The Urban Development Zone Tax Incentive
What is it?
The Cape Town UDZ tax incentive is a SARS administered tax incentive encouraging residential and commercial development in certain specified areas in Cape Town, in which the Radisson Blu Hotel and Residence will be located. The tax incentive offers property owners a tax deduction against taxable income over five years and could act as a deferment of tax payable until the unit is sold.
How does it work?
The purchaser of a redeveloped residential unit located in the UDZ, will be able to claim an income tax allowance of 30% of the VAT inclusive purchase price of the unit over five years. The tax allowance is recouped on the sale of the unit for an amount greater than or equal to cost, which can be deferred for as long as the owner holds the unit.
On a residential unit with a cost of R2 million, the purchaser is entitled to claim a tax allowance of 30% of the cost of the unit, which equals R600,000 over five years.
The R600,000 tax allowance is claimed evenly over five years at a rate of 20% p.a. which results in an annual income tax deduction of R120,000.
In the case of a company with taxable income and a 28% tax rate, this could amount to an annual tax saving of R33,600 (R2m x 30% x 20% x 28%) i.e. a total potential tax saving of R168,000 over five years, on the basis that the unit is not sold (in which case the tax saving is recouped). The potential tax saving amounts to an effective 8.4% discount built-in to the purchase price!
In the case of a trust or individuals with taxable income and a marginal tax rate of 41%, this could amount to a potential annual tax saving of R49,200 (R2m x 30% x 20% x 41%) i.e. a total potential tax saving of R246,000 over five years, on the basis that the unit is not sold (in which case the tax saving is recouped). The potential tax saving amounts to an effective 12.3% discount built-in to purchase price!
Please note that the UDZ tax incentive contains a number of requirements which must be met in order to claim the tax allowance. The examples detailed above are of a generic nature and may not apply in certain instances. The developer and its affiliates do not provide tax advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax advice. You should consult your own tax advisors before engaging in any transaction.