During his 2008 Budget speech, the Minister of Finance, Trevor Manuel, announced that the Urban Renewal Tax Incentive that was introduced in 2004, will be extended for another five years until March 2014. This news was celebrated by investors hoping to benefit out of South Africa hosting the 2010 FIFA World Cup.
The tax incentive takes the form of an accelerated depreciation allowance in 16 designated Urban Development Zones (UDZ). The intention of the incentive is to address inner city decay caused by urban migration, and to ensure that existing infrastructure in these areas is maintained and utilised to its full capacity. Central business districts and inner cities typically have well-developed transport infrastructure and population carrying capacity. The South African government's objective is therefore to promote private sector investment in residential and commercial property; both through construction of new buildings and improvement of existing ones. The buildings must be used solely for the purpose of trade, including rental of residential property. The allowance is structured as follows:
Construction of new buildings or extension of existing buildings:
- 20 per cent allowance in the first year and 8 per cent per year for the next ten years.
Refurbishment of existing buildings:
- 20 per cent straight-line allowance over five years.
There are certain deemed-cost provisions to which the allowance must be applied.
The City of Johannesburg alone has reported R5bn (approx USD $550m) of investments in its UDZ since the introduction of the incentive, with annual projections for the remainder of the term at even higher levels.
In order to promote this incentive among smaller investors, the incentive is not only available to developers, but also first-time buyers of the developed or improved building, including sectional title ownership. The incentive is also not ring-fenced to investment income relating to the building and excess losses can be carried forward indefinitely.
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