Additional tax incentives may be required to boost buyto- let property market.
The quarterly FNB Estate Agent Survey paints a bleak picture as far as non-essential buying of residential property is concerned, such as buy-to-let and holiday homes. The latest data from the 3rd quarter FNB Estate Agent Survey shows that the buy-to-let sector only represents about 7% of total property buying, down from 10% in the 1st quarter of 2007. Reasons cited for the decline include tougher economic conditions and the lack of capital growth making non-essential property buying unattractive from a speculative point of view.
Certain property analysts are of the view that rental market fundamentals are improving, however it seems that more may be needed to boost the buy-to-let market apart from, inter alia, interest rate reductions. One option is to look for tax incentives specifically aimed at the residential property market. These are currently found in section 13sex of the Income Tax Act (the Act).
With effect from 21 October 2008 section 13sex of the Act provides the owner of a property a capital allowance of 5% per annum of the cost of any new and unused residential unit, or any new and unused improvement to a residential unit, subject to certain requirements. The allowance is available to taxpayers who own at least five residential units situated within the Republic and those units must solely be used for the purposes of a trade carried on by that taxpayer (e.g. buy-to-let). The incentive under section 13sex of the Act is not only aimed at the mid to high priced property market but also to low cost residential units which qualify for an increased 10% per annum capital allowance, provided certain requirements are met.
The introduction of section 13sex into the Act brought about two new definitions of what constitutes a 'residential unit' and a 'lowcost residential unit'. A 'residential unit' is defined in section 1 of the Act as a building or self contained apartment mainly used for residential accommodation, excluding buildings or apartments in the hotel trade. A 'low-cost residential unit' is distinguished by different monetary values attached to an apartment within a building and a building in its own right. An apartment within a building qualifies as a 'low-cost residential unit' where the cost does not exceed R 250,000 and the monthly rental charge is capped at 1% of cost. A building (e.g. free standing townhouse) qualifies as a 'low cost residential unit' where the cost does not exceed R 200,000 and the monthly rental charge is capped at 1% of cost plus the proportionate share of land and bulk infrastructure. The cost of a 'low cost residential unit', on which the rental value is based, is deemed to be increased by 10% per year seemingly to take into account the effects of inflation.
Although section 13sex of the Act was a welcome incentive it falls short on many fronts, the most important of which is that it only applies to new and unused residential units or improvements thereto. This means that 'second hand' properties of which there is an oversupply in the current market do not qualify for a deduction under section 13sex of the Act. The section further limits the deduction to only 55% of costs (30% for improvements) where the taxpayer does not actually erect or construct that unit or improvement. One can see the need for a requirement to actually erect or construct an apartment or building in the context of low-cost residential units, given the reasoning by Treasury in the Explanatory Memorandum to the Taxation Laws Amendment Act 60 of 2008 that more support is needed for Government housing programmes. The same cannot be said for the mid to higher tier property market which fall within the definition of 'residential unit' as discussed above.
Consideration should be given by Treasury to extend the section 13sex capital allowance to 'second hand' properties and reduce the number of units to be held - this may assist new entrepreneurs in the buy-to-let market and help create demand in this sector.