Tax Court: Share Block Rental Taxed in the Company
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SARS Tax Court IT 77406 IT 77357 (IT) [2026] ZATC (24 August 2026)
A recent Tax Court judgment highlights an important issue for accountants working with share block companies: being a shareholder in a share block company does not, by itself, mean that rental income from the company's property accrues to the shareholder.
The case involved two share block companies that were the registered owners of commercial properties and leased those properties to third-party tenants. The lease agreements were concluded directly between the tenants and the companies. The companies received the rental, issued tax invoices, accounted for VAT and assumed the contractual obligations of the landlords.
The question was whether the rental income belonged to the companies or their shareholders.
For the 2023 year of assessment, the companies claimed deductions for expenses and reflected amounts distributed to share block holders. This resulted in no taxable income being reflected in their returns. SARS disagreed and issued additional assessments on the basis that the rental income was taxable in the hands of the companies.
What did SARS argue?
SARS argued that the rental accrued to, and was received by, the companies for purposes of the definition of “gross income” in section 1 of the Income Tax Act. SARS focused on the actual legal and contractual arrangements as the companies were the registered owners of the properties and were the parties to the lease agreements. The tenants were contractually required to pay rental to the companies.
SARS also argued that what happened to the rental afterwards did not change its tax character. If the companies first earned the rental and subsequently distributed money to shareholders, the distribution did not mean that the original rental income had accrued directly to the shareholders.
SARS further argued that the exemption applicable to qualifying share block companies under section 10(1)(e) applied to qualifying levy income, not ordinary commercial rental income.
What did the companies argue?
The companies argued that the share block arrangements gave shareholders rights to use and enjoy the relevant properties and that the economic benefits associated with those rights, including rental income, therefore belonged to the shareholders.
They also argued that the companies were effectively acting as agents or conduits for the shareholders. In other words, the companies collected the rental but did so on behalf of the shareholders and were not beneficially entitled to the income.
The companies further argued that the accounting treatment in their financial statements should not determine the tax consequences. They contended that the legal rights created by the share block arrangements were more important than the accounting entries.
They also raised the concern that taxing the rental income in the companies' hands could result in the same income being taxed twice.
The Court's reasoning
The Court considered both the legal structure of the share block arrangements and how the companies actually operated.
A share does not make the shareholder the owner of the property
The Court rejected the argument of the companies that shareholders had a “real right” to the properties because of their shareholding and the Use Agreements. A share gives the shareholder contractual rights in the company. It does not make the shareholder a part-owner of the company's assets.
Under the Share Blocks Control Act, a share block holder has a right to use a specified part of the immovable property under a Use Agreement. The Court found that this did not give the shareholders a real right in the underlying property or automatically give them the right to the rental income generated from it. This was particularly important because the taxpayers could not demonstrate that the commercial properties had been allocated to individual shareholders in the manner contemplated by the legislation.
The companies effectively relied on a collective arrangement and a single historical Use Agreement for successive shareholders. The Court found no clear documentation identifying the particular portions of the commercial properties allocated to the individual shareholders.
There was no evidence that the rental rights had been ceded
The companies also argued that the right to receive rental had effectively been transferred to successive shareholders.
The Court found no contemporaneous documentation supporting this.
There were no written deeds of cession, amended Use Agreements or other documents showing that the right to receive rental had been transferred as the shareholding changed.
The companies operated as landlords, not agents
The companies argued that they merely collected rental as agents for the shareholders.
There was, however, no written agency agreement or mandate between the companies and the shareholders.
More importantly, the actual conduct of the parties pointed in the opposite direction:
the companies concluded the leases in their own names;
tenants were required to pay rental to the companies;
the companies issued the tax invoices;
the companies accounted for VAT;
the companies assumed the contractual obligations of the landlords; and
the companies provided suretyships in their own names in relation to the leases.
The Court found that these facts were consistent with the companies acting as principals, rather than simply collecting rental as agents for the shareholders.
The rental was pooled and distributed
The way the rental was handled also influenced the Court's conclusion.
The Share Blocks Control Act requires a share block company to establish and maintain a levy fund for the management and maintenance of the property. Instead, the evidence showed that the rental income was pooled, expenses were deducted by the companies and the remaining amount was distributed to shareholders.
Importantly, the distributions were made according to shareholding rather than according to the rental generated by a particular unit allocated to a particular shareholder.
The Court found this difficult to reconcile with the argument that rental from individual units accrued directly to individual shareholders.
The accounting records also mattered
This part of the judgment is particularly relevant to accountants. The companies argued that their accounting treatment should not determine the tax position. The Court accepted that accounting entries do not, by themselves, determine a taxpayer's legal or tax position. However, the accounting records were still important evidence of how the arrangements actually operated.
That being said, there were inconsistencies between the tax returns and financial statements. For example, property values were reflected differently in the tax returns and financial statements, while substantial amounts were described as distributions to share block holders.
The Court found that these inconsistencies had to be considered together with the lease agreements, Use Agreements and other evidence. They contributed to the conclusion that the companies were operating and accounting for the rental as their own income.
The important distinction is therefore that the accounting records did not determine the legal position, but they were relevant evidence of how the arrangements were actually operated.
Section 10(1)(e) exemption for qualifying levies
Section 10(1)(e) provides an exemption for qualifying levies received by a share block company from its shareholders. The Court confirmed that this exemption is directed at levy income and it does not mean that all income earned by a share block company is exempt. Commercial rental income and other non-levy income remain taxable, subject to any applicable statutory exemption.
The Court’s decision
The Tax Court dismissed the appeals. and found that the rental income was received by and accrued to the companies and therefore constituted gross income taxable in the hands of the companies.
The subsequent distribution of the net rental to shareholders did not change the character of the rental income or shift the original tax liability from the companies to the shareholders.
The companies were also ordered to pay SARS's costs on Scale C, including the costs of one counsel, because the Court found their grounds of appeal to be unreasonable.
Key lessons for accountants
The judgment provides several practical lessons when dealing with share block companies.
Do not assume that shareholders own the rental income.
Start by establishing who has the legal right to claim the rental. Being a shareholder does not, by itself, mean that rental income from the company's property accrues to the shareholder.Review the Use Agreements carefully.
Check whether the shareholding is properly linked to a specified part of the property, as contemplated by the Share Blocks Control Act. Do not rely on a general or historical agreement without checking whether it properly reflects the current arrangements.Check for documented agency or cession arrangements.
If a company is genuinely collecting income on behalf of shareholders, there should be clear evidence supporting that arrangement. In this case, the absence of documentation supporting the alleged agency and cession was significant.Look at what actually happens.
Do not consider the legal documents in isolation. Check who signs the leases, who invoices the tenants, who receives the money, who accounts for VAT and who carries the obligations and risks of the landlord.Keep rental income and levies clearly separated.
The section 10(1)(e) exemption relates to qualifying levy income. Ordinary commercial rental income should not be treated as exempt simply because the entity is a share block company.Make sure the accounting records, tax returns and legal agreements tell the same story.
In this case, inconsistencies between the financial statements and tax returns became part of the evidence considered by the Court. An accounting “shortcut” can become a tax problem when it creates a picture that is inconsistent with the legal and contractual arrangements.Be able to support corrections.
If a taxpayer later says that the accounting records or tax returns were incorrect, there should be credible supporting documentation explaining what was wrong, why it was wrong and what the correct position should be. The Court placed considerable emphasis on the need for evidence to explain the discrepancies.Check who has the enforceable right to claim the income.
For tax purposes, the important question is not simply who ultimately receives the money. The Court considered when and to whom the right to claim the rental accrued. An amount generally accrues when the taxpayer obtains an unconditional right to claim it.
Bottom line
For accountants, the key message is simple: do not determine the tax treatment of share block rental income from the name of the entity or simply from the fact that shareholders ultimately receive the money. Look at the legal rights, Use Agreements, lease agreements, flow of money, VAT treatment, levy arrangements and accounting records together.
In this case, those factors pointed to the companies being the landlords and the rental income being taxable in their hands.
