How rental income affects your annual tax return

Letting out property can provide excellent annuity income and the current buyer's market offers good opportunities to invest in rental property. Bear in mind though that rental income is subject to tax with severe consequences for non-disclosure.

SA tax laws are complex and professional advice should be sought regarding your particular circumstances. Some basic aspects around tax to bear in mind include:

Rental income must be declared

The rental income earned must be declared on your annual tax return regardless of the type of accommodation, whether a whole house or apartment, just a room/garden flat or similar, or if you are in the guesthouse/B&B/Airbnb business. 

Some expenses can be claimed, but not all

Only expenses incurred in producing the rental income can be claimed, i.e. levies, rates and taxes, bond interest only, advertising, agent's fees, homeowner's insurance, garden services, electricity and water, repairs and maintenance - and must be claimed pro-rate if only a portion of the property is let.

Renting out accommodation in a dwelling is VAT exempt and you cannot claim VAT on any expenses incurred. Capital expenses cannot be claimed, e.g. improvements to the property (but can be claimed against any CGT (Capital Gains Tax) should you sell the property).

How you are taxed and the concept of "ring-fencing"

Your total taxable income (i.e. including net rental income) will be taxed as per current tax tables. While a loss can be set-off against other income earned, SARS may apply the concept of "ring-fencing" in terms of prevailing anti-avoidance provisions. Ring-fencing means that rather than permitting it to be off-set, the losses will be carried forward so that when your letting business starts turning a profit the losses can then be set off against that profit.

You may also need to register as a provisional taxpayer if you earn more than R30,000/annum from rentals.

Keep detailed records

It is vital that you get tax advice and keep full records including a record of all income and expenses as well as all supporting documents.

For those looking to invest in property, the year started off on a positive note with a 25 basis point cut in the prime interest rate to 9.75% and a possible further cut this year. Home loan finance is now a little cheaper while home loan approvals are still faster and on better terms compared to prior years.

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