RENTAL UNITS Squeezing more cash out of SARS

What expenses are deductible against property rental income in South Africa?

Any expense incurred in the production of rental income is deductible if it is not of a capital nature and laid out for the purpose of the landlord’s trade. The following mexpenses are deductible:

•    Interest on bond
•    Levies (municipal fees)
•    Repairs (not improvements!)
•    Insurance on the property
•    Letting agent fees
•    Cleaning services
•    Bank fees related to the property (fees re - bond payments, repairs, etc)
•    Depreciation on any furniture
•    Accountant fees

Remember that expenditure incurred by a landlord in relation to a property, before he can commence letting the property, does not rank for deduction.

Expenditure, normally deductible by a lessor without question (rates, interest payments in respect of the mortgage bond and so forth) may be disallowed as deductions in three particular situations:

•    Where the expenses are incurred before the building is ready for letting for the first time.
•    Where the expenditure is incurred during a break in letting, perhaps during reconstruction work.
•    When the property had been let but at the time the expenditure was incurred the lease had expired. In most cases the substantial repairs required to put the premises into a condition to be re-let can be undertaken by the landlord only when the premises have been vacated.

Repairs have to be distinguished from improvements, which is capital in nature and not deductible in the carrying of a rental trade. The test is: Has a new asset been created resulting in an increase in the income-earning capacity, or does the work undertaken merely represent the cost of restoring the asset to a state in which it will earn income as it did before? In a particular court case the roof over kilns where a lot of heat was generated had been constructed of Baltic deal timber. The roof had to be replaced with a reinforced concrete roof.  This was classified as a repair, not an improvement. By contrast, the cost of waterproofing a concrete roof by providing a protective covering has been disallowed as a deduction on the grounds that it was not a repair. Similarly, the strengthening of a retaining wall by inserting a concrete beam and supported by buttresses has been characterized as an improvement and not a repair.

Adequate tax planning requires steps to be taken in advance to secure the optimum tax results. If the scope of the building operation warrants it, this would normally entail obtaining certificates from architects or engineers prior to building operations, separately identifying the repairs and the improvements and quantifying the cost of each separately. The taxpayer’s case would further be bolstered by taking photographs before the work starts and finally, by drawing up separate contracts in respect of repairs and improvements. If expenditure on repairs has to be made prior to letting the property, the safest course for the lessor is to defer the actual incurring of expenditure on repairs until a lease has been entered into or to pass the cost of repairs on to the lessee..

You are welcome to contact the tax consultant, Fanus Jonck (tax@jonck.net) on +27 (21) 913 4164 for advice on your property related tax issues.