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Relaxation of Allowances on Improvements to Leasehold Property

Wednesday, 08 January 2014   (1 Comments)
Posted by: Author: Douglas Gaul
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Author: Douglas Gaul (Grant Thornton)

In the past, if a tenant was not the owner of land and buildings, but wanted to claim a deduction in terms of section 11(g) of the Income Tax Act in respect of the cost of the improvements to the land and buildings, the deduction was only allowed if the improvements were undertaken as result of a legal agreement, typically imposed by the landlord. However, there have been significant changes to this scenario, with further changes in the recently published Taxation Laws Amendment Bill, dated 24 October 2013.

To qualify for the deduction in terms of section 11(g), the following requirements also had to be met:

  • the value of the improvements had to be included in the gross income of the landlord and
  • the land and buildings had to be occupied for the production of income

The cost of these improvements was generally deductible over the lease period, subject to a maximum of 25 years. If the allowance was not fully claimed by the end of the lease period, the remaining amount was deductible by the lessee.

Section 12N 

In 2010, a new section 12N was inserted in the Income Tax Act to provide for depreciation allowances in respect of such obligatory leasehold improvements undertaken on leased land or buildings owned by the government or certain exempt quasi-government entities. Tenants claiming these depreciation allowances could claim the allowances as if the improvement were directly owned by them.

However, there has been a further proposed relaxation of requirements for deductibility of improvements by tenants in the recently published Taxation Laws Amendment Bill, dated 24 October 2013.

Extending the parameters

Treasury recognized that tenants may often voluntarily embark on improvements on leased land or buildings in order to make their places of business commercially suitable or viable for their businesses and invariably not for the landlord.

As such, the landlords usually receive little value for such voluntary improvements, because the tenant has undertaken the improvements solely for their own benefit, with the useful life of the improvement usually matching the lease period.

The proposed amendments to section 12N will see the depreciation allowances in respect of costs voluntarily incurred to improve leased premises no longer being limited to land and buildings of government or quasi-governmental entities, but extended to all entities.

The Explanatory Memorandum on the Draft Bill states that, in such circumstances, the tenant is deemed to be the owner for purposes of claiming the allowances and the focus of the allowance is on the deemed useful life of the asset in question, as opposed to the duration of the lease.

Given that the proposed allowances will only be applicable in respect of voluntary construction or improvements, no income inclusions will be required for the lessor in respect of the construction or improvements.

The proposed amendments are expected to be effective from 4 July 2013, applying improvements completed on or after that date. This amendment is welcomed, as there has historically been a large amount of uncertainty as to whether any allowances could be claimed on such improvements.

This article first appeared on


Corlie Hazell says...
Posted Monday, 20 January 2014
This amendment was not removed from the final TLAA and the previous rules and provisions remain of application



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