SARS aims to resuscitate housing boom

2008-09-03 00:00

Last year, new provisions introduced in the Income Tax Act granting allowances for commercial buildings caused much excitement among investors, highlighting the need for tax breaks to stimulate investment in property.

This year, a further surprise was in store for investors in property. The lawmakers realised that given the inherent risks involved in the property market, the construction and provision of low-income housing poses a unique challenge within the domestic environment. This, coupled with the good response to the commercial building allowances introduced last year, presumably prompted the lawmakers to make changes to the allowances for residential property.

Previously, a depreciation allowance could be claimed in terms of section 13ter of the Income Tax Act. This section provided that an allowance of 12% could be claimed in the first year a residential unit was let or occupied, with a further two percent in succeeding tax years.

Effectively, allowances could only be claimed over a 45-year period.

In order to stimulate investment in residential units, particularly housing for low-income earners, it has been proposed in the Revenue Laws Amendment Bill, 2008, that section 13sex be introduced into the Income Tax Act. This section will take the place of section 13ter, and will provide better tax incentives to investors in residential property.

Section 13sex will apply to all new and unused residential units, or any new or unused improvement to a residential unit, owned by a taxpayer, and which was acquired, or the erection of which commenced, on or after September 23, 2008. A “residential unit” is any residential building or self-contained apartment except units used as a hotel, motel, inn, guest house, boarding house or holiday accommodation.

Like the old section 13ter, the taxpayer must own at least five residential units, but section 13sex requires that they must be situated within the same geographical vicinity. It is unclear, at present, what is meant by the term “geographical vicinity” — should the units, for example, be on the same plot of land, or will it be sufficient if the units are all within the same city, or province, or country?

In order to qualify for the allowance, the residential units must be used for the purposes of producing income in the course of trade or must be occupied by full-time employees.

The allowance is generally equal to five percent of the cost per annum (a write-off period of 20 years). Where the residential unit is a “low-income residential unit” (that is, a free-standing building costing less than R200 000 or an apartment costing less than R250 000 to build) that is let for a monthly rental of less than one percent of the cost of building the unit, the taxpayer may claim an allowance of 10% per annum (a write-off period of 10 years).

It should be noted that in respect of “low-income residential units”, the unit has to be situated within South Africa. This requirement does not apply to a “residential unit”, so it seems that taxpayers will be able to claim the five percent allowance on residential units built outside South Africa, provided that the other requirements have been met.

All is not lost to a taxpayer who buys the new and unused residential unit from a developer. As with the allowances for property in an urban development zone, the taxpayer will be allowed to claim the allowance on 55% of the acquisition price of the unit, or on 30% of the acquisition price in the case of an improvement acquired.

Yasmeen Suliman

Associate director: corporate tax

KPMG

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