South African Property Tax Advice

Property Tax Pointers

An article published by Real Estate Web provides some excellent insights on how to beat property tax. “For expenses to be tax deductible against rental income, there must be a genuine intention to conduct the trade of letting” (David Warneke, tax fundi).

In cases where the property was not let fully during the tax year then reasonable steps must have been taken to find another tenant and if losses were incurred, there has to be a reasonable prospect of the investment turning a profit (even after a number of years). Where losses did result, these may be “ringfenced”, which means that they might not be deductible against income from any other trade. This only applies to an investor who is a natural person.

The following is a list of the most common income tax deductions on residential property that is rented out:

§ Interest on bond or other loans
§ Repairs and maintenance
§ Rates
§ Letting agent’s commission
§ Sectional title levies
§ Advertising
§ Insurance
§ Wear and tear on movable assets let with the property
§ Accounting fees
§ Bad debts
§ Bank charges
§ Write-off of the cost of the property in terms of section 13 (relating to certain properties in ‘Urban Development Zones’)

The following are not tax deductible, but can be added to the base cost for CGT, which is calculated when the property is sold:

§ Transfer duty or VAT on the purchase of the property
§ Bond registration fees
§ Conveyancer’s fees
§ Cost of improvements to the property (provided that these are still reflected in the state of the property when it is sold)
§ The remuneration of a surveyor, valuer, auctioneer, lawyer or consultant relating to the acquisition of or disposal of the property
§ Any expenses incurred to establish, maintain or defend a legal right or title in the property.

When it comes to the various problems related to the expenses outlined above, these include:

Interest:
The loans must be used to finance the property. This will preclude cases where the bond is raised using the property as security and the funds are then used to finance private expenses.

Repairs versus improvements:
There are a multitude of income tax cases that deal with the distinction between repairs and improvements to property. While repairs are tax deductible, improvements may qualify for inclusion as part of the base cost of the property for CGT. In other words, for an expense to qualify as a ‘repair’, there has to be damage or deterioration and the intention of the taxpayer must be to restore the item ‘repaired’ to its original condition. The repairs also have to apply to a part of the property and not amount to the reconstruction of substantially the entire property.

Wear and tear on assets let with the property:
Wear and tear can be claimed only if the assets have not been integrated into the building. Once an asset becomes integrated, it loses its status as a separate asset in its own right. For example, this applies to light switches and fittings.

Bad debts:
The debt must have gone bad in order to claim it. This means that the taxpayer must be able to produce evidence that the amount has become irrecoverable during the tax year – it cannot simply be doubtful.

Although these pointers are relatively straightforward, it is still optimal to seek professional advice when discussing tax deductions.

The information in this article is courtesy of David Warneke, a tax partner at Cameron & Prentice, senior lecturer on Tax at UCT and author of a text used at universities throughout South Africa. (“Property tax beaters: 24 quick pointers”, Real Estate Web, 14 July 2008).

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