Article by STBB Property Investors Club
Designed to incentivise property investment, section 13sex of the Income Tax Act (‘the Act’) provides a valuable – and often underutilised – tax deduction tool for individuals and entities investing in new and unused residential rental properties in South Africa.
Introduced in 2008 to simulate the growth of the residential rental sector, section 13sex of the Act entitles a taxpayer to deduct 5% of the building cost of any new and unused residential unit or improvement to such a unit, provided certain conditions are met.
These conditions are as follows:
If the unit qualifies as a low-cost residential unit, an additional 5% deduction is permitted in terms of section 13sex(2), bringing the total allowable deduction to 10% per annum. Generally, SARS defines low-cost units based on specific criteria relating to unit size, cost, and rental thresholds, which makes this additional allowance particularly attractive for investors targeting the affordable housing market.
While section 13sex does not expressly impose a time limit on the duration over which deductions can be claimed, the practical effect of the 5% per annum allowance is that the full cost of the qualifying residential unit (or improvement) can be deducted over 20 years (5% × 20 years = 100%). Correspondingly, the deduction is spread over 10 years for low-cost residential units.
Importantly, section 13sex(3) limits the allowable cost to the lower of the actual cost incurred or the market-related cost under an arm’s-length transaction. Where a taxpayer acquires only part of a building (e.g., a sectional title unit), section 13sex(8) deems 55% of the acquisition price to be the cost of the unit, and 30% in the case of an acquired improvement.
In addition, it is essential to note that no deduction is allowed where the unit has already been disposed of in a prior tax year, or where any portion of the cost has qualified for a deduction under another provision of the Act, per section 13sex(6). Moreover, the aggregate of all deductions under section 13sex and any other provision may not exceed the original cost of the unit or improvement, in line with section 13sex(7).
For developers and investors building a portfolio of rental units, understanding and utilising section 13sex has significant tax advantages. When applied correctly, the provision can substantially improve after-tax internal rate of return (‘IRR’), support cash flow planning, enhance the financial feasibility and viability of large-scale residential development, and provide a predictable tax benefit over time. Strict compliance with all legislative conditions, however, is required.
If you are in the process of developing or acquiring residential units for rental, it is imperative to structure your transactions from the outset to comply fully with the requirements of section 13sex. Accordingly, it is strongly recommended to engage a skilled and qualified legal advisor to ensure that you gain optimal benefit from this crucial tax provision.
For expert legal guidance in all property and related matters, contact our professionals at info@stbb.co.za.
