South African Tax Law Amendments

New Tax Break on Residential Units

If you own at least 5 residential property investments then SARS may soon hand you a gift by changing the tax law. Tax expert David Warneke explains that the new Revenue Laws Amendment Bill issued on 1 August 2008 has a number of interesting, but fairly complicated amendment proposals to the Income Tax Act. Among these is the proposal to revamp the section 13ter allowance applying to residential housing units let out by the taxpayer or occupied by the full time employees of the taxpayer.

Warneke is a tax partner at Cameron & Prentice Accountants and he examines the proposal in a guest column published by Realestateweb. He says that the amendment essentially entails a write off at the uniform rate of 5% over 20 years, which replaces the current total write off of 12% in the first year and 2% every other year for a period of 45 years with an upfront loading of deductions.

However, where the unit consists of only part of a building, for instance a single flat in a sectional title scheme that was not developed by the taxpayer then the cost on the write off is deemed to be only 55% of the taxpayer’s actual cost. This means that if the flat cost R1,5m then the write off will be 5% of 55% of R1,5m or R41 250 per annum. Where the unit is a stand-alone property, such as a house or if the taxpayer built the flat then the 55% reduction does not apply and the full 5% per annum of actual cost may be claimed.

Warneke goes on to say that the new dispensation will only apply to new and unused residential units or improvements. “Residential units” are essentially defined as a residential building or apartment, other than guesthouses, hotels or holiday accommodation. The section requires that the taxpayer own at least 5 residential units within the same geographical vicinity to qualify for any deduction. Furthermore, the residential unit or improvements must be wholly or primarily used for producing rental income in the course of a trade carried out by the taxpayer. It is also allowed for the unit to be occupied by employees of the taxpayer or of another company within the same group of companies as the taxpayer (if the taxpayer is a company).

According to Warneke, the write off accelerates to 10% straight line where the building is a “low income residential unit”, which is defined as a residential unit where the cost does not exceed R200 000 and if an apartment, the cost does not exceed R250 000. These amounts do not include the cost of land and the bulk infrastructure. The section also requires that the owner of the low income residential unit must charge a monthly rental of no more than 1% of the cost, i.e. R2000 pm if a building and R2500 if an apartment.

The information in this article is courtesy of David Warneke (“New tax break: Allowance on residential units revamped”, Realestateweb, 7 September 2008).

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