. The interpretation note also provides examples of the members of these associations, citing residents or owners of security estates and gated communities or tenants of shopping centres. Therefore, associations will typically be centred on:

  • common ownership of immovable property; or
  • a shared responsibility to maintain common facilities.

No exemption for prohibited transactions

Although they meet the requirements of 'qualifying entities' within Section 10(1)(e), where the body corporate, share block company or association of persons is party to a transaction, operation or scheme with the sole purpose of reducing, postponing or avoiding any tax, levy or duty otherwise payable by any person in terms of the Income Tax Act or any act administered by the commissioner for SARS, the exemption will no longer apply to the entity.

The exemption in Section 10(1)(e)(i) will still apply to an entity that was not knowingly a participant in a prohibited transaction as described above. However, the interpretation note sets out that this rule applies irrespective of whether the entity itself, or any other person (ie, a shareholder or unit holder), has benefitted from the reduction, postponement or avoidance of any applicable tax.

Application for exemption

Body corporates and share block companies are automatically exempt from income tax in respect of levy income and need not apply for the exemption in Sections 10(1)(e)(i)(aa) and (bb). The Tax Exemption Unit (TEU) need not be involved and these qualifying entities are merely required to register at a SARS branch office and submit their annual income tax returns, even if they do not appear to have an income tax liability. Body corporates and share block companies will find that the levy income exemption and the basic exemption are applied automatically during the assessment.

Tax Exemption Unit

An association of persons will be fully taxable on all of its income, unless it gains approval from the commissioner by lodging an application in this regard with the TEU. The most recent details for the TEU are provided in the interpretation note.(4)

The TEU will decide whether the association of persons meets the requirements in Section 10(1)(e)(i)(cc) based on the founding document lodged in the association of persons' application. SARS recommends in the interpretation note that applications include confirmation that the sole object of the association of persons is to manage the collective interests common to all of its members, including:

  • expenditure relating to the common immovable property; and
  • the collection of levies in this regard for which members are liable.

It is further recommended in the interpretation note that applications clarify that the association of persons cannot distribute funds to any person other than to a similar association of persons and that, on dissolution of the association of persons, its remaining assets will be distributed to a similar association of persons which is also exempt from income tax in terms of Section 10(1)(e).

When making an application to the TEU, the association of persons should also bring to the commissioner's attention any amendments that have been made to the association's founding documents and submit the amended documents to the TEU.

Defining 'levy'

The term 'levy' is not defined in the act. As such, further clarification is needed when considering Section 10(1)(e), which exempts levy income. As set out in the interpretation note, the levies accrued to or received by qualifying entities in Section 10(1)(e) are the amounts collected by the qualifying entities from their members in order to pay certain expenditure which arises from the management of the collective interests of the members.

A useful means to distinguish a levy has been included in the interpretation note as follows: "the members would be responsible for paying and administering their share of the expenditure if it were not for the qualifying entities that manage their collective interests". SARS explains in the interpretation note that, when determining whether an amount is a levy, the true nature of the transaction must be considered.

Types of exempt levy

Examples of levies that will be exempt from income tax when received by or accrued to qualifying entities in terms of Section 10(1)(e) are provided in the interpretation note. Most common of these are:

  • the general levy, which covers day-to-day running and maintenance costs; and
  • the special levies, which may be raised to pay for capital improvements, including:
    • paving or security upgrades; or
    • as part of the creation of a reserve fund for future capital expenditure envisioned by the qualifying entity.

SARS also details in the interpretation note that 'stabilisation fund levies' – being levies for the purposes of subsidising future expenditure or to create a reserve for capital improvements or unforeseen expenditure – will be regarded as a levy, provided that the founding document of the qualifying entity makes provision for a levy stabilisation fund. This type of fund aims to mitigate undue increases in levies by creating a buffer for any extra costs. Stabilisation fund levies are usually paid as fixed, one-off payments and are often in the form of an entry levy when a member purchases a unit or an exit or departure levy when an owner disposes of a unit. In order to qualify as levy income, the stabilisation fund levies must be provided for in the founding documents of the qualifying entity and the rules relating to the governance of the stabilisation fund must also be included.

The interpretation note includes expansive requirements to qualify for the stabilisation fund levy income exemption, stating that the founding document of the stabilisation fund must:

  • contain the methodology under which the levy will be payable to the fund; and
  • stipulate that the levy income is used only to defray expenditure on common immovable property governed by the qualifying entity.

The stabilisation fund levy must also be a charge imposed by the qualifying entity and, if the levy is payable by the owner on alienation of a unit, the founding document must specify that the amount to be paid is a liability due, although only payable on alienation.

What about timeshare levies?

The interpretation note clarifies that timeshare exchange entities are non-qualifying entities. Although immovable property is involved, similar to body corporates and share block companies or qualifying associations of persons, members of a time-sharing arrangement do not own the common immovable property, nor are they responsible for maintenance, repairs, improvements or bond repayments on the immovable property. They are merely owners of timeshare points. As such, according to the interpretation note, unless the entity selling timeshare interests in holiday accommodation to members of the public qualifies as a body corporate in terms of the Sectional Titles Act, or as a share block company in terms of the Share Blocks Control Act, the timeshare exchange entity will not qualify for the exemption under Section 10(1)(e).

Are building penalty levies taxed?

Building penalty levies are described in the interpretation note as qualifying for exemption as a levy. These levies are typically expressed as a multiple of a general levy and are aimed primarily at recovering additional costs incurred by the qualifying entity as a result of delayed construction. Members of qualifying entities will be made to pay a building penalty levy when they have failed to commence or complete building activities within the prescribed period to cover costs (eg, for repairing damages that have been caused by construction vehicles on the roads). Provided that the building penalty levy is distinguishable from a penalty or a fine, the levy will be exempt from income tax in terms of Section 10(1)(e).

Distinction between levies, penalties and fines

In the interpretation note, SARS suggests that qualifying entities will not enjoy the exemption if the income in question is received by or accrued to them by way of penalties and late payments. Although penalties, fines and levies are conceivably intertwined, the interpretation note clarifies that fines, for example, do not qualify as levy income. Fines are identifiable in that they are put in place to discourage certain non-desirous behaviour and often occur as a result of a member's conduct or lack thereof. Where a member is obliged to pay an additional amount over and above any exempt levies that is unrelated to expenditure incurred or to be incurred in relation to the qualifying entity's common immovable property, such receipt by the qualifying entity does not represent an amount collected with the intention of funding expenditure relating to the common immovable property and therefore does not qualify as exempt levy income.

Notably, late payment penalties and interest charged on outstanding levies receive similar treatment and do not qualify as exempt levy income.

Tax rate

Qualifying entities in Section 10(1)(e) fall within the definition of 'company' in Section 1(1) of the act. Therefore, they are treated as companies for income tax purposes and pay tax at the company rate on their taxable income.

Impact on taxable income

While levy income is exempt from income tax, expenditure incurred by a qualifying entity in relation to the management of the collective interests of members which is funded by member levies is not allowable as a deduction in determining taxable income, because it is incurred in the production of exempt income and therefore cannot be set-off against other income.

The basic exemption contained in Section 10(1)(e) should not be ignored. Examples of the receipts and accruals outside levy income that will qualify for the basic exemption are provided in the interpretation note and include as follows:

  • investment income;
  • amounts charged on unpaid levies;
  • rental income from letting portions of immovable property (eg, parking spaces);
  • fees charged for the use of facilities on immovable property (eg, tennis courts or entertainment halls); and
  • fines paid for not adhering to conduct rules.

Although the scope for exemption of receipts and accruals outside levy income is ostensibly wide, the basic exemption limits the aggregate of the qualifying income in this respect to only R50,000.

Exemption for provisional tax, donations tax, dividends tax and capital gains tax

Qualifying entities are excluded from the definition of a 'provisional taxpayer' and need not submit provisional tax returns or make provisional tax payments.

Donations made by or to a qualifying entity are exempt from donations tax under Section 56(1)(h) of the act.

In respect of the capital gains tax (CGT) implications associated with the exemption, the interpretation note states that it would be unusual in practice for a body corporate, share block company or association of persons to derive a capital gain during the normal course of its operations. Per the interpretation note, movable depreciable assets are unlikely to yield capital gains. Unit holders would have to account for capital gain or loss on the sale of a portion of common property and the body corporate would therefore have no CGT consequences. The transfer of immovable property in a share block company to a shareholder in the company will not give rise to a capital gain or a capital loss in the company as per Paragraph 67B(3)(a) of the Eighth Schedule to the Act.

SARS addresses dividends tax in the interpretation note by confirming that cash dividends paid to a qualifying entity are exempt from dividends tax under Section 64F(1)(a) of the Income Tax Act, and dividends in specie declared and paid by a share block company that comprises a disposal contemplated in Paragraph 67B(2) of the Eighth Schedule would be exempt from dividends tax under Section 64FA(1)(d).


Ultimately, the interpretation note serves as a welcome update to the previous 2015 issue. With the rising prevalence of complex developments, security estates, shopping centres, wellness compounds and high-rise flats in South Africa, body corporates, homeowners' associations and share block companies are commonplace and clear guidelines as to the taxation of these entities is imperative.

For further information on this topic please contact Jessica Carr at Cliffe Dekker Hofmeyr by telephone (+27 115 621 000) or email (jessica.carr@cdhlegal.com). The Cliffe Dekker Hofmeyr website can be accessed at www.cliffedekkerhofmeyr.com.


(1) 'Body corporates' are defined in Section 10(1)(e)(i)(aa) of the Income Tax Act.

(2) 'Share block companies' are defined Section 10(1)(e)(i)(bb) of the Income Tax Act.

(3) 'Associations of persons' are defined in Section 10(1)(e)(i)(cc) of the Income Tax Act.

(4) The TEU's email address is teu@sars.gov.za.

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