January 15, 2020
“Few of us ever test our powers of deduction, except when filling out an income tax form” (Laurence J. Peter of The Peter Principle)
Letting out property can give you an excellent “annuity” income, and if that concept appeals to you and a buy-to-let property comes your way at the right price put an offer in right now; before the current ‘buyer’s market’ runs its course.
In your financial planning however remember the tax implications, because as a landlord you must add your rental income to your salary and other taxable income in your tax return every year. Not to do so is tax evasion, and that carries heavy financial penalties as well as the very real threat of criminal prosecution.
Having to pay tax on your rental income could be make-or-break when it comes to deciding on how much you should pay for a particular property, so do your homework before you put your offer in.
Our tax laws are complex and specialised, so professional advice on your particular circumstances is essential here. These general concepts will however help you in your initial planning –
- You must declare all property rental income
You must declare your gross rental income to the taxman whatever type of accommodation you rent out – whether a whole house or apartment, just a room/garden flat or anything similar – or if you are in the guesthouse/B&B/Airbnb business.
- You can claim some expenses, but not all
Your taxable income will be calculated by subtracting allowable deductions from your gross income.In general, only “expenses incurred in the production of that rental income can be claimed” (SARS). So you can claim things like levies, rates and taxes, bond interest, advertising, agent’s fees, homeowner’s insurance, garden services, electricity and water, repairs and maintenance to the leased area (which would, says SARS, “usually take place when a person attempts to restore an asset to its original condition as a result of damage or deterioration”). Beware the “beginner’s mistake” of thinking that your full bond repayment instalments are deductible – not so, only the interest portion can be claimed and not the capital repayments.In regard to VAT (per SARS): “The supply of accommodation in a dwelling is an exempt supply for VAT purposes, and consequently you may not deduct VAT incurred on expenses in respect of supplying accommodation in a dwelling.”
And when it comes to renting out only a portion of a property (a room say in the house you live in) you can only claim pro-rata to total floor area. Click here for a practical example from SARS.
Take advice also on claiming depreciation on furniture and the like – your allowable deduction there might be worthwhile.
Not allowed are “expenses that are capital in nature or that are not in the production of rental income” (SARS). So the cost of improvements to the property – which would normally “result in the creation of a better asset” (SARS) – cannot be claimed. Improvements can however be added to the “base cost” of your property – important when you come to pay CGT (Capital Gains Tax) on eventual disposal.
- How are you taxed, and what about “ring-fencing”?
Your total taxable income (i.e. including net rental income) will be taxed as per current tax tables.What if your letting business shows a loss? Per SARS – “should the expenses exceed the rental income, the loss should be available for set-off against other income earned by the individual, provided that the loss is not “ring-fenced” in terms of prevailing anti-avoidance provisions”. In other words SARS could ring-fence your letting business losses to stop you from setting them off against your regular non-rental income. But if that happens you don’t lose those losses, they are just carried forward so that when your letting business starts turning a profit the losses can then be set off against that profit.Keep an eye also on your obligation to register for and pay provisional tax. As an individual if you earn taxable income of R30,000 p.a. or more in “rental from letting of fixed property” you fall into the net.
- Keep full records from Day 1!
Create and maintain a full spreadsheet, with a file of supporting documents, of all income and expenditure (distinguish between revenue and capital, claimable and not claimable). It’s a relatively painless exercise if you update it regularly, but a real challenge if you end up trying to recreate everything only when the annual “income tax return panic” sets in, or when SARS and/or your accountants call for breakdowns and documentation.
June 5, 2019
“An income tax form is like a laundry list – either way you lose your shirt” (Comedian Fred Allen)This article is important to you if you are either a South African working abroad or an employer of one. If you don’t fall into either of those categories, but know someone who does, please think of passing this on. As an employee earning foreign remuneration (salary, leave pay, bonuses, allowances, commission etc), you currently enjoy an uncapped tax exemption (on that remuneration only, not on other foreign income) provided that you work overseas –
- For more than a total of 183 days during any 12 month period, and
- More than 60 of those days are consecutive.
Are you a “tax resident”?Only “tax residents” are affected, so the first thing you should establish is whether you are still a tax resident or not. That’s not always easy, so take professional advice in any doubt. To illustrate some of the complexities involved, both physical emigration/relocation and “financial emigration” are different concepts to “tax emigration”. Moreover the Income Tax Act’s tests for tax residency are hardly a model of clarity – you are a “resident for tax purposes” if you are either an “ordinary resident” or a resident in terms of the “physical presence test” –
- You are, says SARS, an “ordinary resident” if South Africa is the country to which you “will naturally and as a matter of course return after [your] wanderings’, your “usual or principal residence”, or your “real home”.
- Even if you aren’t an “ordinary resident”, you will still be a resident under the “physical presence test” if you are physically present in South Africa for more than –
- “91 days in total during the year of assessment under consideration; and
- 91 days in total during each of the five years of assessment preceding the year of assessment under consideration; and
- 915 days in total during those five preceding years of assessment.” Under the physical presence test however if you are outside the country for a continuous period of at least 330 days you are not regarded as a tax resident.
Should you “tax emigrate”?If you are indeed a tax resident, don’t think of changing that status without taking full advice. “Tax emigration” and “financial emigration” are complicated processes and full of pitfalls. For example you could be entitled to foreign tax rebates or other relief on your taxable (i.e. +R1m) foreign earnings, or there may be other benefits to remaining a tax resident. So it is important to have an expert look at your specific situation and determine what is best for you overall. The big thing is to be aware that change is coming. Some long-range planning is the only way to be certain that there are no unpleasant surprises waiting to spring out on you down the line.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.
January 17, 2019
“Never take your eyes off the cash flow because it’s the lifeblood of business” (Richard Branson)
A recent Supreme Court of Appeal (SCA) judgment has confirmed that when a property developer enters into an agreement with a buyer to transfer the property, even if the developer only actually gets paid in a subsequent tax year, the income is deemed to have accrued to the developer at that date. The developer must therefore include the full proceeds of the sale in its income tax return for the year the agreement was signed.
This has the effect of the property developer paying tax before receiving the proceeds of the sale, putting the developer out of pocket until transfer to the purchaser takes place.
A R1.9m tax assessment challenged
A property developer in Cape Town entered into sales agreements for 25 units. Each agreement called for a deposit of R5,000 with the balance of the money to be paid on completion of the development. Purchasers could take possession once the full sale price had been secured or within 60 days of the sale. By the end of the first year 18 purchasers had taken possession and in all 25 cases the purchase price had been fully secured.
Transfer of the properties took place in the next tax year. The developer did not include the sale proceeds in his tax return for the year of concluding the agreements but showed the proceeds in the next tax year.
The Court upheld the decision by SARS to tax the developer in full in the first tax year. The assessment at just under R1.9m was based on taxable income of R6.8m.
Why the developer lost
Property developers assume a substantial risk when they undertake a development – they spend millions of Rand upfront and if they can’t sell the developed properties they make a considerable loss. They mitigate this risk by selling the properties upfront – usually before they commit to building. Clearly they will not get paid until the property is transferred, so they accept a deposit plus a guarantee (usually from the purchaser’s banker) for the balance of the selling price, or alternatively the buyer placing the funds in the conveyancer’s trust account.
Once the developer is assured of selling the properties it then proceeds with the development. On this basis, banks will advance the cost of the development to the developer.
However, in terms of the law as now confirmed by the SCA, the proceeds of the sale of the properties are deemed to have accrued to the developer and are taxable in the year the agreement is signed.
Developers need to be aware of, and plan for, the cash flow implications.
April 16, 2018
“If you hear something (straight) from the horse’s mouth, you hear it from the person who has direct personal knowledge of it” (Cambridge Dictionary)
We all know by now that the VAT rate increased from 14% to 15% on 1 April. How does that affect your residential property sale/purchase?
We are talking big money here – if for example you bought a house from a developer for R10m + VAT, that extra 1% adds R100,000 to your cost. Fortunately a little-known (until now) section of the VAT Act provides some relief to residential property buyers.
This is what SARS has to say about it (slightly simplified) –
Question – “Is there a rate specific rule which is applicable to me if I signed the contract to buy residential property (for example, a dwelling) before the rate of VAT increased, but payment of the purchase price and registration will only take place on or after 1 April 2018?”
Answer – “Yes. You will pay VAT based on the rate that applied before the increase on 1 April 2018 (that is 14% VAT and not 15% VAT).
This rate specific rule applies only if –
- You entered into a written agreement to buy the dwelling (that is “residential property”) before 1 April 2018;
- Both the payment of the purchase price and the registration of the property in your name will only occur on or after 1 April 2018; and
- The VAT-inclusive purchase price was determined and stated as such in the agreement.
For purposes of this rule, “residential property” includes –
- An existing dwelling, together with the land on which it is erected or any other real rights associated with that property;
- So-called plot-and-plan deals where the land is bought together with a building package for a dwelling to be erected on the land; or
- The construction of a new dwelling by any vendor carrying on a construction business.”
But what about commercial property?
Let’s quote SARS again on property generally (once again, slightly simplified) –
Question – “How will the rate increase work generally for fixed property transactions?”
Answer – “The rate of VAT for fixed property transactions will be the rate that applies on the date of registration of transfer of the property in a Deeds Registry, or the date that any payment of the purchase price is made to the seller – whichever event occurs first.
If a “deposit” is paid and held in trust by the transferring attorney, this payment will not trigger the time of supply as it is not regarded as payment of the purchase price at that point in time.
Normally the sale price of a property is paid to the seller in full by the purchaser’s bank (for example, if a bond is granted) or by the purchaser’s transferring attorney. However, if the seller allows the purchaser to pay the purchase price off over a period of time, the output tax and input tax of the parties is calculated by multiplying the tax fraction at the original time of supply by the amount of each subsequent payment, as and when those payments are made. In other words, if the time of supply was triggered before 1 April 2018, your agreed payments to the seller over time will not increase because of the increase in the VAT rate on 1 April 2018.”