INTRODUCTION
The Urban Development Zone Tax Incentive programme was created by the Minister of Finance, in conjunction with South Africa's primary cities, inclusive of eThekwini Municipality, in 2003. It was designed to enable property owners seeking to upgrade or to construct new buildings in designated central business districts to adopt an accelerated building depreciation approach, as allowed for in terms of the Income Tax Act (58 of 1962) and section 33 (7) of the Revenues Law Amendment Act (45 of 2003), including section 13 quat. The Act makes it permissible for owners and/or developers of property to write-off building costs against business income in areas specifically designated as Urban Development Zones.
In 2005, the Revenue Laws Amendment Act was revised so as to also provide incentive access for taxpayers purchasing structures, or parts of such structures, from developers - such as sectional title units - with additional significant revisions made in 2008. Such amendments included an extension to the Urban Development Zone programme's expiry date from 2009 to 2014, a reduction in the new builds claiming period, from 17 to 11 years, and the extension of the programme to include low-income residential developments.
The Urban Development Zone was extended by the South African Revenue Service in 2020 to March 2021. However, to assist in activating the construction and property and to enable the city to continue with its inner-city regeneration programme, the allowance has been further extended to 31 March 2030.
PURPOSE
The underlying purpose of the Urban Development Zone Tax Incentive is to promote capital investment in the country's designated Urban Development Zones, thus giving effect to urban area regeneration and attendant economic growth.
At the end of 2020, the Ministry of Finance appealed to Municipalities that had demarcated Urban Development Zones to review the incentive, providing both qualitative and quantitative information regarding the beneficial contribution the incentive had made to the local economy, the cost of each zone to the South African economy, linkages between such zones and the rest of the local economies, the economic impact of legislative amendments to the incentive and whether the incentive had been effective in reaching its original objective.
In addition, Municipalities were requested to update their annual reporting requirements and to share any available analytical reports. They and Urban Development Zone investors were also to be invited to participate in a survey to illicit information regarding various aspects of the tax incentive.
GUIDE TO THE URBAN DEVELOPMENT ZONE INCENTIVE
A South African Revenue Service guide to the Urban Development Zone allowance incentive has been produced for the benefit of potential investors.
The guide, amongst others, provides:
• A general guide with regard to the application and interpretation of the provisions of the Act pertaining to the allowance incentive;
• An overview of the tax implications associated with the disposal of a building on which the incentive had previously been allowed or the ceasing of a taxpayer to utilise such a building solely for the purposes of that person’s trade; and
• Information about Municipalities which have implemented demarcated areas for the purpose of the incentive and the process of demarcation followed.
It should be noted that the guide is based on prevailing legislation at time of its issue. Detailed information about the Urban Development Zone Incentive is available by:
• Visiting the SARS website at www.sars.gov.za;
• Visiting a branch of SARS;
• Contacting a tax advisor or practitioner;
• Contacting the SARS national contact centre:
Calling locally: 0800 00 7277;
Calling from abroad: +27 11 602 2093 (only between 8am and 4pm South African time).
REQUIREMENTS
Requirements pertaining to the incentive are briefly outlined here, courtesy of the document titled Legal Counsel Income Tax - Guide to the Urban Development Zone Allowance, issued by the South African Revenue Service.
Any person will be eligible to deduct the allowance only if all the following requirements are complied with:
• Building requirement;
• Urban Development Zone requirement;
• Trade requirement;
• Owner requirement;
• Date requirement.
Building Requirement -
Before an allowance may be deducted, certain requirements relating to the building must be complied with. A building is regarded as being a substantial structure, more or less of a permanent nature, comprising walls, a roof and the necessary appurtenances thereto. When deducting the allowance, only the cost of the erection, extension, addition to or improvement of the building will qualify for the allowance, whilst the cost of the land is specifically excluded.
Urban Development Zone Requirement -
The building or part of the building that was constructed, extended, added to or improved, or purchased from a developer, must be located within an Urban Development Zone. Several criteria were taken into account in the demarcation of such areas to ensure that the impact of the allowance was maximised in the parts of the cities that were most in need of development.
Trade Requirement -
A taxpayer will qualify for the allowance only if the relevant commercial or residential building or part of the building that has been erected, extended, added to or improved by the taxpayer, or purchased by the taxpayer from a developer, is situated within an Urban Development Zone and is used by the taxpayer solely for the purposes of trade. Further, the allowance commences only once the building has been brought into use solely for the purposes of the taxpayer’s trade.
A building is considered to have been brought into use when it is actually used by the taxpayer for the first time in order to conduct trading activities. Activities leading up to a taxpayer earning income will also be considered to be trading activities, as long as they are conducted with the intention of earning income for that particular trade; for example, advertising an unoccupied apartment for rental purposes. However, should the apartment be used for the taxpayer’s own private residential purposes while advertising the property for letting purposes, the taxpayer will be regarded as having commenced carrying on a trade in relation to the apartment only once tenants have been secured and occupation has taken place.
Owner Requirement -
The building or part of the building that was erected, extended, added to or improved must be owned by the person deducting the allowance.
An “owner” is not defined in the Act and therefore takes its common law meaning. Ownership in immovable property such as land and buildings is indicated and confirmed by the title deed registered in the Deeds Office. Ownership in land can be conveyed from one person to another only by a deed of transfer, executed by the registrar under the Deeds Registries Act, 47 of 1937. Thus, a person that leases a newly constructed building from another cannot deduct the allowance for any costs incurred in extending, adding to or improving the building, since the person is not the owner. There are, however, limited instances in which a lessee that erects a building or carries out improvements to an existing building owned by a qualifying party in an Urban Development Zone will be regarded as “owner” of the building or improvements and will therefore meet this requirement.
Date Requirement -
The erection, extension, addition to or improvement of the building must have commenced :
• On or after the date on which the Minister has published the particulars of the relevant demarcated area within which the building is located in the Gazette; and
• Under a contract formally and finally signed by all parties on or after that date. A taxpayer purchasing a building or a part of a building from a developer must have concluded on or after 8 November 2005.
Since the requirement is that the erection, extension, addition or improvement must have commenced “in terms of a contract formally and finally signed by all the parties thereto” on or after the date that the Urban Development Zone is demarcated, the relevant agreement must meet all the requirements of a valid contract. It also means that a verbal contract will not suffice. It is not required that the contract be unconditional as at the relevant date, merely that it must be a valid contract and have been signed by all the parties.
No allowance may be deducted in instances in which the erection, extension, addition to or improvement occurs before the demarcation date, since these projects would in all probability have been undertaken in any event. This means that even those costs relating to the demolition of an existing building or the excavating of the land which were incurred prior to the date of demarcation, will be ineligible for an allowance under section 13quat.
(source regarding all the above 'Requirements': Legal Counsel, Income Tax, Guide to the Urban Development Zone Allowance (Issue 7) South African Revenue Service)
URBAN DEVELOPMENT ZONE - ETHEKWINI MUNICIPALITY DURBAN INNER CITY
The Urban Development Zone concept is regarded by eThekwini Municipality as a cornerstone for urban renewal in the inner city.
The Urban Development Zone tax allowance incentive allows property owners who upgrade or erect new buildings in the demarcated CBD area to depreciate their buildings in an accelerated manner. The Income Tax Act (58 of 1962) permits property owners/developers to write-off building costs against the income of businesses in promulgated Urban Development Zone areas. The aim of this tax incentive is to regenerate urban areas and business districts, thus stimulating economic development. The implementation of the incentive encourages capital investment in buildings in Urban Development Zone-defined areas.
EThekwini Municipality's previously-approved Urban Development Zone comprised Durban's greater central business district, but was restricted to areas encompassing (and previously referred to as) Bell Street to Shepstone Rd, the Victoria Embankment, Alexandra Street, Berea Road, Carters Ave, Canongate Road, Warwick Ave, Centenary Road, Carlisle Road, First Ave, Stamford Hill Road, Croydon Road. Walter Gilbert Road, Cobham Road, Old Fort Road, NMR Ave, Somtseu Ave, Stanger Street, Argyle Road, NMR Ave and Walter Gilbert Road.
EThekwini Municipality's Urban Development Zone was extended to include four additional city areas, as detailed in the Government Gazette (number 34264) dated 05 May 2011. The extended area included:
The Point -
The Point includes the area from the existing boundary of Bell road, running south into Albert street, east into King Shaka Avenue and the Ushaka Marine World parking area walkway and into Camperdown Road to the beachfront and continuing to the harbour entrance and parallel to harbour entrance into Mahatma Ghandi Road, before linking once more with Bell Street.
Congella -
Congella encompasses both a part of the Warwick and upper Congella areas and connects with the existing Market Road boundary, continuing to and along Sydney road and then turning to run along Canberra Road and into Magwaza Maphalala and Gale Place, before turning to run along midblock parallel to Umbilo Road. It also partially includes Eden Road before reverting to Umbilo Road midblock before reaching King Dinuzulu Road, where it continues to rejoin Market Road.
Warwick -
Warwick is a triangular area bordered north and south by the in- and out-bound lanes of the N3 freeway and by Julius Nyerere Avenue to the east. This demarcation links the existing boundary off Carters Road, continuing along Chris Ntuli Road to Julius Nyerere Avenue.
Greyville -
Greyville is bounded by Greyville Racecourse, with the demarcated area connecting the existing boundary at ML Sultan Road and continuing along Gladys Manzi Road and into Osborne Road, where it continues to and along Mathews Meyiwa Road before turning into Carlisle Street to rejoin ML Sultan Road.
HOW IT WORKS
The Urban Development Zone Tax Incentive affords immediate benefits to taxpayers with taxable income, or who operate profitable (and taxable) business enterprises from relevant buildings.
In situations where taxpayers are not presently operating profitably, the Urban Development Zone Tax Incentive may create an assessed loss, to be utilised in future years of assessment. Participating taxpayers should be aware that write-off is against all income, not only income earned from the relevant buildings, as long the refurbished, constructed and/or extended buildings are used for purposes of trade.
Legislative requirements pertaining to the Urban Development Zone Taxi Incentive include:
In order to claim the deduction relevant to the Urban Development Zone Tax Incentive, the taxpayer is required to submit a location certificate and pertinent Urban Development Zone form with his/her relevant tax return to SARS. In addition, Urban Development Zone registration documentation is to be completed and submitted to eThekwini Municipality by investors, along with building plans for approval.
The Urban Development Zone registration form affords the investor preliminary confirmation that the building in question is situated within the demarcated Urban Development Zone.
FOR MORE INFORMATION
To learn more about the Urban Development Zone Tax Incentive and eThekwini Municipality's expanded demarcated Urban Development Zone, you are invited to go to:
www.sars.gov.za, or
https://www.durban.gov.za/pages/business/financial-incentive-application
Development Planning, Environment and Management Office
T: +27 31 311 7186
E: Chantel.Palayan@durban.gov.za
Invest Durban Office
T: +27 31 311 4227
E: invest@durban.gov.za
