How the Tax Incentives Work

The tax incentive will have an immediate benefit to a taxpayer who has a taxable income or operates a profitable business (taxable) from the applicable buildings. However, where a taxpayer is not currently in a profitable position, the tax incentive can also create an assessed loss which can be utilised in future years of assessment. Write off is against all income, not only the income earned from the building in question, as long as the taxpayer continues to use the refurbished/ constructed/extended building for purposes of trade.  

The legislation sets out the following requirements for the operation of the tax incentive:

• Deduction shall be allowed from the taxpayer’s income in respect of the cost of the erection, extension, addition, or improvement of any commercial or residential building within a demarcated development zone, if the building is solely used for that taxpayer’s trade and if:
• Building/improvement operations are commenced by the taxpayer on, or after 10 December 2004 (date of promulgation).
• An occupancy certificate, in terms of the National Building Regulations, was issued by the municipality, on completion of the construction work.
• For the improvement of an existing building where the structural exterior framework is preserved: a depreciation allowance of 20% per year of the cost of improvements will be allowed for 5 years. 
• For new buildings and all other extensions: a depreciation allowance of 20% of the costs of construction/erection/addition will be allowed in the 1st year and thereafter 5% per year for 16 years.
• If a developer builds in an urban development zone with the intention to sell the building, will not be eligible to claim the UDZ allowance, since the developer will not use the building for purposes of trade. Purchasers will be eligible to claim if they buy a commercial or residential building or part of a commercial or residential building directly from a developer that complies with all 3 of the following requirements:
• The developer erected, extended, added to or improved the building or part of the building representing a floor area of at least 1 000 m².
• The developer did not claim any UDZ allowance in respect of the building or that part of the building.
• In the case of the improvement of a building or part of a building, the developer has incurred expenditure in respect of these improvements which is equal to at least 20 percent of the purchase price paid by the person in respect of the building or part of the building. 
  

Examples

EXAMPLE 1: How does the incentive reduce my tax?

Facts: After spending R1 million on renovating an existing building and assuming an income of R2 million is made by the taxpayer from this building which is to be used solely for purposes of that taxpayer’s trade:

Result:
Income                              R2 000 000

Depreciation Allowance   R   200 000
(for 5 years)                     (20% of R1 000 000)
                                    ___________
Taxable Income     =       R1 800 000
                                    ___________

30 % Company Tax       R540 000
                                       (30% of R1 800 000)

Without the depreciation allowance it would have been R600 000
(30% of R2 000 000)

EXAMPLE 2: Can I claim the incentive from income generated from other businesses?

Facts: An investor is a doctor that refurbishes a townhouse several kilometers from the investor’s home. The investor rents out the townhouse on permanent basis. In 2005, the investor generates R530 000 of income as a doctor. In terms of the townhouse, the investor also generates R36 000 of rental income, R34 000 of associated ongoing expenses, and a R50 000 urban development write-off.

Result:The R50 000 urban development write-off from the townhouses is fully deductible against the investor’s entire income, not just the net R2 000 annual profits of the townhouse.

EXAMPLE 3: Do sectional title purchasers qualify?

Facts: A developer demolished an old block of flats and erected a new block of flats consisting of 50 units within an UDZ zone after the publication of the particulars of the demarcation of the area. After completion of the erection of the new building the developer sold all 50 units. Some of the purchasers of the units use them for private residential purposes and the rest of the purchasers bought a 1000m2 each and use them solely for purposes of trade.

Result: The purchasers of the units that are used for purposes of trade will qualify for UDZ allowances in respect of such units. The purchasers of the units that are used for private residential purposes will, however, not qualify for UDZ allowances in respect of these units.