Real Estate Investor Magazine South Africa February 2016 | Page 47

Tax deduction relief in 2016
W

ith the 2016 year upon us, tax advisors and
investors alike should be reinvigorated to
explore new methods of reducing their tax
bill, and thereby maximizing their return on investment.
In so doing, it is always disappointing that so many
investors and their professional advisors are unaware
of Capital Allowances that tax law permits specific to
Investment Residential Properties. Making use of these
Capital Allowances can result in significant tax savings,
and therefore increased return on investment.
The Residential Property Capital Allowance
mentioned above is detailed in s13sex of the Income
Tax Act. To summarize all the details of the section is
onerous, however a simple summary will be sufficient to
understand the fundamentals and to reap the rewards.

The Capital Allowance above is subject to the
following criteria:
• It is only applicable to residential property, or any
improvements to a residential property
• The property (or improvement) must be ‘new and
unused’
o New properties purchased from developers
are the most attractive option due to this
requirement
• The property is situated in South Africa
• The taxpayer owns at least 5 ‘residential’ properties
in South Africa
o This requirement does not specify that
each of those properties must qualify under
this section, but rather it is stated that the
taxpayer must simply own at least 5 residential
properties in order to claim the allowance.
Therefore, for an investor that already owns any
4 investment residential properties (whether
it qualifies under this section or not), the
addition of simply 1 more property that does
qualify under this section will result in the
allowance being permitted to be claimed on
this particular property

Meeting the above criteria opens the door to claim an
annual tax deduction of 5% on the cost of the qualifying
property. An additional 5% is allowed where the
property is a ‘low-cost’ residential property.
A simple comparative illustrates the impact of
utilizing this allowance. Say, for example, the cost to
an investor of 5 investment residential properties is
R3,5million (R700,000 each). The investor purchased
these properties in his personal capacity and his personal
income tax rate is an effective 38% in this particular
tax year. The total taxable profit he enjoyed from those
investment properties amounts to R180,000 for the year.
Assuming the investor cannot claim the s13sex
deduction detailed above, the total tax drain on his profit
would amount to R68,400 (38% of R180,000), therefore
he would net an after-tax amount of R111,600.
On the other hand, where the investor is permitted to
claim the s13sex deduction on the properties, he would
enjoy a substantial tax deduction of R175,000 (5% of
R3.5million). As such, he will only be subjected to tax
on the difference of R5,000 (R180,000 – R175,000).
Total tax payable amounts to R1,900 (38% x R5,000),
therefore he would net an after-tax amount of
R178,100. Total tax saving in this example amounts to
97%.
The allowance above can continue until the entire
cost of the property has been ‘claimed’, and therefore
would continue for 20 years. The total savings over the
period of enjoyment will certainly excite even the most
seasoned investor.
The s13sex deduction is especially desirable for cashbuyers and investors that are enjoying cash-positive
returns on their investment properties, as the deduction
will result in actual cash being saved (see example above).
For those investors who are still enduring shortfalls on
their property portfolios, the deduction above remains
valuable as tax losses (which are accumulated) will be
enlarged, and will be available for set-off against taxable
profits when the portfolio begins to enjoy a cashpositive position.

RESOURCES

www.finservegroup.co.za
www.reimag.co.za

FEBRUARY 2016 SA Real Estate Investor

45