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Improvements effected on land not owned by the taxpayer

On 1 October 2014, the South African Revenue Service (SARS) released Binding Private Ruling 180 (Ruling) dealing with the question of whether a taxpayer, who is a party to a Public Private Partnership (PPP), would qualify for a deduction under s12N of the Income Tax Act, No 58 of 1962 (Act) in respect of improvements effected on land not owned by the taxpayer.

In respect of PPP’s, Government often undertakes to provide underlying land to a private party for the construction of buildings or the improvement of the land, without parting with ownership of such land.

Section 12N of the Act allows for private parties to a PPP to claim deductions in respect of improvements effected on land or buildings owned by Government, even though the private party only has a right of use or occupation of the land.

To qualify under s12N of the Act, a private party must:

  • hold a right of use or occupation of the land or buildings;

  • effect improvements on the land or buildings in terms of a PPP;

  • incur expenditure to effect the improvements; and

  • use or occupy the land or buildings for the production of income, or derive income from the land or buildings.

By way of background, a company incorporated in and a resident of South Africa (applicant) and a department of the National Government (department) entered into a PPP in terms of which it was agreed that under the proposed transaction, the applicant would:

  • finance, design, construct, operate and maintain a new serviced head office building for the Department that is to be constructed on land owned by the Government; and

  • assume the financial, technical and operational risk for the project.

The applicant would be able to use subcontractors to carry out its obligations for both the construction and the operational phases of the PPP. The PPP provided for a unitary payment to be made by the department to the applicant of the capital amount owed to the applicant, together with interest and service fees.

Furthermore, during the construction phase, the applicant would be granted possession of and access to the project site to construct the serviced head office building. The operational phase would commence thereafter.

It is important to note that the applicant would not hold any right of use or occupation of the land or the serviced head office building by virtue of any term of the PPP. The applicant would only be given access to the new building exclusively for purposes of providing the services as described in the PPP.

The issue under consideration before SARS was whether the applicant qualified for any of the deductions referred to in s12N of the Act in respect of the improvements effected on land not owned by the taxpayer.

SARS ruled that the applicant did not comply with the requirements of s12N of the Act and therefore did not qualify for any deduction under any provision referred to in s12N of the Act.

The draft Taxation Laws Amendment Bill 2014 (draft Bill) was released by National Treasury on 17 July 2014. The explanatory memorandum to the draft Bill notes that under certain PPP arrangements a private party is not able to meet the criteria of s12N of the Act. Specifically, the private party will not necessarily have the right of use or occupation of the land or buildings. The private party could, for example, only have a right to access the land or building in order to perform under the PPP. As a result, the private party is not able to claim any deduction under section 12N and this has an effect on the overall pricing of the project.

The draft Bill proposes the insertion of s12NA into the Act, which addresses the above problem and will essentially allow a private party to claim a special capital allowance in respect of improvements to State-owned land and buildings where the Government has the right to use or occupy the land or buildings, and not the private party. In order to claim this special allowance, the private party must:

  • be a party to a PPP agreement with Government; and

  • incur expenditure of a capital nature.

The proposed insertion of s12NA to the Act will come into operation on 1 April 2015 and will apply in respect of expenditure incurred to effect improvements during any year of assessment commencing on or after that date.

It is evident that the insertion of s12NA to the Act will provide relief to those private parties to PPPs, who find themselves in a position similar to the applicant, where they do not have the right of use or occupation of land or buildings owned by the Government and to which improvements have been effected.

Author: Heinrich Louw (Cliffe Dekker Hofmeyr)

This article first appeared on

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