The Urban Development Zone (UDZ) tax incentive, administered by the South African Revenue Service and introduced by the National Treasury in 2003, is being underused, although it is a great motivation for development, says Cape Town Central City Improvement District chairperson Rob Kane.
The UDZ initiative aims to encourage inner-city regeneration across the country through an accelerated depreciation allowance for new builds or for the refurbishment of existing buildings.
Any owner-builder or owner-first-buyer qualifies for the incentive, provided that the relevant preliminary conditions are met. Commercial and residential developers qualify for the UDZ tax incentive within the zone corridors.
Kane states that the UDZ tax incentive has been a considerably successful factor in the recent building boom in the Cape Town central business district (CBD).
He explains that the incentive applies to the development of properties in predetermined urban development corridors and that property owners can write off all relevant upgrade or build costs against their tax income bill.
This incentivises property owners to help upgrade cities while giving them money back.
The UDZ tax incentive’s sunset clause has been extended from March 31, 2014, to March 31, 2020, to enable investors to have more time to identify properties, develop them and apply for the incentive.
The UDZ allowance covers all construction costs pertaining to the erection, extension, addition or improvement of buildings.
Costs under the incentive exclude borrowing or finance costs, but includes land excavations, demolishing existing buildings or parts of buildings and costs incurred to permanent structures or works on land directly adjoining the building construction or refurbishment site.
This can include ramps, lifts, parking and landscaping, as well as providing electricity, water, sewerage, drainage and waste disposal for the building.
It can also be used to cover the costs of building security infrastructure, such as fences, as well as cameras and surveillance equipment.
Only the end-user or taxpayer of the property, who must use the building or part of it for trade purposes, including residential rentals, can claim the tax incentive.
“If an investor buys a run-down building within the UDZ corridor for R5-million and improves it while retaining the existing structural and exterior frame at an additional cost of R20-million, then that investor can deduct 20% a year off the R20-million refurbishment and upgrade costs over five years once the building is in use, Kane explains.
This enables the owner to write off R4-million to tax every year for five years. Only the initial R5-million property purchase cost does not qualify for the UDZ tax incentive.