13...No longer unlucky for some

2008-08-13 00:00

Finally, investors in commercial property have been granted tax relief. Previously, only industrial buildings used in a process of manufacture were entitled to tax allowances. The SA Revenue Service (SARS) has now recognised the “mortality” of commercial buildings and has introduced section 13quin, which provides for a five-percent allowance on the cost of any new and unused commercial building.

Section 13quin applies to any new and unused commercial building owned by the taxpayer, as well as any new and unused improvements to any existing commercial building owned by the taxpayer, provided the commercial building is wholly or mainly used by the taxpayer for purposes of producing income, other than the provision of residential accommodation.

The allowance is based on the lesser of the actual cost or market value of the commercial building or improvement, excluding the cost of the underlying land. Therefore, when purchasing a commercial building, one would need to split the total cost between the actual building and the land for purposes of claiming the section 13quin allowance.

It must also be noted that SARS does not include the cost of clearing and levelling the site for construction, the costs of excavation, and the cost of external paving and fencing as part of the cost of the building.

It is worth remembering that this allowance is not apportioned for part of a year, and therefore if a qualifying commercial building is purchased in month 11 of a tax year, the full allowance can still be claimed in that year.

Therefore, if an investor purchased a new and unused commercial building for R5 000 000 (excl. VAT) after April 1, 2007, he would be entitled to a R250 000 (R5 000 000 x 5%) allowance per year. This would have the effect of writing off the cost of the commercial building over 20 years.

An important aspect to section 13quin is that it is deemed to have come into operation on April 1, 2007, and is applicable in respect of any commercial building or improvement that was contracted for on or after that date, and the construction, erection or installation of which commenced on or after that date.

Importantly, SARS considers that the erection of a building commences when the laying of its foundations commences, and this was supported by a judgment that held that the date when the erection of a building commenced was to be taken as the date on which the foundation started, and not the date when the excavations were made in preparation for the laying of the foundations.

Lastly, all is not lost if an investor already owns an existing commercial building erected before April 1, 2007. The cost of any improvements commenced after April 1, 2007, on this existing commercial building can also be written off in terms of section 13quin at five percent per annum.

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