In 2003 the Urban Development Zone (UDZ) tax incentive was introduced to promote urban renewal in 15 designated inner cities. Initially the deduction was only available until March 2014; however, this has now been extended to 31 March 2020 by the Taxation Laws Amendment Act 22 of 2012. This means that buyers and developers must bring the properties into commercial use before this time, despite the incentive of the annual income tax deduction still continuing after this date (see below).
The Incentive: Section 13quat of the Income Tax Act
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) where such building is erected, extended, improved or added to.
The incentive is essentially an accelerated depreciation allowance which allows a taxpayer to deduct substantial portions of the cost of the building/development from his/her/its taxable income. The amount is not limited to taxable income and can, in fact, create an assessed loss.
The deduction can only be claimed once the building has come into use; however, as long as this event takes place before 31 March 2020, the deduction applies for the tax years subsequent to the building coming into use, including the years after the deadline.
The amount of the deduction depends on: whether the building is purchased, erected, extended, improved or added to; the purpose for which the building used; whether the taxpayer owns the whole or part of the building/development (if only part of the building is owned, a floor area of at least 1000m²); and whether it is in fact situated within the area demarcated as the urban development zone.
In basic terms, Section 13 allows the following deductions from the taxable income of the taxpayer:
Where the building is used for commercial/residential purposes:
-In the case of erection, extension of or addition to a building: 20% of the costs in the year the building is brought into use and 8% for the succeeding 10 years of assessment;
-In the case of improvement (including addition where the external structure of the building is preserved): 20% of the costs in the year the building is brought into use and 20% for the succeeding 4 years of assessment.
Where the building is used for low-cost residential units:
-In the case of erection, extension of or addition to a building: 25% of the costs in the year the building is brought into use and 13% for the succeeding 5 years of assessment and 10% in the last year thereafter;
-In the case of improvement (including addition where the external structure of the building is preserved): 25% of the costs in the year the building is brought into use and 25% for the succeeding 3 years of assessment.
Where the building or part thereof is purchased from a developer:
-A portion of 55% of the purchase price of a newly erected/extended/added to building and 30% of the purchase price of a newly improved building is treated as a deemed cost and can be deducted in those proportions as above.
The deduction commences once the building has been brought into use by the taxpayer and no longer applies when the trading activity ceases. The allowance is also not limited to the tax payer’s current year’s taxable income, meaning that should the taxpayer not use the full allowance in a year, that unused portion of the allowance can be carried forward to the following tax year.
There are, of course, a number of statutory requirements to comply with, particularly so for developers, in order to qualify for the deductions. Accordingly, it is advisable to contact your attorney before you attempt to make use of the incentive. The property department at Dingley Marshall Inc is well versed in the particulars of Section 13 and look forward to assisting you.