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How to work out what to claim

There are rules and regulations which determine what you can claim and how to work out what the tax incentive will be.

  • The costs that can be claimed
  • The position of the developer
  • How we treat purchases from developers
  • The amounts that can be deducted
  • How improvements to buildings are dealt with
  • Buildings on land owned by third parties
  • Other deductions
  • Use the UDZ tax incentive calculator to help you work out how much you may claim.

The costs that can be claimed

How do we define costs?

The costs (other than borrowing or finance costs) actually incurred in erecting or extending, adding to or improving a building or part thereof and it includes any costs incurred –

a. In demolishing any existing building or part thereof;

b. In excavating the land for purposes of that erection, extension, addition or improvement; and

c. In respect of structures or works directly adjoining the building or part so erected, extended, added to or improved, for purposes of providing – In respect of structures or works directly adjoining the building or part so erected, extended, added to or improved, for purposes of providing –

i. Water, power or parking with respect to that building or part;

ii. Drainage or security for that building or part

iii. Means of waste  disposal for that building or part; or

iv. Access to that building or part, including the frontage thereof;

So let’s give you some examples of what we would and would not consider as costs.

​ACCEPTABLE COST ​UNACCEPTABLE COST
Construction work ​Purchase price of the land
​Architectural and appropriate fees ​Transfer duties
​Sidewalks ​Borrowing or financing
​Parking for the building ​Transfer or related costs
​Landscaping as part of the development
​Drainage
​Security (fences, cameras, surveillance equipment)

​The Developer

How do we define developer?

A person who erects, extends, adds to or improves a building or part of a building –   a. With  the purpose of disposing of that building or part thereof immediately after completion of that erection, extension, addition or improvement; and   b. Disposes of the building or part of a building within three years after completion of that erection, extension, addition or improvement.   According to the definition of “developer”, a developer may temporarily use or rent out property that was constructed or improved by it for a period of three years. This rule is applicable from 10 January 2012 and relates to contracts of sale concluded on or after this date. The old definition of “developer” will apply to a contract of sale that is concluded before 10 January 2012 and no deduction will be allowed to the purchaser of the property that was previously used or leased by the developer.   We have created an example of a UDZ claim made by a developer to explain things further.   So what happens with purchases that are made from developers and what costs are considered then?   A taxpayer may claim a UDZ incentive on the “purchase price” paid to a developer for the acquisition of a UDZ an entire building or part of it.  The “purchase price” relates to any building or part of the building that is purchased by a taxpayer from a developer means the lesser of –   a. The actual cost to the taxpayer to purchase that building or part; or   b. The cost which a person would have incurred had that person purchased that building or part under a cash transaction concluded at arm’s length on the date on which that taxpayer purchased that building or part.

How do we treat purchases from a developer?

  A taxpayer may claim an Urban Development Zone (UDZ) tax incentive on the “purchase price” paid to a developer for the acquisition of a UDZ building or part of a UDZ building.   Under section 13quat(1), “purchase price” in relation to any building or part of the building that is purchased by a taxpayer from a developer means the lesser of –   a. The actual cost to the taxpayer to purchase that building or part; or   b. The cost which a person would have incurred had that person purchased that building or part under a cash transaction concluded at arm’s length on the date on which that taxpayer purchased that building or part; he cost which a person would have incurred had that person purchased that building or part under a cash transaction concluded at arm’s length on the date on which that taxpayer purchased that building or part.   In the event of a purchase of a building or part of a building from a developer –   

  • 55% of the purchase price of that building or part of a building, in the case of a new building erected, extended or added to by the developer; and
  • 30% of the purchase price of that building or part of a building, in the case of a building improved by the developer,

will be deemed to be costs incurred by the person for the erection, extension, addition to or improvement of the building or part of the building.   These costs will be regarded as costs for purposes of the UDZ incentive and no further adjustments will have to be made in this regard. The purchaser of a building or part of a building will thus qualify for a UDZ incentive on the “deemed costs” pertaining to such a building or part of a building.

The amounts that can be deducted

Depending on the type of development involved, that is, new, improved or low-cost, the UDZ incentive allowance is calculated at a different rate.   Let’s consider these different types:  

  • The erection of a new building or the extension of or addition to any building
    • An amount equal to 20% of the cost relating to the erection or extension of or addition to, the UDZ building in the year of assessment during which the building or part of the building starts to be used by the taxpayer solely for the purposes of that person’s trade. In the event that land is purchased on which a building is erected, the UDZ incentive is only worked out on the cost of the erection (excluding the cost of the land).

Top Tip: The allowance can only be claimed from the year of assessment in which the building or part of the building is brought into use by the taxpayer for trade purposes, not the year of assessment in which the expenditure is incurred or when the building or part of the building is complete.  

  • An amount equal to 8% of the cost in each of the following 10 years.
  • The improvement to an existing building or part of a building which preserves the existing structural or exterior framework:
    • An amount equal to 20% of the costs of the improvement of the building in the year of assessment during which the improved part of the building begins to be used by the taxpayer solely for the purposes of trade. No apportionment is required in case the building is brought into use during the year of assessment.
    • An amount equal to 20% of the cost in each of the four following years of assessment.
  • The erection of a new building or the extension of or addition to any building to the extent that it relates to a low-cost residential unit
    • A “low-cost residential unit” is defined as –
      • an apartment qualifying as a residential unit in a building located within the Republic, where—

(i) the cost of the apartment does not exceed R350 000; and

(ii) the owner of the apartment does not charge a monthly rental in respect of that apartment that exceeds one per cent of the cost; or 

  • A building qualifying as a residential unit located within the Republic, where

(i) the cost of the building does not exceed R300 000; and

(ii) the owner of the building does not charge a monthly rental in respect of that    building that exceeds one per cent of the cost contemplated in subparagraph (i) plus a proportionate share of the cost of the land and the bulk infrastructure:

  • Provided that for the purposes of paragraphs (a)(ii) and (b)(ii), the cost is deemed to be increased by 10 per cent in each year succeeding the year in which the apartment or building is first brought into use;
  • The incentive for low-cost residential units is determined on the following basis:
    • An amount equal to 25% of the cost of the erection or extension of or addition to a low-cost residential unit in the year of assessment during which the unit so erected, extended or added to is brought into use by the taxpayer.
    • An amount equal to 13% of that cost in each of the five succeeding years of assessment.
    • An amount equal to 10% of that cost in the seventh year of assessment.
  • Improvements to an existing building or part of a building, to the extent that it relates to a low-cost residential unit. These are worked out as follows:
    • An amount equal to 25% of the costs of improvement of the low-cost residential unit in the year of assessment during which the part of the unit so improved is brought into use by the taxpayer.
    • An amount equal to 25% of that cost in each of the three succeeding years of assessment.

How improvements to buildings are dealt with?

The UDZ incentive will be calculated as follows in the case of an improvement to an existing building or part of a building which preserves the existing structural or exterior framework:  

  • An amount equal to 20% of the cost pertaining to the improvement of the building in the year of assessment during which the part of the building so improved is brought into use by the taxpayer solely for the purposes of trade. No apportionment is required in case the building is brought into use during the year of assessment.
  • An amount equal to 20% of the cost in each of the four succeeding years of assessment. 

Land Owned By Third Parties

Here we consider constructions and improvements to buildings which are located on land that may be owned by a third party.

What happens here?

Normally the allowance would only have been available to the taxpayer carrying out the improvements if the taxpayer was the owner of the property.  However, in the event that the property is owned by a third party the “owner requirement” stops the lessee from deducting the costs incurred on any improvements.   As a result, depreciation rules now apply to lessees that hold rights of use or occupation of government-owned property, property owned by:  

  • certain specified exempt entities;
  • the government of the Republic in the national, provincial or local sphere;
  • property owned by parties to a Public Private Partnership or
  • Independent Power Producer Procurement Programme. 

Lessees that make improvements to property owned by qualifying third parties are treated like owners of the property. Consequently, these lessees will be eligible for the specific depreciation allowances provided for under applicable provisions of the Act.

Other deductions 

The UDZ incentive has been introduced in the form of an accelerated depreciation allowance and does not constitute an additional tax allowance. A taxpayer that claimed a UDZ deduction on a building or part of a building may not claim any other deductions on that building or part of the building.  ​

 

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