1704. Residential building allowances
February 2009 – Issue 114
In the past, income tax allowances for residential property have had limited application and have not provided any significant relief to taxpayers who purchase residential property for the specific purpose of letting the property.
The Revenue Laws Amendment Act 60, 2008, introduced amendments to, inter alia, sections 13ter and 13sex of the Income Tax Act No. 58 of 1962 (the Act) which consolidate the income tax relief for residential property in an effort to support, in particular, the low-cost housing market.
In terms of the former legislation, a deduction was available for the cost of erecting at least five residential units which formed part of a housing project. In order to qualify for the allowance, the residential units must have been used by a taxpayer for rentals or must have been occupied by the taxpayer’s full-time employees. The deduction was effectively equal to 10% of the cost of the residential unit in the first year in which all five residential units were let or occupied. A further 2% of the cost was deductible in the first year and the succeeding 44 years. The allowance only applied to new residential units which were erected by the taxpayer either directly or under contract with a developer.
In terms of the Revenue Law Amendment Act, this allowance will only be available for residential units, the erection of which commenced before 21 October 2008.
For new residential buildings erected or acquired after 21 October 2008, the provisions of section 13ter are replaced with the provisions of section 13sex.
In addition to the section 13sex allowance there are also specific depreciation allowances for residential property used by employees in the mining industry and residential buildings in Urban Development Zones which will override the section 13sex allowance.
In order to consolidate the allowances for residential property, general definitions for the terms "residential unit" and "low-cost residential unit" have been introduced to the Act.
A "residential unit" is defined as a building or self-contained apartment used mainly for residential accommodation, but excluding buildings or apartments used in a hotel trade.
The definition of a "low-cost residential unit" includes an apartment within a building as well as a stand alone building.
For an apartment within a building, a "low-cost residential unit" is defined as an apartment qualifying as a residential unit in a building located in South Africa where the cost of the apartment does not exceed R250 000 and the owner does not charge a monthly rental in respect of that apartment which exceeds 1% of the cost thereof.
For a stand alone building, a "low-cost residential unit" is defined as a building qualifying as a residential unit located in South Africa where the cost of that building does not exceed R200 000 and the owner does not charge a monthly rental in respect of that building which exceeds 1% of the cost thereof plus the proportionate cost of the land and bulk infrastructure.
The 1% allowable rental for an apartment or a building to qualify as a "low-cost residential unit" is increased by 10% per annum on a cumulative basis.
In terms of section 13sex where the following three conditions are met a taxpayer will be entitled to an annual allowance equal to 5% of the cost of a "residential unit" or 10% of the cost of a "low-cost residential unit":
1. the taxpayer erects, acquires or makes an improvement to a new and unused residential unit located in South Africa; 2. the taxpayer uses that unit or improvement solely for the purpose of a trade; and 3. the taxpayer owns at least five residential units within South Africa which are used by the taxpayer for the purposes of a trade carried or by the taxpayer.It is worth noting that the letting of property is specifically included in the Act’s definition of a trade. Therefore a taxpayer which acquires residential units for the purpose of letting those units will carry on a trade and may qualify for the 5% or 10% allowances if the above conditions are met.
Even though the section 13sex allowance is greater than the historic allowances, it is submitted that the application of the allowances is still limited in the buy-to-let market. This is mainly because the allowance is still limited to new and unused units or improvements thereto. The cost of second-hand residential units purchased by a lessor as part of his letting trade will still not qualify for any allowance under the Act.
Edward Nathan Sonnenbergs
IT Act:S 1 definition of "low-cost residential property", "residential unit"
IT Act:S 13sex
