One of the major Tax Incentives in South Africa is Section 13sex of the SA Income Tax Act. This enables a qualifying investor to claim back from SARS up to 55% of the purchase price of the property/ apartment over 20 years. This has a huge impact on the portfolio’s Return on Investment.
As a result, an investor can be in a Cash Flow Positive and Profitable situation without having to pay SARS a cent. For the purpose of calculating the deduction, the cost of acquiring a residential unit is deemed to be 55% of the purchase price (effectively splitting the cost of the land and the unit) where a new unit was constructed and 30% in the case of an improvement.
The main requirements to qualify for this allowance are that the taxpayer must own at least 5 residential units situated in South Africa, which must be used by the taxpayer solely for the purposes of their trade, and these units must be acquired on or after 21 October 2008. The deduction of 5% per annum over 20 years is applicable only to new and unused units.
The Act is not specifically clear as to whether all 5 properties must be new and unused. However, it is our professional opinion, echoed by the SA Institute of Tax Professionals, that if one owns 5 residential units in SA, and only 2 are new and unused, one can claim the deduction on the 2 properties, if they meet the other criteria of this allowance. The units do not have to be situated in the same development or area as long as they are all located within South Africa.
Where the cost of the apartment is R350 000 or less, and the owner does not charge rental of more than 1% of the cost, the incentive increases to 10%. The 10% allowance may also be claimed where the cost of a standalone unit is R300 000 or less, the owner does not charge rental of more than 1% and a proportionate share of the cost of the land and the bulk infrastructure. These are referred to as low-cost residential units.
As mentioned the incentive is only available when the taxpayer is carrying on a trade, it would generally apply where someone buys units and rents them out to tenants. It could also be aimed at employers providing accommodation to staff to encourage the construction of accommodation.
Ultimately individuals need to consider whether it is a sound property investment by taking the location, rental yield, expenses and other factors into account and seek the necessary advice around the best structure for the relevant taxpayer. This tax incentive is merely a sweetener for a property investment strategy that makes sense regardless.
Yours in trust!
Almo Lubowski
No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)