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2012-07-10 at 01:29:28 PM GMT
Posts: 16
Improvements to leased premises. 1. What are the income tax and/or cgt implications if a tennant erects a building on vacant land owned by the landlord, and for which no stipluation in the lease contract exists? Landlord intends to agree to the erection on the basis that he expects not to have any tax implications at all. 2. I am reasonably familiar with the tax effects of sect 11(g). If lease agreement stipulates that tennant must erect building at his own cost, tennant may deduct cost of the building (limited to value stated) over the period of the primary lease excl options to extend. Landlord in turn will be taxed on the value stipulated. Landlord may claim relief in terms of S 11 (h) and the latter section is presenting me with some problems. Using an example of R10.0mil over 10 years, tennant will be able to claim a tax deduction of R1.0mil per year. On the other side, landlord will be taxed in year one on R10.0mil income, and may claim relief under S 11 (h). I have consulted various handbooks and find that the application of S11(h) is not clear as to methodology. After having played around it seems to me as though the following should be the situation: Year 1 income R10.0 mil reduced by s11(h); year 2 s11(h) allowed in year should be added back, and the year 2 allowance calculated and allowed as a deduction once again against the R10.0 mil. Is that correct? NOTE THAT i have been advised that many large public companies regularly erect buildings on leased land and that they do not communicate with the landlord what their costs were, and that they belive that there are no tax implications for the landlord. HOWEVER THEY CANNOT ADVISE ME WHAT IS DONE IN THEIR BOOKS FROMA TAX POINT OF VIEW.

2012-07-16 at 08:31:40 AM GMT
Posts: 64

Broomberg on Tax Strategy (Lexis Nexis 4th edition) has devoted entire chapter (chapter 9- pages 91 to 100) on the subject of leasehold improvements.

In short the lessor‘s position is: he is taxed on the total amount of the improvements which lessee is obliged to effect.

Secondly at the discretion of SARS the lessor may be granted relief via an allowance in the year that improvements have been completed (page 92).That is, it is not spread over the period of the lease.

The effect of the relief granted is that lessor is taxed on the present value of the improvements discounted at 6%pa (page 97).




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