I have a client residing in Cape Town but renting out a house in Melville Johannesburg. I have claimed 2% depreciation on the building. I based my claim on the value of the building by submitting the insurance agreement with the insurance company to proof
Important:
This answer is based on tax law for the tax year ending 28 February 2017.
Answer:
It would have been interesting to see the exact wording in the SARS letter of audit (or verification) findings. If the ‘letter’ that you refer to is the notice of disallowance of the objection (you mentioned appeal), we would need to know the grounds of your objection. In essence, we are not sure in terms of which section you made the deduction, but we suspect that the client may not have been entitled to make the deduction.
With regard to section 11(e) of the Income Tax Act, the position is, see proviso (ii), that “in no case shall any allowance be made for the depreciation of buildings or other structures or works of a permanent nature”. The house would be a building and consequently, no deduction under section 11(e) is possible.
The section 13ter deduction is only available if the building is a ‘residential unit’ (a defined term) or improvement thereto and was acquired, or the erection of which commence, before 21 October 2008. The allowance is indeed 2%, but is then based on cost to the taxpayer of any residential unit and not on an insurance value. Another requirement is that the ‘residential unit’ must then be a “residential unit erected by the taxpayer under a housing project of the taxpayer”. For purposes of section 13ter, a “housing project” means “any project for the erection of a building or buildings in the Republic consisting of or including at least five residential units”.
If the taxpayer only has one house, this requirement would not have been met.
Similarly, if the house was acquired after 21 October 2008, section 13sex requires that “the taxpayer owns at least five residential units within the Republic, which are used by the taxpayer for the purposes of a trade carried on by the taxpayer”.