Be aware of tax implications on property rentals

Tourism Month, celebrated in South Africa annually in September, marks the contribution that the industry makes to the country’s economy. 

Alan Winde, Western Cape Tourism MEC has commented that figures from South African Tourism show that in 2009 the tourism industry contributed R67.990m to the country’s economy. Many property owners take advantage of visitors to South Africa by renting their homes for prices often ranging anywhere between a few hundred rands per day to several thousands of rands. 

The Income Tax implications of renting property must not be forgotten. 

For tax purposes, the total amount of rental income made must be declared as ‘gross income’ and will be taxed at the marginal rate. Against this, non-capital expenses incurred in the production of this income are deductible.  These include commissions paid to rental agents, interest on the bond, electricity, water and rates or levies over the period let, as well as the fees paid to a char or cleaning service. All such expenses need to be apportioned to cover the period to which the trade of letting relates. 

Then there is the not inconsequential cost of insurance. The insurance cost relating to the period in which the property was let is deductible. From a financial point of view one must remember that it is highly likely that insurance on home contents will increase substantially due to the commercial use of the property. 

Where net rental losses are declared, taxpayers should be aware that the Income Tax Act contains a ring-fencing provision in section 20A. This provision may or may not be applicable, depending on the circumstances. Where it is applicable, the effect is that it disallows the set off of these rental losses against the taxpayer’s other income. 

If one lets out one’s primary residence, the primary residence exclusion of R1.5m on any capital gains made would be reduced pro-rata, to take into account the rental activities. 

For anyone thinking about evading paying tax on the income made through property rentals:  It should be borne in mind that rental agents are obliged to give to Sars a document showing the rent collected and paid over to a landlord, and in that way Sars will be able to look out for this income on the landlord’s income tax return. 

*David Warneke is an income tax partner at BDO South Africa

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