Lease premiums

The South African Revenue Service (SARS) has released a draft interpretation note for public comment on the tax treatment of lease premiums. According to the SARS note, a lease premium is consideration having an ascertainable money value paid by a tenant to a landlord for the use or occupation or right of use or occupation of, amongst others, land and buildings but which is distinct from, and in addition to, or instead of, rent.

Payment of a lease premium is generally done as a cash lump sum at the beginning of the lease and it is not refundable. A rental deposit is therefore not a lease premium as its purpose is to cover damages and is refundable. Upfront rentals are also not lease premiums as this is not an amount which is distinct from, and in addition to rent, it is rent paid in advance.

Paragraph (g) of the definition of “gross income” in the Income Tax Act 58 of 1962 (the “Act”) requires a landlord to include the full amount of the lease premium in its gross income in the earlier of the year of assessment in which it is received by, or accrues to, the landlord. In other words, the inclusion of the lease premium in the landlord’s gross income may not be spread over the period of the lease.

While paragraph (g) deals with the landlord’s tax obligations, section 11(f) of the Act provides for when a tenant may deduct an allowance for any premium paid. To qualify for the deduction, the premium must have actually been paid by the tenant. Premiums that are incurred and not yet paid don’t qualify. The premium must have been paid for the right of use or occupation of the property, and such use or occupation must be for the production of income, or income must derive from it.

The amount of the allowance must be spread over the number of years the tenant is entitled to use or occupy the property, or 25 years, whichever is lesser. Therefore, the deduction for each year assessment is equal to the greater of, either the premium paid divided by the number of years of the lease, or one twenty-fifth of the premium. For example, a tenant concludes a 20-year lease, and pays a premium of R150,000. The full R150,000 is included in the landlord’s gross income for that year of assessment, while the tenant claims a R7,500 (R150,000 / 20) yearly allowance.

Graeme Palmer,
Garlicke & Bousfield Inc

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