The cement is all used up and the bricks have been laid exactly where they need to be. A huge sigh of relief because… finally, construction and renovations are complete! And, just when you thought the worry was over, you realise that the differences between the building allowance and renovations aren’t clear to you. “Aren’t they all the same?” is the question lingering in your head. Don't fret, below is a breakdown of the exact clarity you’re looking for.
A must-know is, wear and tear allowance can’t be claimed on the cost of buildings because they’re permanent structures. But, there are certain annual capital allowances which building owners can claim. The conditions attached to these allowances, as well as the rates, differ according to the purpose for which the building is used.
However, broadly speaking, they all have the following important factors in common:
- the taxpayer who incurs the cost (either by constructing himself or purchasing the building) is eligible to claim the building allowance. If the building owner leases to a tenant, and the tenant uses it in line with the Income Tax act provisions for building allowances, then the taxpayer (i.e. lessor) will still qualify for the building allowance deduction.
- unlike wear and tear, which is pro-rated per the number of months the asset has been used for, building allowances aren’t apportioned if the building is only used for part of a year.
For example, if Company A owns a building which it has used for commercial office space from 1 January 2016, and assuming it has a February year end, it will claim the full 12-month annual allowance on the building for the full 2016 tax year, and not only for two months i.e. January and February.
- the allowance will start in the year of assessment that the building is first brought into use, for the taxpayer’s trade.
For example, if Company B builds its own building and construction starts in July 2015, but due to building delays it only is completed in October 2016 and is brought into use for its manufacturing operations in November 2016, and assuming the company has a February year end, the building allowance will be claimable for the first time in the 2017 tax year (and not 2016).
- SARS treats an “improvement” to an asset as a separate asset itself for the purposes of capital allowances. If the improvement qualifies for the deduction, then the allowance is based on the cost of the improvements and will start once the improvement is brought into use for the taxpayer’s trade. Therefore, it is quite feasible for a building owner to have two separate capital allowance calculations – one for the building itself based on a particular cost and starting date, and another for the improvements, which would be based on a different cost and starting date.
“Improvements” are any extensions or additions (other than repairs) to a building, which are carried out for increasing or improving the industrial capacity of the building. For example, increasing the floor space of a factory would qualify as an improvement, however repairing a leaking roof after storm damage and restoring it to its previous condition, would not qualify as an improvement as it would not increase the income earning capacity of the building owner.
Understanding the detail of each building allowance can get very confusing. In some cases, the building must be purchased brand new in order to qualify for the allowance and in other cases it can be bought second hand as long as certain conditions apply. The rates of the allowances also vary according to the building type and in some case, the construction date.
See below for a simple summary of the main features of s13, s13quin and s13quat…Plus UDZ rates and s13 rates
|Manufacturing or Research and Development buildings||Commercial building (eg. an office block)||Commercial or residential building in * UDZ|
|NB: does not apply to any part used for residential letting|
|If used for R&D, only applicable to buildings used for this purpose after 1 October 2012.||Only applies to buildings/improvements contracted for after 1 April 2007 and also where construction has started after this date.||Building must start after details of UDZ demarcated area is published in Government Gazette and,|
|if purchased from developer, purchase agreement must have been concluded on or after
8 November 2005.
|Building owner is eligible to claim the allowance||Building owner is eligible to claim the allowance||Building owner is eligible to claim the allowance|
|Building must be wholly or mainly used for taxpayer's trade||Building must be ** wholly or mainly used for taxpayer's trade. This cannot be residential letting.||Building must be soley used for taxpayer's trade|
|The allowance starts when the building is brought into use for company's trade||The allowance starts when the building is brought into use for company's trade||The allowance starts when the building is brought into use for company's trade|
|Allowance is claimable on buildings constructed by taxpayer||Allowance is claimable on buildings constructed by taxpayer||Allowance is claimable on buildings constructed by taxpayer|
|If taxpayer purchases building, the allowance is claimable if the building is brand new and never been used||If taxpayer purchases building, the allowance is claimable if the building is brand new and never been used||If taxpayer purchases building, the allowance is claimable if the building is brand new and the developer had not claimed a s13quat allowance on the building or part sold|
|If taxpayer purchases a second hand building, the allowance is claimable only if previous owner used for manufacturing and was eligible to claim allowance||If taxpayer purchases a second hand building, the allowance is NOT claimable||If taxpayer purchases a second hand building from a *** developer, the allowance is claimable only if the developer has spent an amount on improvements at least equal to 20% of the purchase price paid by the company and,|
|the developer must have erected, extended, added to or improved either an entire building or a part of a building representing a floor area of at least 1 000 m2|
|Allowance claimable on improvements||Allowance claimable on improvements||Allowance claimable on improvements to whole building or if part of building improved, the floor area of the improvements must be at least 1000 square meters|
|The rate of the allowance depends on when the building erected or improvements commenced - currently 5% of cost||5% of construction cost of building|
|5% of purchase price if whole building is purchased|
|see table for detailed rates||5% X 55% X purchase price if part of building is purchased||see table for detailed rates. Note special rates for low cost residential housing in UDZ|
|5% X 30% X purchase price if part of improvement is purchased|
|Allowance is calculated based on cost||Allowance is calculated based on lower of cost or market value||Allowance is calculated based on lower of cost or market value|
|Cost excludes the clearing and levelling of the site in preparation for construction, excavations, external paving and fencing. It also excludes the cost of the land.||Cost includes demolition costs of existing buildings and excavating land for constructing or improving building.It also excludes the cost of the land.|
|No apportioment of allowance for part of year||No apportioment of allowance for part of year||No apportioment of allowance for part of year|
|The allowance stops when building is no longer mainly used for company's trade or it is sold||The allowance stops when building is no longer mainly used for company's trade or it is sold||The allowance stops when the building is no longer mainly used for company's trade or it is sold|
|If purchased, the taxpayer must request a certificate from the Municipality, confirming the building is located within a UDZ|
|The developer also has to give a certificate to the purchaser confirming:|
|1. erection or improvement commenced after the area was declared an UDZ|
|2. improvements covered the whole building or a floor area at least 1000 square metres|
|3. the agreement of purchase and sale between the purchaser and developer was concluded on or after 8 Nov 2005|
|4. the developer has not claimed a s13quat allowance on the building or part of the building|
|5. the developer has incurred expenditure on improvements equal to at least 20% of the price paid by the purchaser|
* UDZ (Urban Development Zone) - certain designated urban areas within various cities in South Africa, which due to dereliction and decay, have been earmarked by government
for renewal and development. Government plans to do this by offering a tax incentive to investors who construct or improve commercial or residential buildings,
including low-cost housing units, within these demarcated UDZs. The details of these areas can be foud on the National Treasury website (www.treasury.gov.za)
** wholly or mainly -this means more than 50%. For example, if the building consists of five floors and three were used for offices and two were rented out for residential purposes,
three fifths of the total space is used for commercial purposes and therefore the building would qualifiy for a s13quin allowance.
*** developer - a person who erects, extends, adds or improves a building or part of a building, with the purpose of selling the building immediately after completion of the building,
and does in fact sell the building or part of the building within three years after its completion.
Note, that since a developer would affectively treat the building as trading stock, they would not generally be eligible to claim the s13quat deduction themselves
(it would be claimed by the purchaser who bought the building from them)
|Normal housing in UDZ (not low-cost)||New Buildings or extensions/additions to existing buildings|
|Taxpayer incurs cost of building, extension or improvement for his own trade - on property he owns||Taxpayer purchases a new building or part of new building from a developer|
|Year 1||20%||cost X 55% X 20%|
|Year 2-11||8%||cost X 55% X 8%|
|Existing buildings - improvements to the building (or parts) where existing structural or exterior framework is preserved|
|Taxpayer incurs cost of building, extension or improvement for his own trade - on property he owns||Taxpayer purchases a used building from a developer - the part of the purchase price relating to the new improvements made to the building is subject to the allowance|
|Year 1||20%||cost X 30% 20%|
|Year 2-5||20%||cost X 30% X 20%|
|**Low cost housing in UDZ||New Buildings or extensions/additions to existing buildings|
|Taxpayer incurs cost of building, extension or improvement for his own trade - on property he owns||Taxpayer purchases building or part of building from a developer|
|Year 1||25%||cost X 55% X 25%|
|Year 2-6||13%||cost X 55% X 13%|
|Year 7||10%||cost X 55% X 10%|
|Existing buildings - improvements to the building (or parts) where existing structural or exterior framework is preserved|
|Taxpayer incurs cost of building, extension or improvement for his own trade - on property he owns||Taxpayer purchases a used buildng from a developer - the part of the purchase price relating to the new improvements made to the building is subject to the allowance|
|Year 1||25%||cost X 30% 25%|
|Year 2-4||25%||cost X 30% X 25%|
** A "low-cost residential unit" is a building or self-contained unit mainly used for residential where the cost of the apartment does not exceed R350,000
and the owner of the apartment does not charge rental that exceeds 1% of the cost.
Remember, that the total allowances claimed over the years cannot exceed the cost of the building.
Let’s look at some examples to see how these allowances work in practise.
Section 13 – Manufacturing or R&D building
|Date on which the erection of the building or improvements commenced||Rate of Allowance|
|(a) Before 1 July 1985||2% x cost|
|(b) On or after 1 July 1985 but not later than 31 December 1988|| 2% x [cost- (17,5% x cost)*]
|(c) On or after 1 January 1989 but not later than 30 June 1996||5% x cost|
|(d) On or after 1 July 1996 but not later than 30 September 1999 and brought into use on or before 31 March 2000||10% x cost|
|(e) On or after 1 July 1996 but not later tan 30 September 1999 and brought into use after 31 March 2000.||5% x cost|
|(f) On or after 1 October 1999||5% x cost|
Company A is a toy manufacturer with a February year end. It starts building a factory in which to house its production processes on 1 January 1999. It brings the building into use on 1 January 2000. It commences renovations to add another floor to the factory in 2015 and brings this new floor into use on 1 October 2015.
Original cost of building = R2,000,000
Cost of renovations = R500,000
Annual allowance on building (starting tax year end February 2000):
R2,000,000 X 10% = R200,000
Annual allowance on improvements (starting tax year end February 2016):
R500,000 X 5% = R25,000
Company B buys building from Company A (see example 1) in November 2016 for R3,000,000.
Annual allowance on building (starting February 2016):
R3,000,000 X 10% = R300,000 (What is the 10%)
It is important to note that the rate of the allowance is determined by when the building was constructed and not when the improvements commenced.
Section 13quin – Commercial Building
Peter built a 5-storey property for R4,000,000 and building was completed on 5 June 2016. Each floor is the same size. The first three were converted to offices, which he rents out. The top two are converted to residential apartments; he rents out the one and Peter, lives on the top floor himself.
Two fifths of the building (i.e. 2 floors out of 5 floors) are used for residential letting which is excluded from the provisions of Section 13quin. This leaves three fifths (i.e. 3 floors out of 5 floors) being used to produce income during the taxpayer’s trade. Since it is “wholly or mainly used” (more than 50%) for this purpose, and is also a brand new building, it would qualify for the s13quin deduction. Even though it is partially used for residential, the allowance is applied to the cost of the entire building.
Peter’s s13quin allowance is R4,000,000 X 5% = R200,000
Section 13quat – Urban Development Zone (UDZ) Allowance
Janet owns three low-cost residential units in an UDZ, which she rents to tenants. The costs and rental income associated with the units are as follows:
Unit A – new unit erected by Janet, total cost R400,000, monthly rental income R3,500.
Unit B – new unit erected by Janet for R280,000, monthly rental income R2,500.
Unit C – purchase of brand new existing unit from developer by Janet for R200,000, monthly rental R1,800
Based on the above, Janet can claim an UDZ allowance on all three units however different rates will be applicable as per below:
Unit A –does not qualify as a low-cost residential unit as cost exceeds R350,000, therefore special rates for low-cost units do not apply.
s13quat allowance Year 1: R400,000 X 20% = R80,000
Year 2-11: R400,000 X 8% = R32,000
Unit B – does qualify as a low-cost residential unit as the cost is below R350,000 and the monthly rental is less than 1% of the cost.
s13quat allowance Year 1: R280,000 X 25% = R70,000
Year 2-6: R280,000 X 13% = R36,400
Year 7: R280,000 X 10% = R28,000
Unit C - does qualify as a low-cost residential unit as cost is below R350,000 and monthly rental is less than 1% of the cost. Since it was purchased from a developer, the allowance needs to be applied to 55% of the cost.
S13quat allowance Year 1: R200,000 X 55% X 25% = R27,500
Year 2-6: R200,000 X 55% X 13% = R14,300
Year 7: R200,000 X 55% X 10% = R11,000
Company C purchased an old building in an UDZ which it spent R2m converting to new offices. The existing structural framework was not changed.
Since this is an improvement to an existing building, Company C’s s13quat allowance is:
Year 1-5: R2,000,000 X 20% = R400,000 (How was the 20% calculated?)