This week, the YourProperty panel considers a query from a landlord about which expenses can be deducted from rental income.
According to Schalk van der Merwe from Rawson Properties in Somerset West, Cape Town, there are two main provisions of the Income Tax Act that deal with such deductions.
“These two provisions are useful in attempting to clarify which expenses can indeed be deducted.”
Van der Merwe says the so-called “general deduction” provides for “expenditure and losses actually incurred in the production of the income, provided such expenditure and losses are not of a capital nature”.
“This would include expenses such as rates and levies, advertising, agent’s commission and rent collection fees, the interest on the loan raised to purchase the property as well as insurance, security expenses, water and electricity.”
Van der Merwe says another section of the Act refers to expenditure actually incurred in repairing a property occupied for the purpose of trade.
“This includes expenditure incurred on treatment against attack by beetles of any timber forming part of such property.”
The reference to “for the purpose of trade” does not mean that the property is to be used for commercial purposes, says Van der Merwe.
“In this instance, the renting out of the property constitutes a commercial activity as would be the case in a buy-to-rent scenario.”
Grant Hill of Miller Bosman Le Roux Attorneys in Somerset West says a repair is different from an improvement or renewal and the guidelines laid down in the 70-year-old case of CIR v African Products Manufacturing Co still stand.
“A repair is a restoration by either a renewal or replacement of a subsidiary party of the whole; the materials used need not be the same as the original material.”
Hill says it follows then that renewal is a reconstruction of the entirety or substantially the entirety, whereas improvement is the creation of a better asset.
“When an asset is improved the result is a better asset that possibly has an improved income-earning capacity.”
However, the distinction between “repair” and “improvement” is sometimes vague, says Hill.
“For an asset to be repaired, there must be damage or deterioration to a part of the original asset or structure and the intention of the taxpayer must be to restore the asset or structure to its original condition.”
Hill says some examples of such deductible costs include the costs of scraping off old paint and stripping woodwork, filling cracks in walls and repainting walls.
“The cost of installing a sprinkler system will be of a capital nature, but should any part of an existing sprinkler system be repaired or replaced when it becomes faulty, such costs will be deductible expenses in terms of this provision.”
From these examples it is clear that no expenditure of a capital nature is allowed under the general deductions, says Hill.
“It is not excluded under the provision relating to repairs but it does follow that whatever repairs you are not able to deduct under that provision will not be deductible under general deductions either.”
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