The South African Revenue Service (SARS) permits a significant tax benefit on residential property under section 13 Sex of the Income Tax Act No. 58 of 1962. This incentive allows purchasers of residential units to ‘write-off’ a percentage of the cost of buildings, or improvements thereof, acquired or built after 21 October 2008. The following criteria applies
- The taxpayer must own at least 5 residential units. A residential unit refers to a building or self-contained apartment, mainly used for residential accommodation with the exclusion of structures used for business purposes, for example hotels.
- All units must be situated in South Africa.
- Residential units must be new and unused. (For example, buyers of flats that had previously been occupied would not qualify for this incentive.)
- The units must be used solely for the purpose of a trade (i.e. residential letting). This prevents housing claims for personal use.
A 5% deduction is allowed under the Act for normal residential units. An even greater depreciation of 10% is permitted in the case of low cost accommodation. The Act defines low cost accommodation as a stand-alone unit to the value of up to R300 000 or an apartment to the value of up to R350 000. Furthermore, the owner may not charge a monthly rental rate in excess of 1% of the aforementioned amounts. Note that the additional 5% claim is a bonus for low-cost units and only applies if the normal 5% deduction is allowed. The allowance is claimable until the full cost of the unit is written off.
Cost on which the allowance is based:
The ‘total cost’ used for the calculation is considered to be the lesser of the actual cost incurred or the market value on the date at which the transaction was concluded. This limitation is in place to prevent taxpayers buying or building a unit at inflated prices from connected parties to obtain a greater tax deduction. Furthermore, there will be no deduction permitted if the taxpayer has previously claimed a deduction under another section of the Act.
Where taxpayers buy the residential unit without erecting or constructing the unit, or ‘acquire an improvement to a residential unit’, the cost is calculated as follows:
- 55% of the total cost (acquisition price) where a new unit is acquired, or
- 30% of the acquisition price where an improvement is acquired.
Taxpayers need to remember that should they dispose of the property, any allowance previously made available will be regarded as recovered or recouped upon disposal. Also, any amount received in excess of the cost of the property will be liable to capital gains tax.
CJW (Pty) Ltd buys a block of 20 flats on 1 January 2015. The flats are not new. It spends R1 million per flat on improving all the flats. Once the improvements are complete, it sells the flats to individuals for R4 million each (including VAT). The selling price (per flat) is made up as follows:
- Cost of flat (excluding improvements) – R3 000 000
- Cost of improvements (new and unused) – R1 000 000
Mr. H buys five of the flats and lets them all to tenants for R12 000 per month each.
Mr H can claim the residential allowances as follows:
- R4 million x 5 units x 30% = R6 000 000 (deemed cost of improvements)
- Section 13 Sex allowance: R6 000 000 x 5% = R300 000 per annum
If CJW (Pty) Ltd had constructed the units and sold them to Mr H for R 4 million each, as new and unused, Mr H’s allowance would be:
- R 4 million x 5 units x 55% = R 11 million
- Section 13 Sex allowance: R11 million x 5% = R550 000 per annum
If Mr H had only let 3 units in the first year he would not be entitled to the allowance. He would only be entitled to claim the allowance in the first year that 5 units were used by him or his trade. The allowance is not apportioned for part of a year.
(Haupt, P 2015, Notes on South African income tax, H and H Publications, Roggebaai.)