By Paddocks
Although a body corporate should not have “making a profit” as their primary function, it is notable that the trustees are tasked with doing all things reasonably necessary for the control, management and administration of the common property, and for the enforcement of the scheme rules in the interest and the benefit of the body corporate. This may include doing things that could reduce or subsidise the monthly levies of the owners.
The nature of a body corporate is not to run at a profit, but rather to pay their operating expenses and generate reserves. Section 4(g) of the Sectional Titles Schemes Management Act 8 of 2011 (“the STSM Act”) gives the body corporate thepower to to invest any monies of the administrative fund. The body corporate’s authority to invest moneys extends also to its reserve fund as Prescribed Management Rule (“PMR”) 21(3)(d) states that:
“(3) The body corporate may, on the authority of a written trustee resolution, invest any moneys in the reserve fund referred to in sections 3(1)(b) of the Act in a secure investment with any institution referred to in the definition of “financial institution” in section 1 of the Financial Services Board Act, 1990 (Act No. 97 of 1990).”
The reference to “secure investments” and “financial institutions” limits a body corporate’s investment opportunities. The legislation therefore requires a conservative approach to investing body corporate funds. The trustees have a fiduciary duty to the body corporate in terms of section 8 of the STSM Act”, and this would include the duty not to subject the body corporate’s funds to unnecessary risks.
It is important to note that PMR 21(2)(c) states that:
“The body corporate must not distribute to a member or any other person any portion of the body corporates profits or gains except
(i) upon destruction or deemed destruction of the buildings, or
(ii) where such profit or gain is of a capital nature.”
It is important to note that tax is only payable on income other than levies and exclusive use contributions. Where the body corporate makes a profit of a capital nature, it may be required to pay capital gains tax. Furthermore, where the the body corporate makes a profit it will be required to pay income tax.
Another way in which the body corporate can generate additional income includes the letting of portions of the common property, such as parking bays. Section 4(h) of the STSM Act gives the body corporate the power to let a portion of the common property to any such owner or occupier by means of a short-term (less than ten years) lease on the authority of a special resolution.
In terms of section 29 of the ST Act and section 5(1)(g) of the STSM Act, the body corporate may, by special resolution, enter into a servitude, or other restrictive agreement, either burdening or benefiting the common property. For example of a situation where a servitude burdening the common property would be appropriate in the case of an agreement with a cellular phone company to use a portion of the roof space of the building to install a cellphone mast in exchange for a monthly fee.
Other schemes have made use of exit levies to subsidise their levy contributions. Levy stabilisation funds are common in sectional title schemes designed for retired persons, the rationale being that retired persons generally live off a fixed income and cannot afford to pay large increases in their ordinary levies each year. Typically, a levy stabilisation fund is provided for in the scheme’s rules, and is funded by once-off payments, payable by owners when they alienate their units. They are normally calculated by determining a percentage of the profit (the difference between the acquisition price and the selling price or market value of the unit) which an owner has made on his or her unit. In our view this is an unreasonable infringement of an owner’s proprietary right to take the fruits of his property and is a substantial detraction from the capital value of the units.
We hope you found some of these suggestions useful. Please contact us at consulting@paddocks.co.za if you require advice on any income opportunity that your scheme may wish to explore.
