A property tax incentive that’s not so sex-y

Wiehann O’livier, audit manager at Mazars, soon responded: “No mention is made of the recoupment and the CGT [capital gains tax] implications when the property is sold… Perhaps a good idea to give the public the full picture when you use a tax incentive to advertise.”

IGrow replied: “As every investor’s strategy differs in terms of wealth creation we guide the investor accordingly.”

But what is the section 13sex incentive and what is the full picture?

Dr Beric Croome, tax executive at ENSafrica, explains that the incentive is meant to encourage the building of domestic residences. It allows for a tax deduction of 5% of the cost of the building, improvement or acquisition of any new and unused residential units if the taxpayer owns at least five units situated in South Africa and uses them solely for trade purposes.

The units do not have to be situated in the same development or area as long as they are all located within South Africa, he says.

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.

Croome says because 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. It is available where the units were acquired or built on or after October 21 2008.

The incentive effectively allows qualifying taxpayers to write off the cost of the units if they meet the three requirements.

But as O’livier rightly pointed out, the deduction would only be available as long as the taxpayer owns the units and earns rental. Should the taxpayer sell the units, there would be a recovery of the tax allowance received in prior years and capital gains tax would be levied.

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 calculation in the advertisement is as follows:

R743 260 (purchase price) x 55% (deemed cost of new unit) x 5 (number of units) = R2 043 965

R2 043 965 x 40% (the old marginal tax rate – for the 2017 tax year, it should be 41%) = R817 586

Croome explains that the annual deduction will be calculated as follows:

R743 260 (purchase price) x 55% (deemed cost) x 5 (number of units) x 5% (deduction allowed per annum) = R102 198

When the units are sold, the deduction allowed up until that point would be recouped and added to the investor’s taxable income. Thus, it is effectively a temporary incentive.

Selling the units for an amount in excess of R743 260 each (assuming no other cost) will also trigger a capital gains tax event.

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. A tax incentive should merely be the sweetener, Croome says.

“The tax should not be the primary driver of the investment. It must make commercial sense.”

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