Earlier this year, we presented an argument in our monthly newsletter (September) that over-recoveries on services e.g. electricity, water, effluent, should not be deemed taxable income. It was argued that charges for services are no different from levies and that it is widely accepted that levy income, whether it results in a surplus or not, is not taxable.
The above investigation was conducted by WPM, due to several auditors wanting to classify such income as taxable, thereby causing an unnecessary loss for the community schemes in question.
Not being happy with our interpretation of tax matters, the auditors insisted on a proper review by a qualified tax consultant, before they would consider amending financial statements. Given that such opinion would benefit many of the schemes that we manage, WPM at its own expense employed the services of a tax expert. Such opinion could then be relied upon by the auditors when preparing the financial statements for a Community Scheme.
It is common cause that in terms of Section 10(1)(e) of the Income Tax Act, Community Schemes are exempt from paying tax on charges that are considered levy income. Furthermore, Community Schemes are exempt from tax on the first R50 000 for all receipts and accruals other than levy income. 
Tax, when applicable, is charged at the company tax rate (27%) and applies to any form of penalty income (fines, late payment penalties etc.) and other non-levy income (rentals etc.).
The problem comes in where a scheme may have over-recovered in a particular tax year on utility billing and would face the possibility of having to pay tax on such over-recovery. An over-recovery can occur when a municipality passes estimates and then reverses same at a later stage, replacing the estimates with charges based on actual meter readings (we’ve managed schemes where estimates are passed for longer than 6 months!!). 
Electricity over-recoveries are becoming common where schemes have installed solar panels and thus receive a portion of their electricity supply at no cost, other than the original cost of installation or the monthly rental they might be paying for the solar system.
Water over-recoveries can occur when occupants are being charged the traditional stepped tariff, but the scheme receives their water as a bulk supply and pays a bulk charge.
There are many other such examples. 
Provided that the fee charged to owners is in line with local tariffs and has not been deliberately inflated by the scheme to make a profit, any over-recovery is deemed incidental and is NOT taxable. Such view has been confirmed by our independent tax expert and is available on request – simply send an email to info@whitfields.co.za.
Further research might be needed on schemes with “pre-meditated” or deliberate over-recoveries (not incidental as described above). For now, such income is taxable.
In the City of Cape Town municipal area (and this could be in the pipeline at other municipalities too), excess electricity generated by solar installations at certain times may be pushed back to the grid, for compensation. Is such income taxable? One must again look at the motivation behind the solar installation. Community scheme solar installations are not done with the aim of selling electricity to third parties eg the municipality. They are done to provide their occupants with electricity. Any amount received for electricity not used by members during peak production would be considered incidental and is thus not taxable.
In instances where there is a deliberate over-recovery for services, schemes should explore the possibility of writing off linked expenses against such income eg battery and inverter costs, sophisticated metering systems, depreciation of equipment etc.
We are all for paying to Caesar what is owed to Caesar, but don’t pay more than you need to!