Technical FAQs: June 2013
30 May 2013
Posted by: Author: Dieter van der Walt
Author: Dieter van der Walt (SAIT Technical Support Executive)
Capital allowance on residential units
Q: I have a client who owns approximately 11 flats/apartments that are
rented out to tenants. The average rentals are between R2700 to R5000 per
month. Under which section of the Act can I deduct capital allowances on the
residential apartments and what percentage can I deduct every year? How far can
I backdate the allowances?
A: The Income Tax Act (the Act) provides for
capital allowances in respect of immovable (residential) property (and in one
specific case, dependant on the location of the property). The sections in the
Act that provides for these allowances are as follows:
section provides for an allowance in respect of residential or commercial
buildings that are owned by the taxpayer and used solely for the purpose of the
taxpayer's trade (renting out the building will qualify as the taxpayer's
trade). For purpose of this section, the relevant building must be located in
the urban development zone, a specific area demarcated by municipalities for
purpose of this allowance. The rate of the allowance applicable to a specific
building depends on whether the erection, extension, addition or improvement to
a building commenced on or after 21 October 2008 or before this date. Refer to
section 13quat(3) for the relevant rates.
Section 13ter and 13sex
two sections provide for an allowance in respect of residential properties.
Section 13ter was replaced by 13sex with effect from 21 October 2008. Section
13ter provided for an allowance (initial allowance of 12% of the cost and
annual allowances of 2% of the cost) where a taxpayer constructed residential
buildings under a housing project of the taxpayer. A housing project is defined
as any project for the erection of a building or buildings in the Republic
consisting of or including at least five residential units.
13sex applies in respect of new and unused residential units, acquired or
constructed on or after 21 October 2008. The unit must be used solely for the
taxpayer's trade, it must be located in the Republic and the taxpayer must own
at least five residential units within the Republic that are used by the taxpayer
for the purpose of a trade carried on by the taxpayer. The section provides for
an allowance of 5% of the cost of a residential unit.
From the information
provided it is really difficult to determine as to which section of the Act
would apply. I trust that the above summaries will help in determining as to
which section would be applicable.
2. Input VAT claims
Q: If a company leases five parking bays (VAT
inclusive) and two employees rent two of the bays (VAT exclusive), is the
company eligible to claim the output VAT on the bays rented by the employees?
A: Input tax (you refer to output tax, I trust you mean input tax) may only
be claimed to the extent that the goods or services were acquired for the
purpose of consumption, use or supply in the course of making taxable supplies.
- It is my understanding that the company does not charge output tax on
the rent charged to the employees. This in itself would suggest that the
company cannot claim the input tax payable on the rent charged for the parking
bays (apportioned 2/5) – no VAT was charged on the supply (not for making
- Based on the information provided am I of the opinion that the fact that
no VAT is charged on the supply made to the employees may be incorrect. The
transaction should rather look as follows:
a) The rent charged to the employee is of a commercial nature and VAT at
the standard rate should be charged on the supply made to the employee – s 7 of
the VAT Act.
b) The company may claim the full input on the rent of the parking bays but
has to declare out VAT on the supply made to the employees.
3. Residential property -
have a client who collects rentals (from residential property) for the property’s
owners. They charge a percentage of the collection as an administration fee. Is
there any need to declare output VAT on this administration fee? Both parties
are VAT Vendors. I would also like to know if any commission earned on selling
residential property on behalf of the owner is subject to output VAT? In
addition, will the procurement fee earned for the once-off procurement of
tenants be subject to VAT?
A: Any transaction will attract VAT if the following four requirements are
- A supply – in terms of the definition of ‘supply’ in s 1 of the VAT Act,
this term includes a sale, rental agreement, instalment credit agreement, as
well as all other forms of supply, whether voluntary, compulsory or by
operation of law, irrespective of where the supply is affected.
- Should be a supply of goods or services – ‘services’ is very widely
defined and includes the granting, cession or surrender of any right or the
making available of any facility or advantage.
- The supply of goods or services should be made by a vendor – a person
who is required to be registered for VAT under the VAT Act must charge VAT on
his taxable supplies.
- The supply should be made in the course or furtherance of an enterprise.
As you correctly state below, the supply of residential accommodation is
exempt from VAT. Your client is merely managing this supply, and this part of
the transaction would not attract VAT at the standard rate however, the second
part of the transaction is your client receiving a reward for managing the
exempt supply and this supply will attract VAT at the standard rate as all 4
requirements above have been met. Your client has made a supply of services and
is a VAT vendor and this supply was made in the furtherance of your client’s
4. CGT implications –
Q: I am hoping you will be able to assist me with a question I received
from an Investment Advisor: Assuming
the trust is dissolved and the Old Mutual Life wrapper transferred into P’s
name. Apparently, the policy is now considered a second hand policy. Are you familiar with the tax implications
pertaining to second hand policies? Bearing in mind the policy is taxed in
terms of the four fund approach, how would P or the future beneficiaries of the
policy be taxed?
A: Capital gains may only
be disregarded on the disposal of certain second hand policies in terms of
Paragraph 55 of the Eight Schedule. This includes policies where the disposal
results into a receipt or accrual to a certain person such as a spouse, a
former spouse or an employee or former employee for a key-man policy in terms
of s 11(w) of the Income Tax Act. All risk policies will from 1 March 2012 be
exempt from capital gains tax in terms of Paragraph 55(1)(e) of the Eight
Schedule and the amendment is effective immediately on all policies issued
prior to this date but where the death of the life assured occurred after this