Sectional title and homeowners association accounting

What the law requires of a body corporate

A body corporate in a sectional title scheme has obligations under the Sectional Titles Schemes Management Act and its regulations that go well beyond ordinary bookkeeping:

• An annual budget prepared and approved by members at the AGM, from which levies are determined
• Two separate funds: an administrative fund for operating costs and a reserve fund for future maintenance, held and accounted for separately
• A ten year maintenance, repair and replacement plan, which drives the minimum contribution to the reserve fund
• Annual financial statements prepared and presented to members at the annual general meeting
• Proper accounting records including a levy roll showing what each owner owes and has paid

Homeowners associations constituted as non profit companies carry the same practical requirements plus CIPC obligations, including annual returns and the beneficial ownership position for the company.

The reserve fund rule that catches schemes out

The regulations set a minimum contribution to the reserve fund based on the relationship between the current reserve balance and the administrative fund budget. Where the reserve is below 25 percent of the administrative budget, the minimum contribution is 15 percent of that budget. Where it is between 25 and 100 percent, the contribution must at least equal the amount budgeted for maintenance in the plan for that year. Above 100 percent, no minimum applies.

Schemes that have historically run a thin reserve are frequently under contributing without realising it, which surfaces when a major maintenance item arrives and the only options are a special levy or deferring the work.

What we do for schemes and associations

1. Levy roll and statements. Every unit's levy calculated on participation quota, statements issued, receipts allocated, and the roll kept current.
2. Separated funds. Administrative and reserve funds accounted for separately as the Act requires, with transfers between them properly authorised and recorded.
3. Arrears age analysis. A report trustees can act on, showing who is behind, by how much and for how long, so recovery starts at 60 days rather than at 600.
4. Special levies. Accounted for separately from ordinary levies and tracked against the purpose they were raised for, which is a common audit finding when it is not done.
5. Budget preparation. The annual budget built with the trustees, informed by actual spend and the ten year maintenance plan, in a form that can be put to members.
6. AGM financial statements. Prepared and presented in time for the meeting, with the notes members and any auditor will look for.
7. Income tax. The scheme's tax position, including the section 10(1)(e) exemption and where it stops applying.

The tax position schemes get wrong

Section 10(1)(e) exempts levy income of a body corporate, a share block company and certain associations from income tax. What it does not exempt is other income: interest earned on investments above the prescribed threshold, income from letting common property, antenna and signage rentals, and laundry or vending income.

Many schemes assume they are entirely tax exempt, never register or file, and accumulate an obligation quietly. The amounts are usually small, but the non compliance is not, and it becomes a problem when the scheme needs anything from SARS.

Trust accounting for managing agents

Where you manage schemes as a managing agent, the money you hold belongs to the schemes and must be accounted for separately from your own business. We set up and reconcile the trust accounts, produce the statements each scheme needs, and keep the records in the state a Property Practitioners Regulatory Authority audit expects. Your own management fee income then sits in a clean set of business books alongside it.