A client of mine, whose service business is operated in a close corporation (CC), recently asked me whether, if the CC were to buy the property in which it operates, it would be able to write off the capital cost of the property.
The question was an important one because if you're buying fixed property you need to take note of any tax benefits which may affect your future cash flow requirements.
The answer to the question depends on a number of factors.
In this client's case, the property was a capital asset in the CC's hands, and because the CC's business is service in nature, the property would not qualify for any tax write-offs. (There are certain structures that can be put in place that can result in there being, legally, an effective write-off of all, or some, of the capital cost of the property, but these are not viewed favourably by the SA Revenue Services (SARS) and I won't go into them any further here.)
Although at this stage my client's CC will not be able to claim any income tax benefits as a result of buying the property, if the CC sells the property in the future, provided it has not embarked on a business of trading in property, it will not pay any income tax on the proceeds of the sale.
If you are considering buying, building or improving a property you may be able to claim tax allowances against the cost of the property in the following cases:
* If the property will be used wholly or mainly (ie more than 50 percent) to house manufacturing or a similar process (SARS has issued a practice note which you can refer to to establish whether your business is a qualifying "process" or not). If it does qualify, you will be able to claim an annual allowance of either two percent, five percent or 10 percent, depending on whether you bought or built the property, and when.
* If you build, extend or improve a property which will be used for farming operations, the costs may be set off against farming income. If the farming income is less than the costs of the property, the costs can be carried forward and set off against farming income in future years.
* If you are a hotel keeper or lease to a hotel keeper, and you build or improve a hotel, you may claim an annual allowance of five percent of the total costs. Alternatively, if you improve an existing hotel, to the extent that you do not extend the existing framework of the building, you may claim an annual allowance of 20 percent. (The improvement must have begun on or after 17 March 1993.)
* In certain instances, if you build, or assist in financing the building of homes for your employees, 50 percent of the costs, up to a maximum of R6 000 per dwelling, may be claimed. (For a farmer the figure is R6 000 per employee).
If you build more than five units (which satisfy certain criteria) to be provided to full-time employees, or to be let out to tenants on a profit making basis, you may claim an investment allowance of 10 percent, and after that an annual allowance of two percent, of the total costs of building the units. This excludes amounts claimed under the provisions allowing you to claim up to R6 000 (see the previous point).
Although in many instances you may not be able to claim any income tax deductions for the purchase or building of fixed property, there are instances where you can claim some of the costs, and it's well worth being aware of them.