Sars "misses a property trick"
David Warneke

How to cut tax and make everyone's money go much further - expert

Realestateweb's guest columnist and tax Partner at Cameron & Prentice Chartered Accountants David Warneke revisits the Revenue Laws Amendment Bill of 2008 - which has implications for property investors. He says a new housing allowance is only second prize.

The Revenue Laws Amendment Bill of 2008 proposes an allowance for employers who sell low cost housing to their employees.

Briefly, the general idea is that the sale of the low cost housing to the employee has to be on interest-free loan account, for a price that is no higher than the cost of the housing to the employer. The allowance granted to the employer is 10%, per annum, of the loan balance outstanding at each tax year end of the employer.

For example, if the employer sells a low cost house to an employee for R100 000 and does not demand any repayment for 10 years, the employer would enjoy an allowance of R10 000 each year for 10 years.

The Explanatory Memorandum to the Bill states that the employer will have to own at least 5 residential units in the same geographical vicinity in order to qualify for a deduction. However, this requirement is absent from the Bill. Therefore a taxpayer who owns only one such unit would qualify for a deduction.

However, taxpayers who wish to provide for their domestics by transferring a low cost house to them will not be able to benefit from this provision. The reason is that the Income Tax Act expressly disallows, as a deduction, any expense which is for the maintenance of the taxpayer's family or establishment. For this reason expenses related to the employment of domestics do not qualify for deduction.

It seems that National Treasury may have missed a trick here. The cost to the fiscus would be considerably less if private individuals were to be given a tax incentive to provide low cost housing than if the State had to provide the low cost housing. In the former case the cost to the fiscus would be a maximum of 40% of the cost of the housing, and in the latter case, 100%. Also, it is suggested that a 10 year write-off period is too long to excite employers.

Further points regarding the new allowance are as follows:

* A "low-cost residential unit" is defined as a building, the cost of which does not exceed R200 000 (exclusive of the cost of the land), or an apartment, the cost of which does not exceed R250 000 (exclusive of the cost of the land).

* The selling price of the unit to the employee cannot exceed the original cost, to the employer, of the unit and the land.

* The sale has to be on loan account and, further, the loan has to be interest-free.

* The disposal to the employee cannot be subject to any condition, other than for the re-sale of the unit to the employer on termination of service by the employee or the resale to the employer where there is a consistent failure by the employee to repay any amount owing to the employer after three months. The resale cannot be at more than the original cost of the unit (and the land) to the employer.

* The provision also applies where the taxpayer disposes of a residential unit to the employee of an employer that forms part of the same group of companies as the taxpayer, for example where the property is owned by a company within a group but the employer is another group company. In these circumstances the property-owning company would claim the tax deductions.

* The provision will apply to sales of units taking place after 21 October 2008.

* If the employee repays any portion of the capital outstanding on the loan, a recoupment will arise in the employer's hands.

It is, however, wise to consult your tax adviser closely if this is an option you are considering.

About the Realestateweb guest expert: David Warneke is tax partner at Cameron & Prentice, a Senior Lecturer in Tax at UCT and co-author of a text that is used at most universities throughout South Africa.

Disclaimer: This article does not constitute individual advice. You are urged to consult a professional in connection with your own transactions.

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