Urban Development Zone (UDZ) tax incentive – Sec13quat of the Income Tax Act

By Newsletter

In the 2018 budget, six special economic zones (SEZs) namely Coega, Dube Trade Port, East London, Maluti-a-Phofung, Richards Bay and Saldanha Bay, were approved. This is in addition to the existing Urban Development Zone (UDZ) tax incentive in terms of section 13quat of the Income Tax Act.

The core objectives of the incentive – an accelerated depreciation allowance under section 13quat to promote investment – are to:

  • address dereliction and dilapidation in South Africa’s largest cities, and
  • promote urban renewal and development by promoting investment by the private sector in the construction or improvement of commercial and residential buildings, including low-cost housing units, situated within demarcated UDZs.

This incentive is designed to encourage investment in CBDs, high population-density areas, and inner-city environments – crucially areas that already have an urban transport network in place, such as trains, buses and taxis.

The basic mechanics of the incentive mean that the taxable income of a taxpayer is reduced when they claim this allowance against their personal income tax. The allowance can even be used to create an assessed loss.

There are two UDZs within the Cape Town city limits. The first encapsulates parts of the Cape Town and Bellville CBDs, as well as portions of:Woodstock

  • Salt River
  • Woodstock
  • Observatory
  • Maitland
  • Mowbray
  • Athlone
  • Gatesville

The second Cape Town UDZ includes the older part of the Bellville CBD, as well as some of the properties along Modderdam Road and Kasselsvlei Road.

The Johannesburg UDZ includes:

  • the CBD
  • Newtown
  • Braamfontein
  • Berea
  • Hillbrow

The approved UDZ also encompasses lower-density residential areas such as Bertrams, Judith’s Paarl, Doornfontein, Troyeville, Bellevue, Bellevue East and Yeoville.

Only areas which have a dire need for an extra zone will be granted UDZ status, subject to Ministerial approval. Municipalities can apply for extensions to already existing zones or for an additional demarcated UDZ within that municipal zone.

The onus is on the taxpayer to acquire a certificate from the local municipality confirming that the building is within a UDZ. When the allowance was first introduced, maps were issued outlining the borders of the UDZs.

Essentially, Section 13quat provides “an accelerated depreciation allowance on the cost of the erection, extension, addition or improvement of any commercial or residential building or a part of a building.” The building has to meet a number of specifications and requirements before the allowance is granted. If a taxpayer buys a building (or part thereof) directly from a developer, he can claim a UDZ incentive as long as the developer hasn’t already claimed any section 13quat.

It is important to note the use of the term developer. The developer is only classified as such if the developer used or rented the property for less than three years after completion. If the period extends beyond the three-year mark the developer will no longer be defined as a “developer”, so the purchaser will not be able to claim the UDZ incentive.

The deduction percentages are as follows:

  • 55% of the purchase price of that building or part of a building, in the case of a new building erected, extended or added to by the developer; and
  • 30% of the purchase price of that building or part of a building, in the case of a building improved by the developer.

The UDZ incentive allowance is calculated at a different rate, based on the type of property involved: new, improved or low-cost. Taxpayers wanting to make a claim must have the necessary UDZ forms, a location certificate and, if applicable, a certificate of occupancy. As always with regards to SARS matters, pay close attention to the reporting requirements.

As things stand, this deduction is available until 31 March 2020.