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Income Tax Act, 1962 (Act 58 of 1962)

Chapter II: The Taxes

Part I: Normal Tax

13quat. Deductions in respect of erection or improvement of buildings in urban development zones

 

(1)        For the purposes of this section—

 

‘certificate of occupancy’

[deleted by the Taxation Laws Amendment Act No. 17 of 2009];

 

cost’ means the costs (other than borrowing or finance costs) actually incurred in erecting or extending, adding to or improving a building or part thereof and includes any costs incurred—

(a) in demolishing any existing building or part thereof;
(b) in excavating the land for purposes of that erection, extension, addition or improvement; and
(c) in respect of structures or works directly adjoining the building or part so erected, extended, added to or improved, for purposes of providing—
(i) water, power or parking with respect to that building or part;
(ii) drainage or security for that building or part;
(iii) means of waste disposal for that building or part; or
(iv) access to that building or part, including the frontage thereof;

 

developer’ means a person who—

erects, extends, adds to or improves a building or part of a building—

(a) with the purpose of disposing of that building or part thereof immediately after completion of that erection, extension, addition or improvement; and
(b) disposes of the building or part of a building within three years after completion of that erection, extension, addition or improvement;

 

purchase price’ in relation to any building or part of a building purchased by the taxpayer means the lesser of—

(a) the actual cost to the taxpayer to purchase that building or part; or
(b) the cost which a person would have incurred had that person purchased that building or part under a cash transaction concluded at arm’s length on the date on which that taxpayer purchased that building or part;

 

urban development zone’ means an area demarcated by a municipality in terms of subsection (6), the particulars of which were published in the Gazette in terms of subsection (8);

 

(2) There must be allowed to be deducted from the income of the taxpayer an allowance determined in terms of subsection (3) or (3A) in respect of the cost of the erection, extension, addition or improvement of any commercial or residential building or part of a building which is owned by the taxpayer and is used solely for purposes of that taxpayer’s trade, if—
(a) That building is situated within an urban development zone;
(b) The erection, extension, addition or improvement was commenced by the taxpayer or the developer, as the case may be, on or after the date of publication of the notice contemplated in subsection (8) in respect of that urban development zone, in terms of a contract formally and finally signed by all parties thereto on or after that date; and
(c) the erection, extension, addition to or improvement by the taxpayer or developer covers either the entire building or a floor area of at least 1000 m² of that building; and
(d) in the case where the taxpayer purchased that building or part from a developer—
(i) the agreement to purchase was concluded on or after 8 November 2005;
(ii) that developer has not claimed any allowance under this section in respect of that building or part; and
(iii) if the developer improved the building or part as contemplated in subsection (3)(b) or (3A)(b), that developer has incurred expenditure in respect of those improvements which is equal to at least 20 per cent of the purchase price paid by the taxpayer in respect of that building or part.
(e) [deleted by the Revenue Laws Amendment Act No. 60 of 2008].

 

(2A) For the purposes of this section, if a taxpayer completes an improvement as contemplated in section 12N, the expenditure incurred by the taxpayer to complete the improvement shall be deemed to be the cost of the erection, extension, addition or improvement contemplated in subsection (2).

 

(3) The amount of the allowance contemplated in subsection (2)—
(a) in the case of the erection of any new building or the extension of or addition to any building (other than a building in respect of which paragraph (b) applies), is equal to—
(i) 20 per cent of the cost to the taxpayer of the erection or extension of or addition to that building, which is deductible in the year of assessment during which that building is brought into use by that taxpayer solely for the purposes of that taxpayer’s trade; and
(ii) eight per cent of that cost in each of the 10 succeeding years of assessment; or
(b) in the case of the improvement of any existing building or part of a building (including any extension or addition which is incidental to that improvement) where the existing structural or exterior framework thereof is preserved, is equal to—
(i) 20 percent of the cost to the taxpayer of the improvement, extension or addition which is deductible in the year of assessment during which the part of the building so improved, extended or added is brought into use by the taxpayer solely for the purposes of that taxpayer’s trade; and
(ii) 20 per cent of that cost in each of the four succeeding years of assessment.

 

(3A) The amount of the allowance contemplated in subsection (2)—
(a) in the case of the erection of any new building or the extension of or addition to any building, to the extent that it relates to a low-cost residential unit, (other than any improvement in respect of which paragraph (b) applies) is equal to—
(i) 25 per cent of the cost to the taxpayer of the erection or extension of or addition to that building, which is deductible in the year of assessment during which that building is brought into use by that taxpayer;
(ii) 13 per cent of that cost in each of the five succeeding years of assessment; and
(iii) 10 per cent of that cost in the year of assessment following the last year contemplated in subparagraph (ii);
(b) in the case of the improvement of any existing building or part of a building, to the extent that it relates to a low-cost residential unit, (including any extension or addition which is incidental to that improvement) where the existing structural or exterior framework thereof is preserved, is equal to—
(i) 25 per cent of the cost to the taxpayer of the improvement, which is deductible in the year of assessment during which the part of the building so improved, is brought into use by the taxpayer; and
(ii) 25 per cent of that cost in each of the three succeeding years of assessment.

 

(3B) For purposes of subsection (3) or (3A), where the taxpayer purchased a building or part of a building from a developer—
(a) 55 per cent of the purchase price of that building or part of a building, in the case of a new building erected, extended or added to by that developer as contemplated in subsection (3)(a) or (3A)(a); and
(b) 30 per cent of the purchase price of that building or part of a building, in the case of a building improved by that developer as contemplated in subsection (3)(b) or (3A)(b),

is deemed to be costs incurred by that taxpayer in respect of the erection, extension, addition to or improvement of that building or part of a building.

 

(4) No deduction shall be allowed under this section, unless the taxpayer has obtained or determined the following for submission to the Commissioner in such form and within such time as may be prescribed by the Commissioner—
(a) a certificate issued by the municipality to the taxpayer confirming that the building is located within an urban development zone within that municipality;
(b) the total amount of the costs to the taxpayer (other than a taxpayer contemplated in paragraph (d)) of the erection, extension, addition or improvement and the extent that those costs relate to any portion of a building;
(d) particulars as to whether the costs referred to in paragraph (b) were incurred in respect of the erection or extension of or addition to a building as contemplated in subsection (3)(a) or the improvement of a building as contemplated in subsection (3)(b); and
(e) in the case of a taxpayer who purchased the building or part of a building from a developer—
(i) the purchase price of that building or part;
(ii) the amount of the purchase price deemed to be a cost incurred by the taxpayer in terms of subsection (3A); and
(iii) a certificate from the developer in the form prescribed by the Commissioner confirming that the requirements in subsection (2)(b), (c) and (d) have been met.

 

(5) No deduction shall be allowed under this section in respect of any building or part of a building—
(a) where that taxpayer ceased to use that building, or part solely for purposes of that taxpayer’s trade during any previous year of assessment in or prior to which an allowance contemplated in subsection (2) was claimed;
(b) which has been disposed of by the taxpayer during any previous year of assessment, or
(c) which is brought into use by the taxpayer after 31 March 2020.

[Subsection (5)(c) substituted by section 34(1) of Act No. 22 of 2012 - effective 30 March 2014]

(6) For the purposes of this section, one area may be demarcated by a municipality where—

(a)

(i) that area is a developed urban location within the municipality of Buffalo City, Cape Town, Ekurhuleni, Emalahleni, Emfuleni, eThekwini, Johannesburg, Mahikeng, Mangaung, Matjhabeng, Mbombela, Msunduzi, Nelson Mandela, Polokwane, Sol Plaatje or Tshwane;
(ii) that area is demarcated through formal resolution by the relevant municipal council;
(iii) that area is prioritised in that municipality’s integrated development plan adopted and undertaken in terms of Chapter 5 of the Local Government: Municipal Systems Act, 2000 (Act No. 32 of 2000), as a priority area for further investments to promote business or industrial activity or residential settlements to support such activity;
(iv) that area proportionately contributes or previously contributed a significant portion of the total revenue collections for all areas located within the current boundaries of that municipality, as measured in the form of—
(aa) property rates; or
(bb) assessed property values,

and where the contribution from that area is undergoing a sustained real or nominal decline; and

(v) significant fiscal measures have been implemented by that municipality to support the regeneration of that area, including—
(aa) the appropriation of significant funds for developing the area in the annual budget of the municipality;
(bb) special tariffs for categories of residential, commercial or industrial users; or
(cc) partnership arrangements with the business community for the promotion of urban development within that area; or
(b) that area is approved by the Minister by notice in the Gazette, after application by a municipality in the form and manner and at the place and time that the Minister prescribes, if the area complies with criteria as the Minister must prescribe by regulation.

[Subsection (6) substituted by section 38(a) of the Taxation Laws Amendment Act, 2016 (Act No. 15 of 2016)]

 

(7)        

(a) Subject to paragraph (d), the area demarcated in terms of subsection (6) may not exceed—
(i) where that municipality has a population of not more than 500 000 persons, a total area of 150 hectares; or
(ii) where that municipality has a population of more than 500 000 persons, 150 hectares plus 20 hectares for each additional 100 000 persons included in that population.
(b) Where that municipality has a population of 1 million persons or more, the municipal council may demarcate two areas in lieu of the one area demarcated in terms of subsection (6): Provided that—
(i) the two areas do not in total exceed the one area contemplated in paragraph (a)(ii); and
(ii) each area otherwise satisfies the requirements of subsection (6).

[Subsection (7)(b) amended by section 32(1)(b) of the Taxation Laws Amendment Act, 2015 (Act No. 25 of 2015]

(bA) Where a municipality has a population of less than 1 million persons the Minister may by notice in the Gazette approve that municipality for the purposes of paragraph (b) in terms of subsection (6)(c).

[Subsection (7)(bA) substituted by section 38(b) of the Taxation Laws Amendment Act, 2016 (Act No. 15 of 2016]

(c) For purposes of this subsection, the population of a municipality shall be the population figures as determined by Statistics South Africa in the Census for 2011 and the total population of that municipality must be rounded to the nearest multiple of 100 000.

[Paragraph (c) amended by section 32(1)(d) of the Taxation Laws Amendment Act, 2015 (Act No. 25 of 2015]

(d) The area demarcated in terms of subsection (6) may exceed the limits contemplated in paragraph (a) where—
(i) the municipality proves to the Minister that the excess area is integrally related to the area within the limitation contemplated in paragraph (a);
(ii) the municipality can prove to the Minister that sound economic reasons exist for demarcating a larger area; and
(iii) [deleted by the Revenue Laws Amendment Act No. 60 of 2008]; and
(iv) the Minister is satisfied that the demarcation of the excess area would fall within Government’s affordability constraints.

 

(8) The Minister must publish by notice in the Gazette particulars of an area demarcated by a municipality after that municipality has proved to the Minister that the area so demarcated complies with the provisions of subsection (6).

 

(9) Every municipality must provide a report annually to the Commissioner and the Ministerin respect of each urban development zone located within that municipality containing such information, within such time and in such manner as is prescribed by the Minister.

 

(10)        Where—

(a) a municipality does not provide an annual report as contemplated in subsection (9) or the Commissioner reports to the Minister that the municipality has issued a certificate contemplated in subsection (4)(a) in respect of a building that is located outside an urban development zone; and
(b) corrective steps are not taken by that municipality within a period specified by the Minister,

the Minister may withdraw the notice contemplated in subsection (8) for that municipality in respect of contracts formally and finally signed by all parties thereto on or after the date of withdrawal.

 

(10A) Every developer who erects, extends, adds to or improves any building within an urban development zone must, if the estimated cost of that erection, extension, addition or improvement is likely to exceed R5 million—
(a) inform the Commissioner within 30 days after commencement of the erection, extension, addition or improvement of the estimated costs thereof in respect of the building or the parts which the developer intends to sell and the estimated selling price of that building or those parts; and
(b) inform the Commissioner within 30 days after sale of the building or all anticipated sales of any parts of the building have been concluded of the actual costs incurred in respect of that building or parts and the actual selling price of that building or parts thereof.

 

(10B) If the Commissioner has reason to believe that the information provided in the certificate by a developer as contemplated in subsection (4)(d)(iii) is not correct, the Commissioner must disallow any deduction claimed under this section, unless sufficient information is provided to the Commissioner to prove that the information contained in that certificate is correct.

 

(11) The Commissioner must on an annual basis submit a report to the Minister containing information relating to—
(a) the number of taxpayers which have during the relevant year claimed an allowance in terms of this section;
(b) the total amount of the deductions by taxpayers allowed in that year in terms of this section; and
(c) the total amount of the costs to those taxpayers which are or will be allowable as a deduction in terms of this section.