The South African Revenue Service (SARS) recently warned property owners who receive rental income from hosting fee-paying guests against their tax obligation.
The tax collector emphasised that property owners who host fee-paying guests, and receive rental income, have the same obligation to declare such income to SARS, just as homeowners letting out their property.
Although the legal position is fairly clear, it appears that SARS may have identified the need to focus on improving taxpayer compliance in the property sector, said Ursula Diale-Ali, an associate designate at legal firm Cliffe Dekker Hofmeyr.
“In particular, amongst property owners who derive rental income from hosting fee-paying guests, and therefore on an ad hoc basis, rather than property owners who enter into lease agreements for longer periods of time,” she said.
Deductions and expenditures
In practice, the rental income received by the property owner should be added to any other income which that person may have received or accrued, said Diale-Ali.
“However, such person’s tax liability on the rental income can be reduced by claiming a deduction in respect of certain expenses which have been incurred during the period in which that person rented out the property, provided that those expenses meet the requirements of the general deduction formula in section 11 of the Income Tax Act (ITA).
“To this extent, private expenses or expenses of a capital nature cannot be claimed as an expense and will therefore not be allowed as a deduction.”
Diale-Ali said that the ITA also permits the deduction of expenditure actually incurred in relation to the repairs of property which is occupied for trade purposes.
“At this stage, it will become crucial for the property owner to distinguish between repairs and maintenance costs, as well as costs pertaining to the improvement of the property,” she said.
The firm said that SARS generally regards a repair and maintenance cost as a cost relating to the upkeep of an asset, while improvement costs are generally regarded as those costs relating to the enhancement of an asset which are differentiated from the costs associated with ordinary upkeep.
Based on guidance documents published by SARS, it appears that in the property rental context, the list of expenses that can be claimed as a deduction includes the following:
- Rates and taxes;
- Bond interest;
- Agency fees of estate agents;
- Homeowner’s insurance;
- Garden services;
- Repairs in respect of the area rented out; and
- Security and property levies.
Options for non-compliant taxpayers
In its statement, SARS encourages property owners who to date, have not declared their rental income to regularise their affairs with immediate effect, which can be done in terms of SARS’ Voluntary Disclosure Programme (VDP).
Failing this, non-compliant taxpayers may be selected by SARS for an audit and more stringent processes will be adopted.
“The potential downside of an audit is also that pursuant to its finalisation, SARS could issue additional assessments in terms of which additional tax, interest and penalties of up to 200% on the additional tax could be imposed,” Diale-Ali said.
“Under the VDP, only additional tax and interest will be imposed, if the VDP application is approved. SARS has expressed their enthusiasm to provide clarity and certainty for taxpayers to enable them to meet their obligations effortlessly, however it is not clear what measures (and the severity thereof) SARS will adopt to ensure taxpayer compliance in addition to current processes.”
When considering letting out residential property, the firm said that taxpayers must be cognisant of the tax obligations arising from their trading activities, as well as the tax benefits available to them in the short and long term.
“As it remains to be seen how SARS will ensure compliance with tax obligations in the property sector, taxpayers are encouraged in the meantime, to take active steps and seek professional advice to regularise their tax affairs and utilise the VDP availed to them to avoid the payment of penalties.”