Sale of Buildings in South Africa
Upon disposal of a property the Income Tax Act No.58 of 1962 Section 8(4) requires that where an asset is sold for a figure in excess of its tax value, wear & tear allowances previously claimed are to be recouped. The recoupment will equal the sale price less the tax value, however, the recoupment cannot exceed the value of the deductions previously claimed.
Case law suggests that the sale of land and buildings are the sale of one asset, and therefore if a property is sold at a price exceeding the sellers purchase price, any allowances previously given will be fully recouped. Additionally, apportionments made to reduce potential recoupment of allowances are not justified, unless such apportionment is stated in a contract of sale and agreed by both parties.
From a tax perspective, it is therefore beneficial for the seller to apportion the purchase price within the sale agreement to the relevant asset classes. The revenue authorities, without such an apportionment are entitled to apply a reasonable value to the assets sold in determining the recoupment.
In order to suffer no recoupment the sale agreement should therefore apportion the purchase price as follows:-
- Fixed assets within the property qualifying for wear & tear allowances. The sale price is to equal the tax written down value (the disposal value).
- Land & buildings (excluding machinery, plant, etc as above) is to equal the remainder of the purchase price.
From a tax paying purchaser’s perspective the apportionment to qualifying fixed assets should be as high as possible, as they will be entitled to allowances on that portion. It is therefore important during the negotiation process to identify whether a claim has been made, and which of the parties are likely to gain the most benefit from the available allowances.
Prior to disposal of any properties, it is suggested that you contact PJB in order that the recoupment provisions of the Income Tax Act are addressed, and potential recoupment is kept to a minimum.