UDZ tax incentive lucrative boon for property investors
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The Urban Development Zone (UDZ) tax incentive seems to be one of the best kept tax break secrets of the South African property sector. Since its introduction by the Treasury in 2003, a steady stream of investors has been using the scheme to invest in property in areas earmarked for the incentive, such as the Cape Town central business district (CBD).
However, not enough investors have taken advantage of this profitable incentive. Investors and developers need to acquaint themselves with the scheme, and take advantage of its tangible benefits.
The Cape Town CBD, a world class premier business destination, has certainly made use of the scheme. Close to R15 billion has been invested in the city centre since the scheme was promulgated.
Between 2006 and 2011, the City of Cape Town has issued location certificates to UDZ applicants for R2bn of new construction, and R1.16bn of refurbishments. Of this amount, 73 percent occurred in 2010 and 2011 alone. The city estimates that these investments have in turn generated approximately 35 000 permanent and temporary job opportunities.
It is a win-win situation for investors and the government. Investors not only have the opportunity to be located in strong commercial nodes such as the Cape Town CBD, they also get a tax write-off or a straight line accelerated depreciation, which allows them, as taxpayers, to write off an asset within a declared UDZ. Straight line accelerated tax deduction is based on a special depreciation allowance on capital investments in either refurbishing existing properties or building new properties in the identified areas.
The government, on the other hand, through the capital investment by the private sector, realises its goal of revitalising commercial and residential buildings in business districts that were previously at risk of decentralisation.
A flagship of the UDZ in the Cape Town CBD is the R1.6bn Portside development, which will be the city’s tallest building on completion next year.
The co-investors of the development, FirstRand and Old Mutual Properties, cite the financial savings realised through the UDZ programme as one of the reasons they committed to investing in the CBD, alongside their confidence in the future of the city centre as a quality business environment. The UDZ allowance is designed to cover all construction costs related to the erection, extension, addition or improvement of buildings.
The tax incentive can only be claimed by the end-user or taxpayer of the property, who must use the building or part of it for trade purposes.
It is not just JSE-listed companies that can benefit from the UDZ. Any owner-builder or owner-first purchaser is eligible for the incentive; it does not matter if they are an individual, company, close corporation, trust or partner in a partnership.
Hip House, a building in the CBD, utilised the incentive to transform what used to be a run-down neglected office block with low-rent tenants, to what is now a building with dual commercial and residential zoning, occupied by one of the country’s largest digital media agencies, a premier film production company, boutique travel advisory and a luxury retailer.
The developer is passing on the 55 percent discount available to the first buyer of the completed properties, meaning that the cost per square metre of these luxury units in net terms is under a third of the comparable price in more established areas along the Atlantic Seaboard and the Waterfront.
Passing on the tax benefit to purchasers and using the UDZ incentive to “sweeten the deal” for property brokers are additional benefits of the scheme that make it an attractive proposition. Being able to pass on the tax benefit is an excellent amendment to the incentive by the Treasury. When the UDZ scheme was initially introduced, only the person who undertook the construction or refurbishment of a property could claim the UDZ allowance. This meant that the incentive was of no value if a developer constructed or refurbished a building, and then later sold that building to a purchaser. This is no longer the case.
Previously, the incentive was seen as too complicated. While there are rules and qualifications that need to be met to qualify for the scheme, as with any regulation, there is no catch with the UDZ scheme, nor is it a complex affair.
Organisations such the Central City Improvement District (CCID), the Cape Town Partnership and local governments such as the City of Cape Town are ensuring that information on the incentive is simplified and easily accessible.
Early this year, the Treasury announced the extension of the sunset clause of the UDZ incentive from March 31, 2014 to March 31, 2020. This means that more investors have even more time to apply for the incentive.
The updated UDZ maps, along with a guide to the scheme and other useful information, may be downloaded from the City of Cape Town’s new planning web portal, www.capetown.gov.za. Potential investors can also visit the CCID’s website, www.capetowncid.co.za, for answers to frequently asked questions on the scheme.
The Cape Town Partnership – the collaboration between the public and private sectors working together to develop, promote and manage the Cape Town central city as a place for all citizens – will also facilitate access to information and best practice to use the UDZ to the benefit of the city centre.
It is hoped that more investors will make use of the extended deadline and take advantage of the tax write-offs presented by the incentive. While profit should be incentive enough for any investor, the added value of investing in the Cape Town CBD is the return on investment that will come from having a property located in a premier business destination and in a quality, world-class environment.
Rob Kane is the chairman of the Cape Town Central City Improvement District.