UDZ Allowance : is the recoupment of the allowance is taxable ? COY has a tax loss , say R 2m. which came about mainly via the allowance. Now there is a Capital gain on sale of building say R 6. Can the tax loss be off set against 80 % of the gain or does
Important:
This answer is based on tax law year ending 28 February 2017.
Answer:
In terms of section 8(4)(a), of the Income Tax Act, there shall be included in the taxpayer's income all amounts allowed to be deducted or set off under the provisions of sections 11 to 20, inclusive, … whether in the current or any previous year of assessment which have been recovered or recouped during the current year of assessment …
It therefore includes section 13quat. SARS, in their Guide to the Urban Development Zone (UDZ) Tax Allowance (Issue 7), explains it as follows:
The allowance will cease upon the sale of a building and the taxpayer will no longer qualify for any allowance from the year following the year of assessment in which the building was sold. All allowances that were previously deducted will then be subject to the recoupment provisions contained in section 8(4)(a). In addition, such taxpayer will be subject to taxation on any capital gain made on the disposal of the building.
The recoupment of the allowance will be included in gross income, paragraph (n) of the definition of gross income, and will consequently end up in the taxable income of the taxpayer for the year of assessment. The balance of the assessed loss can be deducted in arriving at the taxable income before the inclusion of the taxable capital gain (which is after the inclusion rate was applied).
Remember that the recoupment, as will the section 13quat allowances, reduce proceeds and base cost respectively.