Criminally charging VAT on Levies

Photo: Niu Niu

Several residents have approached us about the VAT charged on levies at Pecanwood Estate. Many of these homeowners owned or own property elsewhere in housing complexes or on other estates where no VAT was/is charged on their levies and they assumed the status quo would prevail on this estate.

A few residents have approached the Pecanwood Homeowners Association (PHOA) on the subject, both privately via email and at the AGM’s. The standard response is that, should the PHOA deregister for VAT, “they would have to immediately pay back to the South African Revenue Services (SARS) the VAT claimed on assets and creditors”. By implication, members would have to cough up these amounts in the form of another special levy nullifying the benefit from not having to pay the R700.09 VAT currently being charged on the levy amount of a single stand. At the last AGM the Financial Director categorically refused to be transparent on the issue of VAT because she did not want "Questions about questions".

As with all disinformation, there are always a few strands of truth in it, just enough to make the story believable but intrinsically a lie.

Let us unpack the VAT on levies at Pecanwood Estate and the possible reasons why the PHOA refuses to deregister as a VAT vendor.

1. Directive to deregister as a VAT vendor

On 01 April 2014 SARS issued a Directive that Homeowners’ Associations deregister for VAT. The collector of our taxes based their instruction on the understanding that homeowners’ associations raise levies to members for the cost sharing upkeep of communal property within the shadow municipality created by these types of residential areas and that HOA’s were therefore not business enterprises. The instruction to deregister could only be “waived” by lodging an application with SARS to remain VAT registered.

2. Communal property obtained from the Developer (“Fixed Assets”)

As part of SARS’ directive to HOA’s, any organization which opted to deregister would have to pay back the VAT on assets held as at 31 March 2014 if the instruction was complied with up to 30 September 2014, giving HOA’s six months to comply.

The fixed property portion of the assets would normally have been transferred from the developer to the HOA at nominal value or at no cost.

The Developer of Pecanwood Estate, Maccon, transferred the communal fixed assets to the HOA at no cost, therefore there is no VAT liability to be paid back to SARS. Please see the below excerpts for confirmation of what constitutes common property at Pecanwood and its transfer consideration from the developer.

The communal property obtained from Maccon, is defined in the MOI of Pecanwood Homeowners Association as,“the open spaces” means the common and general areas, including but not limited to the gatehouse, landscaped areas, private streets, street lights, pavements, kerbs, sidewalks, traffic islands inclusive of road reserve, water and sewerage treatment plants, electrical and water reticulation, any staff housing owned or used by the company, estate offices and other amenities and open spaces situated on the land, but excluding the golf and country club and golf course and boat club;” [Interpretation 1.11 of the MOI].

The PHOA Auditor, NettRand clarifies further in note 17 to the annual financial statements for May 2021 that:

“17. Common property

Common property acquired from the developer incudes the entrance gate, roads, storm water drainage, internal dams, water treatment and sewage plant, boreholes, potable water and sewage reticulation, irrigation and associated pumps and management systems. These were acquired at no cost to the HOA, and therefore do not meet the definition of assets in terms of IAS16.”

3. Moveable assets

The only remaining items on which VAT would have been refundable to SARS would be on any bakkies, tractors, trailers, or golf carts, office furniture, computers, etc., owned by the PHOA at the time and the amount to be paid back to SARS would be based on the lower of the cost or market value of these goods. All these items are subject to depreciation over time which reduces their value. Note that SARS requires the VAT on the value at de-registration and not the VAT on the brand-new item. It is debatable whether any vehicles used by the HOA would qualify for a VAT input claim since “making a taxable supply” places levies outside that category. VAT may only be claimed on vehicles used for the business of “making a taxable supply”, for example a vehicle used by a construction company in the process of generating an income. We use this example as many members on the estate own construction businesses and would be familiar with this practice.

4. Homeowners Associations to deregister for VAT relief scheme (Section 8(2)G

In terms of the instruction to deregister, homeowners’ associations were given a grace period of six months over which to repay the final VAT amount due to SARS.

5. Retaining VAT registration status

Any homeowners’ association that wished to remain registered for VAT had to apply to SARS for a decision to override the instruction to deregister for VAT. The written application had to mention the reasons for wanting to remain registered for VAT and had to be accompanied by a copy of the minutes of the Annual General Meeting or Special General Meeting where the decision was taken to apply for continued VAT registration. Pending the SARS Commissioner’s decision, HOA’s who applied would have to continue charging and claiming VAT.

6. Homeowners Associations that did not adhere to the instruction to deregister

Under this section we would like to quote directly from the VAT Connect Issue 4 (August 2014):

HOAs that have not taken any action regarding their VAT status by 30 September 2014 (that is, not submitted form VAT123e or applied to the Commissioner to override the exemption as explained above) will be dealt with as and when they are identified through SARS’s compliance efforts. Once the details of such cases have been considered by the Commissioner, a decision will be made on a case-by-case basis as to whether the deregistration date will be 1 April 2014 or a later date. The outcome in these sorts of cases will depend, for example, on whether the HOA concerned continued to charge VAT, or deduct input tax on goods and services acquired on or after 1 April 2014. The relief provided under section 8(2G) to pay off the VAT liability arising on the enterprise assets under section 8(2) and the waiving of the applicable penalty and interest will not apply in these cases.

Clearly the neglect to deregister when instructed to do so has placed the PHOA in an extremely unenviable position with SARS. The PHOA is avoiding to de-register as it will expose the unlawful practices of the Association.

7. Vat on creditors

The argument raised by the PHOA at the AGM that VAT would have to be refunded to SARS on all creditors is baseless based on the above statement from SARS. Outputs charged on invoices to members and other estates to whom the PHOA supply water, would be offset against the input VAT on creditors’ invoices. It is only the final VAT calculation amount outstanding to SARS in respect of this offset that would have to be paid.

Based on the above information, the standard comment from the PHOA about the VAT to be refunded in that it would amount to millions of Rand upon de-registration, is disingenuous and a blatant attempt to deceive.

If the PHOA applied to SARS for a decision to remain registered for VAT, why are we not being informed of such an application, the reasons, and the outcome? Is it because the issue was not raised at an AGM or SGM as required by SARS? Or is it rather that the PHOA have neglected to apply for de-registration to the financial detriment of members.

It is a fact that the PHOA is utilizing the levies of members to operate the Golf and Country Club which is not part of the communal property. Our levies are illegally used to pay for expenses not authorised by the MOI.

This raises serious concerns around the Association’s status and its Non-Profit Company designation. However, this does not account for the unlawful decision to remain registered for VAT. The Country Heights lease agreement was reportedly entered into in 2018, four years after the SARS instruction to all homeowners’ associations to deregister. If the PHOA applied all the funds from levies for the common property before 2016*, one other reason to retain the VAT registration status would be if all members were VAT vendors themselves so that they could claim back the VAT raised by the PHOA on levies. Clearly that was also not the case, although members should be cognizant of the fact that some properties are registered to companies who may be VAT vendors.

The only other reason why the PHOA would choose to remain a VAT vendor is for cash flow reasons because of the VAT inputs from invoices to do with the Golf and Country Club. We will discuss the cashflow issue in another article shortly. We will touch on the high employment costs and the fact that Country Heights is not in good standing with SARS due to unpaid taxes which further raises concerns about how VAT is being claimed on rental invoices for the lease of the Golf and Country Club and whether the PHOA are invoicing the sublet premises at the country club and reflecting the income as such in the annual financials and whether any VAT manipulation is happening.

In the meantime, in as much as the PHOA disregards the MOI (as poorly drafted as it is) and members’ objections and concerns, they also disregard the directives of authorities like SARS and reinforces the opinion of a Homeowners Association that has been captured.

Links to sources on the VAT on levies is on our downloads page.

*The Special Levy of 2016 was implemented to maintain Country Heights property – the golf and country club and the boat club, before a lease agreement was entered into.