The South African Revenue Service (SARS) recently released an interesting binding private ruling (BPR 169) dealing with the deduction of a commercial building allowance in respect of a unit, as contemplated in the Sectional Titles Act, No 95 of 1986 (Sectional Titles Act).
By way of background, the applicant, a public company incorporated in and resident of South Africa and the property developer (developer), acquired a vacant piece of land which was held jointly in undivided shares. Upon the joint acquisition of the land, the applicant and the developer each paid their proportionate share of the purchase consideration.
In terms of the proposed transaction, the parties intend to register a sectional title development scheme over the property (and its proposed buildings), in terms of the relevant provisions of the Sectional Titles Act, the object of which is to erect commercial buildings on the land.
Accordingly, it is proposed that the applicant and the developer will give effect to the proposed transaction by concluding a development agreement for each party to erect a commercial building on the jointly owned land, each for its respective separate use and at its own cost.
The proposed development will see the erection of two commercial buildings which will be separated by a green thoroughfare and below ground will be a parking basement, which is to be constructed as a single basement and which will establish a single foundation for the two towers. The basement will further be separated into two parts by a wall on each level, with dedicated parking for each unit.
The development agreement will govern the terms of the proposed development, and will specifically set out the quality and extent of the construction of the applicant's unit, the actual construction project (which will be managed by the developer) and will also regulate the division of the development costs between the applicant and the developer. Furthermore, the applicant will have sole financial responsibility for the development of its separate unit and insofar as the development costs in relation to the shared amenities are concerned, such costs will be shared between the parties in accordance with the ratio to their joint land ownership.
The issue under consideration before SARS is whether the applicant is entitled to claim the commercial building allowance as contemplated under s13quin of the Income Tax Act, No 58 of 1962 (Act).
S13quin of the Act provides for a 5% annual allowance on the cost of any new and unused building owned by the taxpayer, if:
- The building is wholly owned or mainly used by the taxpayer;
- During the year of assessment;
- For the purposes of producing income in the course of the taxpayer's trade.
The ruling made by SARS in connection with the proposed transaction is as follows:
- The applicant will be entitled to claim the commercial building allowance on its unit, as contemplated in s13quin of the Act, on occupying the unit after registration of the sectional plan and prior to tenants of the developer occupying the developer's unit; and
- The applicant will also be entitled to claim the commercial building allowance on its unit, as contemplated in s13quin of the Act, on occupying its unit after registration of the section plan, should the tenants of the developer occupy the developer's unit.