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Tax implications for buying commercial property
chris Nthite
Posted: Tue, 10 May 2005 17:02 | © Moneyweb Holdings Limited, 1997-2005

Buying a commercial property is not a walk in the park as there are complex tax implications that should be navigated by the potential buyer, particularly the small and medium enterprise (SME) owner.

Gerhard Zeelie, head of commercial property finance at First National Bank (FNB) points out that the small to medium sized business owner is often unaware of the tax implications relating to the acquisition of commercial or industrial properties.

According to Zeelie, tax issues could have a significant impact on the perceived benefits and risks associated with the acquisition of property.

“Although the tax implications can be quite complex there are general principles that can assist business owners in making property decisions,” says Zeelie.

“These include VAT and Transfer Duty, Income Tax and Capital Gains Tax,” he explains.

VAT and transfer duty
Zeelie discloses that Value Added Tax (VAT) or transfer duties payable on the acquisition of properties are claimable for VAT purposes if the property is used to derive rental income from tenants or if the property is used by the owner as a business undertaking.

The amount claimed can in some instances only be a portion of the amount paid, depending on the nature of the business operated from the property.

According to Zeelie, if the owner of a property is registered for VAT and eventually sells the property, VAT will need to be levied on the sale of the property. “If the owner is not registered for VAT then Transfer Duty will become payable on the transaction,” he explains.

In the case of a VAT vendor, adds Zeelie, VAT will also need to be levied on the rental received in respect of a property.

Income tax
“Apart from the recently introduced section in the Income Tax Act dealing with capital allowances in respect of Urban Development Zones, there currently exist no other capital allowances (deductions) for commercial and industrial properties in the Income Tax Act,” says Zeelie.

However, he adds, tax deductions will be allowed on all costs relating to the financing of the property, including structuring fees and interest.

“Rental income from these properties is taxable, but related expenses can also be claimed against this income,” he says.

Capital gains tax
A portion of the capital gain arising from the sale of a commercial or industrial building will be taxable. According to Zeelie, the portion that is taxable depends on the nature of the owner of the property.

“If the owner is a natural person then only 25% of the gain will be taxable … in all other cases 50% of the gain will be taxable,” says Zeelie.

“While capital gains tax is widely misunderstood in the market, it is in effect quite simple,” adds Zeelie,

“The amount by which the property appreciates over its initial purchase price is the capital gain, whilst the taxable capital gain is derived after applying the 50% or 25% factor as explained above,” Zeelie clarifies.

Zeelie advises that it is paramount that a potential buyer of commercial and industrial property seeks the advice of a knowledgeable person to guide them through the tax and other financial implications pertaining to the acquisition of the property.

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© Christoph von Kalckreuth, Kapstadt, Südafrika 2005