Various building allowances are available for both owners and lessees of buildings under the Income Tax Act, No. 58 of 1962 (the “Act”) for erecting buildings or for effecting improvements to buildings. Relevant for purposes of this article, is the deduction permitted in respect of residential buildings or residential units, previously recognised under section 13ter of the Act and now provided for under section 13sex of the Act.

Section 13ter of the Act applied to residential units acquired, or the erection of which commenced, on or after 1 April 1982 and before 21 October 2008. Section 13ter of the Act provided for a depreciation regime that allowed a deduction equal to 12% of the cost of the residential unit in the first year in which it was let or occupied, and a further 2% of the cost deductible in each of the succeeding 44 years.

Section 13sex of the Act, applies to any residential unit or improvement to a residential unit acquired, or the erection of which commenced, on or after 21 October 2008 and replaced the depreciation regime under section 13ter of the Act. Section 13sex of the Act now provides for a 5% depreciation allowance per annum over 20 years, and applies only to new and unused residential units or improvements.

Both section 13sex and section 13ter of the Act require that, in order to enjoy the building allowances available under these sections, the taxpayer must own at least five residential units and the residential units must be situated in South Africa. In terms of section 13ter of the Act, the residential units were required to be used by the taxpayer to be let to a tenant for the purpose of deriving a profit for the taxpayer to be occupied by a bona fide full-time employee of the taxpayer. Section 13sex of the Act, on the other hand, requires that the residential units or improvements are used by the taxpayer solely for the purposes of a trade carried on by the taxpayer.

A situation that has arisen in practice is where, for example, a taxpayer purchases three residential units after 1 April 1982 and before 21 October 2008 (ie within the effective dates for the application of section 13ter of the Act), and purchases two additional residential units on or after 21 October 2008, that is, within the effective date for the application of section 13sex of the Act. Clearly, the taxpayer meets the requirement of owning at least five residential units, as required under section 13sex of the Act. Presuming that the residential units are situated in South Africa and are used by the taxpayer solely for the purposes of a trade carried on by the taxpayer, the taxpayer should, in principle, be entitled to the 5% depreciation allowance per annum over 20 years after the purchase of the fifth residential unit.

However, it is our submission that, due to the fact that the first three residential units were acquired before the prescribed dates for the applicability of section 13sex of the Act, they will not form part of the five residential units required for the application of section 13sex of the Act (please see table below for greater clarity).

section 13ter requirements

section 13sex requirements

The taxpayer owns at least five residential units (ie given the term “housing project” in terms of section 13ter of the Act)

ü

The taxpayer owns at least five residential units

ü

The residential units are used by the taxpayer in order to be let to a tenant for the purpose of deriving a profit for the taxpayer or to be occupied by abona fide full-time employee of the taxpayer

ü

The residential units or improvements are used by the taxpayer solely for the purposes of a trade carried on by the taxpayer

ü

The residential units are situated in South Africa

ü

The residential units are situated in South Africa

ü

The residential units (making up the five residential units) acquired, or the erection of which commenced, under the housing project on or after 1 April 1982 and before 21 October 2008

X

The residential units (making up the five residential units) acquired or improvements thereto, or the erection of which commenced on or after 21 October 2008

X

21 October 2008 thus operates as a strict cut-off date for all residential units acquired prior to this date, disqualifying such residential units from counting in favour of the five residential unit requirement in terms of section 13sex of the Act.

Sarah Elliott is a candidate attorney in ENSafrica's tax department.

This article was reviewed by Dr Beric Croome.