Welcome to the

UDZ TAX INCENTIVE CONFERENCE

Day 320 Aug 05

By: Lebo Ramoreboli, Project Consultant – Economic Development, Tourism & Marketing, City of Johannesburg

Finance & Economic Development

UDZ Tax Incentive – Presentation at the Joburg UDZ Conference & Exposition: August 20, 2005

Joburg UDZ demarcation

Area excluded from UDZArea excluded from UDZArea excluded from UDZArea excluded from UDZArea excluded from UDZArea excluded from UDZ

• Approved area commonly known as the Inner City

Inner City Locations within UDZ

• The core CBD and high density residential areas of the inner city.

• Braamfontein, Newtown, Hillbrow, Berea, Yeoville, Bellevue, Troyeville, Bertrams, Ellis Park, Fordsburg, Pageview, Benrose and a number of other areas graphically depicted in the Map

Eligibility • Property owners of commercial, industrial and

residential buildings located in Inner City who either:– Substantially refurbish their premises or– Demolish their buildings and construct new

ones on the premises• Property owners living on the premises who

refurbish or construct granny flats or similar facilities for income generation

Computation of Deductible Amounts

• Annual tax deductions or accelerated depreciation amounts are computed as follows:– For refurbishment of existing buildings, 5-

year straight line depreciation or 20% of investment annually

– For new buildings, 20% of investment in yr 1, and 5% in 16 years subsequent (= 17 years amortization)

Computations• Deduction can be made on all taxable income

including income from sources other than buildings in UDZ, e.g. Salaries from other employment, extraordinary income

• Applicable in cases where improvement or new construction commenced on or after proclamation date

Costs covered under UDZ tax incentive

• Construction costs• Demolition of existing buildings• Permanent fixtures adjoining the site• Water, power, sewage,drainage, waste disposal• Access or parking• Security (fence, cameras, surveillance

equipment, etc.)• Sidewalks• Landscaping as part of development• Painting

Benefits to Private Investors

• Highly innovative accelerated depreciation deductible from all taxable income (including personal income tax).

• Corporate and small investors can now reclaim their income generating-buildings which might have declined or degenerated, renovate them and access the Incentive

• New prospective investors can also buy buildings for income-generating purposes, to renovate or replace them with new structures and still derive the tax benefit  

Example: Comparative scenarios: With and without

UDZ tax Benefit: Assumptions• Refurbishment investment = R2.0mio• 4 blocks of flats comprised of 10 units

each, I.e.,40 units. Rental at R2,000 per month for 12 months

• Income before depreciation & tax = R R476,000.00

• Depreciation of R2.0 million refurbishment investment at 20% per annum for 5 years

• 30% Company Tax

Results• Income in both Scenarios = R 960,000.00• 20% annual depreciation = R 400,000.00• Taxable income without udz incentive = R

476,000.00• Taxable Income with udz incentive = R

76,000.00• Tax expense without udz incentive = R

142,800.00 and R 22,800.00 with udz incentive• Net tax saving with udz incentive =R 120,000.00

Computation of Gain derived from participation in UDZ Tax Incentive Example One

No Item Without With UDZ NotesUDZ Tax TaxIncent6ive Incentive

I. Income R 960,000.00 R 960,000.00 Assume 4 blocks of flats comprised of 10 units each, I.e(Rental Revenue 40 units. Rental at R2,000 per month for

12 months

II. Less: Operating R 384,000.00 R 384,000.00 e.g staff salaries, admin expenses, salaries, computedExpenses at 40% of rental income

III Income Before R 576,000.00 R 576,000.00 III = I - IIInterest, Depreciation& Tax

IV. Less: Financing R 100,000.00 R 100,000.00 Assume 5% interest on R2.0 million bank loanCharges

V. Income Before R 476,000.00 R 476,000.00 V = III - IVDepreciation &Tax

VI. Less: UDZ R 0.00 R 400,000.00 Assume Depreciation of R2.0 million refurbishmentDepreciation Investment at 20% per annum for 5 years

VII Taxable Income R 476,000.00 R 76,000.00 VII = V - VI

VIII Company Tax R 142,800.00 R 22,800.00 Assume 30% Company Tax

IX Net Income R 333,200.00 R 53,200.00 IX = VII - VIII

X Net Tax Saving/Profit 0 R 120,000.00

Computation of Gain derived from participation inUDZ Tax IncentiveExample Two : Including Income from other sources

No Item Without With UDZUDZ Tax TaxIncent6ive Incentive

I. Income R 960,000.00 R 960,000.00(Rental Revenue

II. Income from other R 300,000.00 R 300,000.00Sources

III. Toal Gross Income R 1,260,000.00 R 1,260,000.00

IV. Less: Operating R 384,000.00 R 384,000.00Expenses

V. Income Before R 876,000.00 R 876,000.00Interest, Depreciation& Tax

VI. Less: Financing R 100,000.00 R 100,000.00Charges

VII Income Before R 776,000.00 R 776,000.00Depreciation &Tax

VIII. Less: UDZ R 0.00 R 400,000.00Depreciation

IX. Taxable Income R 776,000.00 R 376,000.00

X. Company Tax R 232,800.00 R 112,800.00

XI. Net Income R 543,200.00 R 263,200.00

XII Net Tax Saving/Profit 0 R 280,000.00

General operational procedures

• Investors have to complete and submit registration form provided by council ASAP

• When construction is complete, fill in application for location certificate

• Submit location certificate and prior obtained occupancy certificate with SARS, tax returns for statutory tax assessment

• SARS is developing an appropriate certificate for UDZ tax incentive beneficiaries which will be available soon

Existing supportive investment climate

• Recent and on-going public investments e.g. Newtown, Constitution Hill, Main street precinct, Standard Bank parking complex, ABSA, etc.

• Establishment of Business Improvement Districts i.r.o supplementary urban management

• Collaboration among council agencies, private sector

• Anticipated initiatives e.g. 2010 Soccer World Cup, Gautrain & Park station development

For Further Information

www.joburg.org.za/udzLebo RamoreboliProject Consultant (Area Regeneration)Finance & Economic DevelopmentCity of Johannesburg

Cell: +27 (0)82 372 3174 Tel: +27 (0)11 358 3437Fax: +27 (0)11 358 3444 E-mail: lebor@joburg.org.za