close
Share with your friends

South Africa: Tax implications of rent relief provided by landlords (COVID-19)

South Africa: Tax implications of rent relief

Rental expenses are one of the most significant monthly fixed expenses and cash outflows for taxpayers, and it is anticipated that one of the industries that will be particularly affected by the “lockdown” in response to the coronavirus (COVID-19) pandemic is the property industry.

1000

Related content

Because the nationwide lockdown prevents tenants from earning income, or when income is significantly curtailed or tenants cannot carry on their trade, these tenants may not be in a position to meet their monthly rental obligations. In order to aid tenants, landlords may provide relief by waiving outstanding lease payments, reducing monthly rental installments for a period of time, postponing payment of lease installments until a future date or even re-negotiating the terms of lease agreements in totality. Landlords may even agree with their tenants to receive rental income in a form other than cash.


Tax implications for landlords

Negotiations to change the payment terms of lease agreements will look different for each landlord. The tax implications of any relief provided to tenants will depend on the specific agreement, or the specific circumstances and must therefore be considered on a case-by-case basis. The formal agreement reached and the proposed changes to the agreement need to be carefully reviewed to determine the true intention, and practical implications, of the amended terms for both the landlord and tenant.

The income tax implications for landlords in situations when tenants cannot pay or from amended lease payment terms include:

  • Provision for doubtful debts and bad debts written off: A deduction in terms of bad debts may be available to landlords on rental income that is considered gross income, which becomes irrecoverable. A tax allowance in respect of a portion of the landlord’s debts receivable that is regarded as doubtful in terms of recovery currently is between 25% and 40% but may be as high as 85% in certain circumstances.
  • Waiver of or postponement of payment of rental income: When the payment of rent is postponed by a landlord, it is important to determine whether the unconditional right to receive such rental income by the landlord remains intact. Any scenario when the rental income still accrues to the landlord may give rise to cash flow constraints if the rental income is not received before the tax liability on the rental income becomes payable or in circumstances when the accrual and postponement does not take place in the same tax year of assessment. In addition, any waiver needs to be evaluated from both a tax deduction and capital gains tax perspective.


Other considerations

It is also prudent to consider:

  • Any value added tax (VAT) implications
  • Whether there are any aspects to consider from a corporate law perspective
  • The timing of any amendments to agreements
  • Determine the timing of receipt/accrual of rental income appropriately so that provisional tax payments are not underestimated


Read an April 2020 report [PDF 137 KB] prepared by the KPMG member firm in South Africa

The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us

 

Want to do business with KPMG?

 

loading image Request for proposal