Tax Implications of 2010 Rental Income

With only months to go before the start of the 2010 FIFA Soccer World Cup, many property owners are considering renting their private homes to international soccer lovers. Bellville-based chartered accountants C2M warn that owners need to take the tax implications into account before making this decision.

Director Arno Nel CA (SA), cautions entrepreneurs that SARS will claim their share of any rental income and that they should not spend the additional income before considering this. “Speculation is rife about the rental potential on properties, rates of up to R70 000 a day have been mentioned for upmarket properties in desirable locations. If you take a hypothetical income of R300 000 during June and July 2010 for a property registered in the name of a couple, the rental income will be split between the involved parties and could potentially push them into a higher tax bracket. If one of them earns R290 001 per year, his or her annual tax obligation will almost double from R67 260 to R120 000. In general, you’ll have to make a tax provision of a quarter of your gross income generated during the World Cup,” mentions Nel.

Nel explains that as with any rental income, expenses related to the maintenance of the property and interest payments on a bond will be deductable. Certain renovations required to generate the rental income as well as pro-rata expenses such as levies, rates and taxes, insurance and electricity can also be declared. “This will only be possible if owners can proof that such costs are directly linked to the rental contract and that any enduring benefit is incidental to the income generated. This requires detailed record-keeping of all expenses and I would advise all owners to invest in a comprehensive rental contract, which stipulates everything included in the accommodation package, including associated services such as meals and transport.”

Owners should note that any rental expenses incurred during the period that they are renting out their primary residence will not be tax-deductable. Although the argument can be made that the expense occurred during the production of income, Section 23g of the Income Tax Act restricts the deduction of such personal expenditure.

There is some good news as property owners, who offer accommodation to World Cup guests, will still be able to take advantage of the R1,5-million Capital Gains Tax exclusion when they decide to sell the property, even though the property was not used exclusively for domestic purposes. “As long as the rental activity is limited to this once-off occurrence, SARS won’t consider the property as one involved in trade,” explains Nel.

Property owners should also note that rental agents are obligated to supply SARS with a detailed breakdown of rent collected and the related beneficiaries. SARS will therefore be able to trace this on the relevant tax returns of those individuals who have received rental income.

TAXtalk: www.taxtalk.co.za.

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