The urban development zone UDZ tax incentive has been operating since 2003. Government had become aware of deterioration to commercial and residential buildings located in a number of cities, towns and villages in South Africa. Much of this was taking place in formerly prominent or historically notable areas, or both. Intent on preserving this heritage, Government decided to do so through the Income Tax Act by offering incentives to owners and developers in the form of allowances. If in redeveloping a building in a zone designated for urban development they retained the faҫade, which would assist in preserving the appearance of the zone, they would qualify for a particular tax allowance. If this proved impossible or impracticable but nonetheless erected a new building whose appearance was in keeping with the zone, a different allowance was available. Municipalities identified the zones suitable for regeneration, most of which were aimed at inner city regeneration and renewal.

Spindle is located in one of Cape Town's UDZs and falls into the category of new buildings whose design makes a positive contribution to the zone. Within this category are two allowances, claimable by the developer or the purchaser. As an owner in Spindle, you would qualify for the purchaser allowance, and it is on this allowance that the rest of this article will focus.

Because Spindle is a new building, you would be able to claim the allowance on 55% of your purchase price. You would claim the allowance in 11 annual tranches: 20% in the year in which you assume ownership and use the property for the first time in carrying out your trade; and 8% per year for the next ten years while you continue with your trade. Your trade may, for example, be that of a practising advocate registered as a vendor under the Value-Added Tax Act; or you may be letting your property as a residential rental enterprise, in which case you would not be required to register as a VAT vendor.

The allowance is not ring-fenced to the trade you conduct in the property. So if the allowance exceeds the income from your trade, the excess may be set off against your other income. Here are some examples: Assume a purchase price of R11 million, 80% financed by a mortgage bond, which means that the total allowance is R6 050 000.

What happens when you sell your property for, say, R25 million at the end of year 4? The gain of R14 million would be taxed as set out below. If you hold the property in a company, 80% of the gain would be taxable at 27%, namely R3 024 000.

For a trust, too, 80% of the gain would be taxable, but at 45%, namely R5 040 000.

A natural person would be taxed on 40% of the gain, namely R5 600 000 (after deducting a minimal R40 000 exclusion, which we will ignore for this example). Applying the 45% maximum marginal rate, the tax payable would be R2 520 000.

In addition, whether company, trust or natural person, you would be subject to a taxable recoupment of the R2 662 000 total UDZ allowances you’ve claimed up to the date of sale at the respective tax rate. If the property is your primary residence and you use it only as such, you won’t have access to the UDZ allowance and 40% of the R14 million gain would be and subject to CGT.

Your net gain would be R14 million, less the CGT and tax on the UDZ allowances, plus the time value of the use of the annual allowances for the four years during which you owned the property.

The UDZ allowances have been extended from their original sunset date, firstly to 31 March 2023 and currently to 31 March 2025. National Treasury and SARS are assessing the impact of the allowances over the past two decades and developers are hoping that they are extended beyond 31 March 2025, given the significant improvements they have generated on the built environment in many of our older areas. They will be looking at factors such as the extent to which the allowances have been taken up, the cost to the fiscus, the impact on building values in the UDZ what proportion of original faҫades in relation to the whole has been preserved, and generally whether the UDZ concept has achieved its objective. Spindle is cautiously optimistic on a favourable decision, but in any event is intent on meeting the 31 March 2025 deadline, bearing in mind that, as a sectional title owner, you will need to be using your property in a trade by that date in order to qualify for the allowances.

Value-added tax. As a VAT vendor, you would claim the 15% input tax on the R11 million cost price, add output tax to your business income or rent, as the case may be, and you would be liable for output tax on the R25 million selling price.

Professor Peter Surtees

MCom (Rhodes) CA(SA)