Tax incentives for employers who transfer low-cost residential units to employees

Included in the draft Revenue Laws Amendment Bill is a provision (section13sept) aimed at encouraging employers to transfer ownership in low-cost houses or apartments to employees. Tax Partner at Cameron & Prentice Chartered Accountant, David Warneke, explains, that while this provision may appear to be aimed predominantly at farmers, the wording of the provision certainly does not restrict it only to these taxpayers.

Currently, where an employer transfers a house or apartment to an employee, no tax incentives exist. In the Explanatory Memorandum accompanying the Bill, the shortage of housing in South Africa and government's plans to provide an environment conducive to home ownership are cited as reasons for the introduction of the incentive.

The benefits of this incentive are similar to those in another proposed incentive (section 13sex) for employers who build residential units for employees and do not transfer ownership to the employee. Therefore, whether or not the ownership in the housing is transferred to the employee, there will be an incentive for the building of residential housing for employees, as the employer will either be able to claim an allowance under this provision (section 13sept - where the ownership is transferred to the employee) or under section 13sex (where the employer retains ownership).

In order to benefit in terms of section 13sept, the employer will have to sell the accommodation to the employee on interest-free loan account. The employer will then be able to deduct, for income tax purposes, an amount equal to 10% of the capital of the initial loan per annum over 10 years, or as long as the loan arrangement lasts. It is probably an oversight with the current wording of the provision that if the employer were to waive the indebtedness of the employee, no further deductions may be claimed. If the employee repays portion of the capital outstanding on the loan, a recoupment will arise in the employer's hands.

The following example is given in the Explanatory Memorandum:

Facts: An employer constructs a house for R100 000 with the allocable land having cost R20 000. In Year 1, the employer transfers ownership of the house to an employee for R120 000 on a non-interest bearing loan account provided by the employer. The loan is repayable over 20 years. The employer transfers ownership of the house subject to a condition that the employee remains in the employ of the employer for a minimum period of 5 years. The employee will be entitled to the market value of the house at the date of the potential return. In Year 2, the employee repays R20 000 of the loan provided by the employer in Year 2.

Result: In each of the Years 1 and 2, the employer is entitled to a deductible allowance of R12 000 on the loan provided to the employee.

However, the employer has a recoupment of 20 000 in Year 2 due to the repayment of the loan capital by the employee.

It is required that the residential unit must be a "low-income residential unit", which is defined as a building, the cost of which does not exceed R200 000 exclusive of the land and the bulk infrastructure, or an apartment, the cost of which does not exceed R250 000. In the draft Bill no mention is made of the cost of the land or bulk infrastructure in the context of the R250 000. However the Explanatory Memorandum and the Bill appear to be at odds. In the Explanatory Memorandum the R200 000 and the R250 000 are inclusive of the land but not the bulk infrastructure for section 13sept, while these amounts are exclusive of the land and the bulk infrastructure for the purposes of section 13sex. It remains to be seen whether the Bill will be amended.

A further requirement is that the employer may not charge a rental of more than 1% per month of the actual cost of the unit (as determined above).

Also, the low cost residential unit must be part of a residential establishment that consists of at least five residential units in the same geographical vicinity. It is further required that the disposal to the employee cannot be subject to any condition, other than two possibilities on termination of service by the employee. These are for the repurchase by the employer at market value at that time or repayment of the balance of the loan amount owing.

The provision would also apply 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.

A number of gremlins have crept into the wording of the draft which one hopes will be corrected before the Bill is passed into law. It is also interesting that the terms "bulk infrastructure", "apartment" and "same geographical vicinity" are not defined. It is also doubtful, based on the current wording of the draft, whether the recoupment of the allowance would operate as envisaged in the example above.

About David Warneke

A true academic with entrepreneurial flair, David Warneke graduated with an Honours degree in Financial Accounting from the University of Cape Town. He also has a Graduate Diploma in Taxation and a Masters degree in Tax Law.

After completion of his training contract, he opened his own practice in 1994. He joined Cameron & Prentice as Partner in 2007. His experience and expertise as a tax professional is of enormous value to the Cameron & Prentice team, staff and clients alike.

David continues to uphold his interest in academia. He is currently Senior Lecturer in Taxation at the University of Cape Town and co-author of a text on taxation that is prescribed at most leading universities in South Africa.