By Lindi Penning (PKF VGA)

There are several different capital allowances allowed by the South African Revenue Service (SARS) with regards to buildings, this article focuses on 2 of these capital allowances:

• manufacturing buildings allowance (Section 13 (1)); and
• commercial buildings allowance (Section 13 quin).

Manufacturing Buildings Section 13(1):

The allowance provided for manufacturing buildings can be claimed on a building that is mainly (more than 50%) used for the purpose of carrying on any process of manufacture or, research and development. This specifically excludes trades of mining or farming.

The allowance can be claimed if the following conditions have been met:

The taxpayer must have,

• erected the building; or
• purchased a used building from a seller that was entitled to the allowance under section 13; or
• purchased a building that had never been used

The annual allowance is calculated at a 'specified rate' per year of the 'adjusted cost' to the taxpayer of the building or improvement.

A taxpayer must have incurred a cost or be deemed to have incurred a cost for purposes of the Act in order to qualify for the allowance. If a taxpayer, for example, acquires a building by way of donation without paying any consideration for it, that taxpayer will not be entitled to the allowance, since the taxpayer has not incurred any cost.

The aggregate of the allowances allowed under section 13(1) may not exceed the cost of the building or improvements less the sum of any recoupment not included in income.

Section13 quin – Commercial building allowance

Section 13quin provides for an allowance on any new and unused buildings or new and unused improvements effected to existing buildings that are used by the taxpayer wholly or mainly for the purpose of producing income in the course of a trade, other than the provision of residential accommodation.

In order to qualify for this allowance, the building or improvement to a building must meet the following 4 requirements;

1. Have been contracted for and construction, erection or installation must have commenced on or after 1 April 2007;

• The date the building or improvement to a building is contracted for is the date that the parties agreed to all the terms governing the particular contract, including conditions, and have concluded a valid contract.
• the date when erection of a building or improvements commences is the date when the laying of the foundation begins.

2. be new and unused;

• the building or improvement, as appropriate, must be new which means recently built. The building or improvement must also be unused and will not qualify for the allowance if it was previously used for any purpose by any person. If the allowance is claimed only on an improvement, only the improvement needs to be new and unused.

3. be owned by the taxpayer; and

• Ownership is not defined in the Act. However, general common law principles apply.
• The acquisition of land, or a building and the land on which it is situated, occurs by means of a deed of transfer from one person to another and is affected by the process of registration in the Deeds Office.

4. be wholly or mainly used by the taxpayer during the year of assessment for the purpose of producing income in the course of a trade, other than the provision of residential accommodation

• It is unnecessary that the building is used wholly for the required purpose, as long as the building is used mainly for that purpose. In the context of section 13quin "mainly" is also interpreted to mean "more than 50%".
• Both the purpose of producing income requirement and the trade requirement must be met in a year of assessment before the allowance may be claimed. Trade is defined in section 1(1).
• If the taxpayer did not derive any income in a particular year of assessment, it does not automatically mean that the taxpayer did not trade in that year of assessment or that it did not trade for the purpose of earning income. The onus would be on the taxpayer to satisfy SARS that it traded in that year of assessment.

The aggregate of all deductions which may be allowed or deemed to have been allowed under section 13quin or any other section in respect of the cost to the taxpayer of the building or improvement may not exceed that cost.

The determination of cost and calculation of the allowance

The allowance is calculated at a rate of 5% a year of the cost of the building or improvement to the building. The allowance is not apportioned if the building or improvement is used for only part of the year.

If the taxpayer purchased the building, the cost of the building is the cost to the taxpayer of purchasing the building, that is, the purchase price paid to the seller. If part of a building is acquired without erecting or constructing it, there is a deemed cost for the part, or the improvement acquired.

Costs that are directly and closely connected with the erection of the building such as architect and civil engineering fees are included in the cost of the building. The cost of an improvement to any building which qualifies for a deduction must be determined by applying the same principles.

Conclusion on Building Allowances

As mentioned above, there are various building allowances available to taxpayers which do contain quite specific criteria in order to qualify. We recommend engaging with your nearest PKF Office to obtain the relevant tax advice and determine which allowances you should be claiming.