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Technical FAQs: June 2013

Thursday, 30 May 2013   (2 Comments)
Posted by: Author: Dieter van der Walt
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Author: Dieter van der Walt (SAIT Technical Support Executive)

1. 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 13quat

This 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

These 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.

Section 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.

  1. 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 taxable supplies).
  2. 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 - VAT

Q: I 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 met:

  1. 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. 
  2. 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.
  3. 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.
  4. 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 enterprise. 

4. CGT implications – second-hand policies 

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 date.


Judy Diedericks says...
Posted Wednesday, 05 June 2013
In terms of Section 13sex, a client bought five or more flats and have upgraded the bathrooms and kitchens of these units. These units were used before, can an allowance be deducted under section 13sex?
Victor Terblanche says...
Posted Wednesday, 05 June 2013
@Residential property - VAT: Output tax should be levied at 14% in terms of section 7(1)(a) on the supply of the rental collection service. Commission earned on selling the properties is taxable in terms of section 7(1)(a) of the VAT Act at 14%. Procurement fee is also taxable in terms of section 7(1)(a) of the VAT Act at 14%. Only the supply of a "dwelling" under an agreement for the "letting and hiring thereof" is exempt in terms of section 12(c) of the VAT Act which means that the owner of the property is not liable to declare output tax on the rental income received from the tenant. The owner may also be liable to levy VAT when the dwelling is ultimately sold as this may be regarded as in the course or furtherance of his "enterprise" even though the property was utilised for making exempt supplies prior to such disposal.



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